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employees kept their original jobs and bosses; about 30 were reassigned because they had positions
that overlapped directly with Cisco workers. Overall, there was little turnover.
The “adaptable” part of Cisco‟s integration strategy has manifested itself in the past five years, as
Cisco has moved from small investments related to its core networking technology into large platform
bets. Since 2003, Cisco has spent $2.5 billion on 44 companies in its core business, and over $11
billion on just four platform deals, including the 2006 $6.9 billion acquisition of set-top box
manufacturer Scientific Atlanta. 8 These large deals for established companies have forced Cisco to
adapt its integration approach, allowing the acquired firms to retain more autonomy, lengthening the
integration time considerably (up to two years), and being careful not to damage existing brands and
relationships. As a result, these platform deals have been largely viewed as successes and have
become major contributors to Cisco‟s sales growth and profitability.
This section highlights some of the factors important to developing and implementing a successful
acquisition strategy for one company. However, not all companies are like Cisco, and what works for
Cisco may not guarantee you a winning acquisition plan. Cisco is fortunate to be in a rapidly growing
industry in continuous need of new technologies and products. At the same time, the keys to
successful implementation discussed earlier (i.e., concern for the customer, taking care of salespeople,
and understanding what creates employee loyalty) are universal and must be part of any acquisition
strategy. In the next section we look more closely at the question of value creation in M&A decisions.
Creating Value in Mergers and Acquisitions
We have already presented the dubious historical evidence on the financial performance of mergers
and acquisitions. This record makes it clear that a significant number destroy shareholder value, some
spectacularly. In this section, we more closely examine the issue of value creation, focusing on its
sources in mergers and acquisitions. We begin the discussion with an assumption that the objective of
managers in initiating these transactions is to increase the wealth of the bidder‟s shareholders. We will
ignore the reality that managers may have personal agendas and ulterior motives for pursuing mergers
and acquisitions, even those harmful to their shareholders. A discussion of these issues is beyond the
scope of this chapter. 9
To be very clear, recall the source of all value for holders of corporate equity. Stock prices are a
function of two things: expected future cash flows and the risk of those flows. These cash flows may
come as dividends, share price increases, or some combination of the two, but the important thing to
understand is that changes in share prices simply reflect the market‟s expectations about future cash
flows or their risk—nothing more and nothing less. If investors believe a company‟s cash flows in the
future will be smaller or more risky, ceteris paribus, the share price will decline. If the expectation is
for larger or less risky cash flows, the share price goes up. Thus, when we talk about M&A decisions
creating value, there can only be two sources of that value: more cash flow or less risk. Our discussion
focuses primarily on the former.
Consider two independent firms, A and B, with respective values V A and V B . Assume that the
managers of firm A feel that the acquisition of firm B (i.e., the creation of a merged firm AB) would
create value. That is, they believe V AB > V A + V B . The difference between the two sides of this equation,