Cisco's new acquisition talisman

Can Ned Hooper keep the magic of Cisco's acquisition machine alive? A lot depends on the answer to that question.

Ned Hooper is the latest in a long line of executives at Cisco Systems to head the company's mergers and acquisition unit. But will he be able to keep the magic alive that has made Cisco such a successful acquirer? As Cisco grows and enters into new markets, the deals seem to be getting larger and the stakes a bit higher. The challenge for the 39-year-old executive, now the company's senior vice president of corporate business development, will be to maintain that success rate.

Having served as the No. 2 man in Cisco's M&A unit, Hooper has already worked on some key deals, most notably the $6.9 billion acquisition of Scientific Atlanta and the $500 million acquisition of Linksys.

A few months into his new job, the executive has already pulled off one significant acquisition. In March, Cisco announced it would spend $3.2 billion in cash to acquire WebEx, the No. 1 Web conferencing company. The midsize publicly traded company will help Cisco move into a new market and will also provide the company an entry into the Web services business.

CNET News.com recently sat down with Hooper (virtually) using the company's Telepresence network that linked a room at a Cisco office in New York with a room in San Jose, Calif.

Q:Cisco has effectively used acquisitions to get into new markets. How do you decide what market to go after?
Hooper: The way we think about acquisitions is to look for markets in transition. For example, the consumerization of technology is a trend that's driving new markets. If you go back 15 years ago, a lot of technology moved from the office into the home. But in recent years it's been the opposite, where we want to take technology from home and bring it to the office.

We're not comfortable pushing out products that are too expensive. The power of Linksys is its accessibility to the average consumer.

Wi-Fi is a good example. People wanted to walk around the office and remain connected to the Internet just like they could at home. So they started bringing Linksys routers into work and setting up Wi-Fi hot spots. But then the IT departments had this problem of rogue access points. So we acquired Airespace, a company that helped manage and provide security for corporate Wi-Fi networks.

Sometimes the transformation is happening through business model innovations and not just straight technology. Like with the WebEx acquisition. There is a trend toward more collaboration. So we are looking at this from a perspective of creating new business opportunities for our customers to create hosted services or other online collaboration tools.

Cisco has talked a lot about mobility as a trend. And the company seems to have focused on the enterprise, helping workers access applications from wireless devices. What about opportunities for mobility in the consumer market?
Hooper: In the consumer market it's all about access to media content. My wife just got a new car and it comes equipped with Bluetooth and an iPod docking station. And it makes you think, how many hard drives are we carrying around with us every day? Three, maybe four. Bluetooth is putting some of those devices wirelessly onto the network to deliver information to the vehicle. So why store data on a portable hard drive when the network is ubiquitous and can deliver that information to the vehicle? I think there is a big opportunity for a networking company like Cisco.

Two years ago, just before the Scientific Atlanta acquisition, Cisco bought a small European consumer electronics company called Kiss Technology. Why haven't we seen any products come out of that acquisition?
Hooper: When you're building boxes for the consumer market, cost is an issue. That's very different from the enterprise, where the productivity improvements are so great when you build out a network. The pricing pressure is just a lot less, and the returns are huge.

Consumers are also much more bound by their wallets than large companies are. That is why I think we're still at the early stages of consumers leveraging the network, because we're still getting the price points on the components down to where we can sell products to the mass market.

If you're really wealthy, you can definitely do a lot of cool things with a home network today. Silicon Valley is famous for people with fully automated homes--or people who have HD TV streaming on 18 TVs or something. But that's not the average consumer. Price points still need to come down. And we're not comfortable pushing out products that are too expensive. The power of Linksys is its accessibility to the average consumer.

Do you think the industry is expecting people to pay too much for upgrading their home networks to do all the cool stuff Cisco and others are always talking about?
Hooper: The share of consumer wallet spend is shifting. Money that used to be spent on buying records or CDs is now being spent on iPods and iTunes. People are investing in home entertainment instead of going to the movies. So that shift in spending on digital media increases the share of the wallet that Cisco can address. But the pricing still has to be right.

There are a lot of deals getting done lately by private equity firms. For example, Avaya and Palm just got investments from private equity. How has this changed the M&A environment for Cisco?
Hooper: Just like any market, mergers and acquisitions go through cycles. A couple of years ago, we were the sole buyers of a lot of companies. That gave us a lot of buying power. We could take our time making decisions, and we could dictate the terms more. Today, things have shifted. The IPO market is back, and private equity is transforming things. We absolutely have to operate differently. I think with WebEx we showed our ability to move very quickly on a medium-sized public company. And that's very important.

In the late 1990s almost every start-up was hoping to be acquired by Cisco. Do you think that's still true today?
Hooper: Yes, I'd say a lot of companies still would like to be acquired by us. That means that we know about pretty much everything that is out there now. And we can still say "yes" or "no" to a lot of deals--and we do. Even in an environment like today's, we make sure it works for us.

What have you had to say "no" to recently?
Hooper: Avaya was on the market for a while, and we did not make a high market bid for that company. We don't do acquisitions to consolidate a market, because those acquisitions don't drive growth. A good M&A strategy looks to build the market by extending the technology and business model.

Cisco has changed so much in the past five to 10 years. And now the company is getting into several new markets. Where do you think Cisco will be in another five years?
Hooper: That's a really good question. Change is the constant in this business. If you don't change, whether you're a $5 million a year company or a $36 million company, you will lose market position. Technology is developed in rapid cycles, and it really punishes those who don't change. If you look back, only 19 percent of the Fortune 500 companies in 1965 are on that list today.

If you don't change, whether you're a $5 million a year company or a $36 million company, you will lose market position.

I think where we will see a lot of change and where we will evolve is in the consumerization of technology. We'll help bring applications that consumers are using at home to the small- and medium-sized businesses and large enterprises. We'll also enable our service provider customers to provide those technologies to their customers. And we'll work with customers in ways we haven't before to address new business models.

You came to Cisco through an acquisition. And several other key executives have as well, such as Charlie Giancarlo. What is it about Cisco that entices smart, entrepreneurs to stay at the company?
Hooper: That's right, I was part of the Lightspeed acquisition in 1998. I always joke that I am nine and a half years into my two-year commitment with Cisco. Actually, Cisco counts the time served at the company that was acquired, so I've been here over 10 years. I got a nice gift, too.

Yeah? What did you get?
Hooper: A Bose noise-canceling headset. They're great for when I have to fly coach. You know we're pretty frugal around here when it comes to travel. But to answer your question seriously, it wasn't the headset that kept me here. It's really the opportunity and ability to do things that have never been done before.

Like you said, Cisco looks different today than it did in 1998 when I came to the company. Initially, I was working on voice over IP for the service provider business. And since then, I've had the opportunity to get into M&A and private equity. I've spent some time in China and India. Now I get to sit around a table with other smart people and look for market changes. I think the people who stay are the ones who embrace change for the company.

People who have held your job in the past have all had great success. Mike Volpi oversaw the M&A heyday with 75 acquisitions. He's now CEO of a start-up, Joost. And Dan Scheinman, the last guy who had this position, did the Linksys and Scientific Atlanta deals. Now he's running a brand-new division for Cisco. What would you like your legacy to be?
Hooper: It might be a little soon to talk about legacies. But we are in a dynamic time in the market. It's a high-growth stage of the economic cycle. There are massive technology and business model changes occurring. And I'm looking for ways to take advantage of those changes to help Cisco achieve the high end of our target, which is 15 percent growth yearly. And my hope is to continue this growth as the company gets increasingly larger.  

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