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Top exec talks strategy inside Cisco

A rising star at Cisco, Mike Volpi navigated the world of corporate mergers and acquisitions before landing his new post as chief strategy officer.

Cisco executive Mike Volpi has become accustomed to life in the fast lane.

A rising star at Cisco, Volpi navigated the world of corporate mergers and acquisitions before landing his new post as chief strategy officer of one of the world?s leading networking equipment companies. Cisco has struck 58 acquisitions in the past six years and plans for some $2 billion in deals this year.

Cisco has become a force to reckon with in the networking world, but it has also had to earn its place. Increasing competition from rivals such as Lucent Technologies and Nortel Networks, not to mention start-ups such as Juniper Networks, have kept the company vigilant.

The ever-changing nature of the networking business as well has made Cisco step up its acquisition efforts in an attempt to stay ahead of the curve.

Yet Cisco also recognizes that its position as a market leader could make it vulnerable to broader antitrust concerns. The company has sought to avoid even the perception of questionable business practices, well aware of the backlash that has befallen Microsoft in Washington's current antitrust climate.

Volpi recently spoke with CNET News.com TV?s Sydnie Kohara about life in one of the industry?s leading networking companies and about what Cisco can do right where Microsoft might have done wrong.

CNET News.com: Cisco has been known for its explosive growth, and a lot of that growth has come from acquisitions. Are we now going to see more research and development?
Well, the reality is that Cisco has always employed a mixture of ways to enter new markets. We've used acquisitions, certainly--we've done 58 of them in the last six years. But we've also spent a lot on R&D; we've also partnered a lot to get into new market segments. R&D spending this year is going to be over $2 billion. But the important thing is that our strategy is going to be a blend of internally developed products and technologies that we come up with (while) partnering with major players like HP and IBM, and effectively buying companies and blending them into our mainstream of products. That hybrid approach is what's made us really successful over the last few years, and I think we'll continue to do that

You?ve recently bypassed Microsoft in terms of market cap, a ?Goliath,? so to speak, of the global world. In light of what has happened with Microsoft in its battle with the Justice Department, tell me what your concerns are for Cisco as it continues to grow.
Well, market capitalization is a reflection of the expectations that your investors have for future growth. So it's nothing more than that to us. Our job isn't to necessarily worry, are we bigger than Microsoft today? Or smaller? It's about satisfying customer needs. It's about staying focused on what the Internet is doing and providing our customers with all the solutions that they need to enable them to capture the opportunity of the Internet.

So in that context, because we've executed well and because we have great opportunities ahead of us, our market cap is large. But while we have a large market cap, on a day-to-day basis we compete with some very strong competitors...I mean just every day they come at us, whether they be start-ups that have a new idea, a new technology, a new product or more established companies like Lucent or Nortel that have been around a long time.

So for us the issue is to worry about all those competitors that we have around us and beat them up. And certainly when we compare ourselves to Lucent and Nortel, we're much more the David than a Goliath because from a size perspective, they have much more employees, they have more history, more relationships--but we?re catching up in a lot of different ways.

We call it a "healthy paranoia." In terms of "do we ever feel like we're like Microsoft?" Not really, other than the market cap is big, but we're a very different company than them. The market we compete in--the worldwide communications market--is about $350 billion annually. If we perform really well, we?ll do $18 billion or a little over $18 billion in revenue this year. So that's a very small piece relative to the big pie.

But at the same time, when you basically control 81 percent of the router market, how do you address particular concerns, for example, antitrust concerns or the Justice Department saying "Wait a minute. Let's take a closer look at this?"
Well, we really don't have too many concerns from an antitrust perspective. The networking business and the communications business are based on standard protocols, which means our devices talk to other devices via a standard communications language. And if one day our products don't work as well as our competitors, we can get thrown out of there. So in that context, we live in a much more dynamic environment. And if you look at what start-ups have done in terms of market capitalization over the last two years, that just tells you how quickly this market moves and how competitive it really is.

So do we worry about the Justice Department on a daily basis? Absolutely not. Do we educate the Justice Department on our market, on issues such as the one you just asked? Absolutely--we educate them all the time so they can understand it.

How do you do that?
Just spend time with them. We get asked a lot of questions about this issue and that issue and we just educate them on what the market looks like, who we compete with, why, what the competitive dynamics are.

Do you think, looking back, that Microsoft didn't do that?
Well, we're really not close enough to tell you what Microsoft did and didn't do. We think that for us the best approach is to keep the government, whether it be the DOJ, the FTC (Federal Trade Commission) and so forth, educated on our market and why it is in fact quite competitive and why we worry about our lives all the time.

What do you feel is more important, acquisitions or talent?
At the end of the day, what is most important is talent. Even in acquisitions we focus very much on bringing in talent that can evolve the technology. Keep in mind that when you buy a company and you spend a lot of money...let's say you spend a billion dollars on an acquisition, it takes you many, many years to recover that investment. And the only way you recover it is if the smart people that came with that acquisition stay at Cisco, grow what they've built and create a business that then returns on that investment.

What's on your shopping list this year that you can talk about?
Well, the shopping list and the internal development list in many ways are very similar because we're trying to get into fast-growing markets. We've done a lot of acquisitions in the area of optical networking, which is a very hot segment today. It's about putting more bits through the fiber-optic lines. And that will continue to be a focused market over the next couple of years.

Voice over the Internet is a very, very important part of our strategy. We've done a few acquisitions in that area, but we continue to build that portfolio. There's some very interesting high-speed Internet access technologies out there. We have a good portfolio in DSL (digital subscriber line) and in cable modems, but there are wireless opportunities, especially mobile wireless, and there are other new technologies that have a lot of promise. And again, the security business continues to be a very important business for us. So there are a lot of sectors. Some of these we're going to address through partnerships and internal development; some we might acquire as well.

You've got 33 analysts who cover Cisco; 12 of them have ?buy? ratings on the stock, and 21 maintain a ?strong buy? rating. Definitely you are at the top, but that means you could have a long way to fall. What happens if you don't make a quarter?
It certainly isn't part of our planning. We stay very focused on obviously setting the right expectations and beating those expectations with Wall Street and our investors. As I said, I think that the opportunity out there is so big that it's about ensuring that we catch the big markets, especially the very rapidly growing markets. And if we do that, the stock will take care of itself. We've been a public company for 10 years now. We've met or exceeded our expectations from Wall Street all of those quarters. We have absolutely no plans to not continue that trend that we've established over the last 10 years.