An Interview with John T. Chambers, Chief Executive, Cisco Systems
A merger of equals had a lot of appeal. If you combine the Number 1 and Number 2 players in an industry, by definition you're Number 1 in terms of size. And when you are growing that fast, you have a number of key management openings you have to fill. By combining two companies with good management teams, you automatically build up the strength of your management and you do it quickly. You can also widen your customer base and have more distribution channels.
In addition, the merger automatically makes your remaining competition second level. As a result, your competition must rethink its strategy. In the end, you force a period of mergers and acquisitions on your competition. They have no choice but to respond to the changes you initiated.
When we looked more closely, our concerns were raised. For example, 50 percent of large-scale mergers fail. Mergers can fail on a number of levels. They can fail in terms of their benefit to the shareholders, customers, employees and business partners. A decision has to be right with each of those groups, or we would not go forward with it.
If you merge two companies that are growing at 80 percent rates, you stand a very good chance of stopping both of them. That's a fact. For a period of time, no matter how smoothly they operate, you lose momentum.
Our industry isnot like the banking industry, where you are acquiring branch banks and customers. In our industry, you are acquiring people. And if you don't keep those people, you have made a terrible, terrible investment. We pay between $500,000 and $2 million per person in an acquisition. So you can understand that if you don't keep the people, you've done a tremendous disservice to your shareholders. So we focus first on the people and how we incorporate them into our company, and then we focus on how to drive the business.
Discuss the following questions:
- Why do firms merge?
- What problems can arise before and after a merger takes place?