Sunday, August 1, 1999
Not a magazine given to patently dramatizing the achievement of Indians, siliconindia’s coverage of Indians has always followed mainstream trends and happenings in business and technology world. But recent dealings in the networking world presented glaring statistics that we just couldn’t ignore.
Clearly, tornado-level winds of acquisition are ripping through the data and telecommunication industries, lifting companies and melding them together with abandon (See "Decoding the Acquisition Spree," page 32). With the statistically improbable number of Indian CEOs at the helm of these networking firms, they are surely putting to shame any decent concept of that tried and eminently trusted method so beloved by Indians — namely, the glorious institution of the Arranged Marriage. In these well-thought-out unions, parents agonize for months over prospective brides or grooms, concerned relatives pore over carefully designed astrological charts, and each side consults priests enlightened by eons of penance among the lofty peaks of the Himalayas. Then, and only then, is there a consensus on the right month and hour and very minute for consummating the holy match.
Whither Arranged Marriages?
Yet, a look at the mind-boggling spate of acquisitions in just the last three weeks gives an indication of the woefully unjust undermining of the reverential, time-intensive system of arranged marriage. Companies are signing deals even before the hangover from the engagement party wears off! We saw Naveen Bisht of UkiahSoft readily handing over his company to Novell for a modest price of $50 million. Ashraf M. Dahod, founder and CEO of NetCore Systems, sold his company to Tellabs in an all-stock deal valued at about $575 million. Representing the aggression of European telecom equipment companies in the US, for approximately $180 million, Alcatel picked up Internet Devices, a company founded by Ashok Jain and Saurabh Jain as an Internet Service Provider (ISP) under the name AbhiWeb, Inc. Transmedia announced that they had just been acquired for $407 million in Cisco’s "highest-valued private transaction." Just a week later, their public relations team was compelled to modify that statement after the quicksilver purchase of StratumOne for $435 million. We then saw Mukesh Chatter leave for his first four-day vacation in three years, with a $900 million chuckle after Lucent bought out Nexabit for that astounding premium.
Sourcing funds through an Initial Public Offering too is seeing fervent action — with the scene of courtship moving from the big chasing the small, to the constant appeasement of Wall Street analysts and ensuring their quarterly expectations are well below quarterly earnings. In just one hot, hectic week in July, we saw Juniper Networks, co-founded by CTO, Pradeep Sindhu, go public, and quickly gain a market cap of $5 billion. Ramp Networks also went public, gaining a market cap of $382.3 million (see box on page 42). We even saw Avici Networks, led by CEO Surya Panditi (see "Chasing Bandwidth," siliconindia, October 1998, page 45), which now harbors the same honorable intention of going public, break off with Nortel, ascribing its prior engagement to a puerile teenage impetuosity.
Love, at Internet Speed
Yes, a love affair of altogether mythic proportions is underway in the networking industry. But forget those blissful notions of an impromptu soliloquy by a love-struck Hamlet of Cisco-like proportions. Forget secret notes being passed along by a courtier-like VC wanting to delicately cash out his investment. Forget obsolete images of the hero jumping into a lion’s pit to rescue a startup’s precocious technology and prove his undying affection for all things new. And, for that matter, forget even the lady confusing his efforts by needlessly bringing up profit/loss statements, tiresome balance sheets or prolix customer specifications.
In tune with the highly compressed, super-fast clocks that these protagonists wear, affairs of the heart are now conducted at the mind-wrenching warp speed of the Internet. The fevered pace of a four-week courtship is often initiated by a discreetly placed private investment later morphing into an OEM agreement. Then come the caffeine-intensive multimillion-dollar negotiations led by 31-year-old VPs of business development who have been freshly minted by brand name B-schools. Indeed, the relentless pace in the pursuit of petite technologists by the Ciscos and Lucents of the world is all fast and utterly unromantic. What characterizes this merger activity?
The Winds of M&A
Ammar Hanafi, Cisco’s director of business development, whose pleasant, boyish face appears accross the table to entrepreneurs of all ages, representing networking startups of all sizes, has negotiated several of its M&A deals in the past two years. He strongly contends that "this is not the Bonfire of the Vanities," referring to the book by Tom Wolfe. Yet, M&A activity is definitely at an all-time high. In 1988, according to CS First Boston, the overall volume was $247 billion; last year, it was $1.2 trillion. 1999 is set to be an even stronger play. Also, the number of deals last year is almost twice that of the busiest year in the 1980s.
But what is the DNA of a deal? Which aspects of negotiation are key to arriving at closure? How does a one-year-old company come to be valued so highly? In terms of valuation, the response of the entrepreneur is fairly typical. "Small, focused teams in startup environments are just more agile and productive than larger companies, and thus they are able to beat them to the punch with the latest and the greatest technologies," says Ray Stata, chairman of Nexabit, board member at MIT and founder of Analog Devices. After meeting with Mukesh Chatter in the basement of the Boston Symphony at 6:45 a.m., sometime in 1996, he funded the company for the next 15 months of its existence before succumbing to Lucent’s generous advances (see "Nexabit’s Big Deal," page 46). Vijay Parikh, StratumOne’s CEO and a veteran of M&A activity—both as a acquirer and as acquiree, notes that "conventional wisdom dictates that the M&A process is not something that is supposed to work."
The DNA of the Deal
StratumOne’s dalliance and subsequent marriage with Cisco provides key insights into the acquisition process. The two players, whose brief biographies follow, met in January 1999 and tied the knot with parental approval (read: approbation from the Board of Directors) in June of this year.
StratumOne, a 78-employee strong venture, was born in 1997 to develop the semiconductor technology that goes into routers. It does so in an environment that was originally geared for an IPO in terms of its R&D staffing, rate of growth, and other characteristics, while rivaling Fort Knox in its level of secrecy. There is no reception area — or any receptionist, for that matter — and even the visitor’s entrance is restricted only to employees. Finally, its Web site (www.stratumone.com) is refreshingly different: it boasts just one short page displaying the company logo. It is devoid of any fancy graphics vying for attention, does not list technical white papers, management bios, press announcements, partnerships, award listings, or any other items common today to Web sites of most technology companies.
Cisco, having completed 36 acquisitions since its inception, has mastered the art of expanding its portfolio by spotting a deal early, making an aggressive offer and buying the firm — all at Internet speed. It has transformed itself from "a router company to an end-to-end solutions provider," says Jayshree Ullal, vice president in the enterprise line of business. In answer to the temptation of "running away to join a startup," she just laughs. Retaining entrepreneurs like Ullal is pivotal to constituting the genetics of the deal. What’s the password to acquiring companies and retaining its key personnel simultaneously? Ammar Hanafi, who works in the business development group, reveals that Cisco’s retention rate of acquired employees is actually higher than its retention rate of hired employees. Seventy-five percent of the CEOs of acquired companies are still working for Cisco. "No kidding," he adds, to counter any skeptical expressions.
