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Cisco Systems, Inc.

Cisco Systems, Inc.

170 West Tasman Drive
San Jose, California 95134-1706
U.S.A.
Telephone: (408) 526-4000
Toll Free: (800) 553-6387
Fax: (408) 526-4100
Web site: http://www.cisco.com

Public Company
Incorporated:
1984
Employees: 34,000
Sales: $24.8 billion (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: CSCO
NAIC: 334210 Telephone Apparatus Manufacturing; 334418 Printed Circuit Assembly (Electronic Assembly) Manufacturing; 334419 Other Electronic Component Manufacturing; 511210 Software Publishers; 541512 Computer Systems Design Services

Cisco Systems, Inc. is a leading supplier of communications and computer networking products, systems, and services. The company's product line includes routers, switches, remote access devices, protocol translators, Internet services devices, and networking and network management software, all of which link together geographically dispersed local area networks (LANs), wide area networks (WANs), and the Internet itself. Cisco serves three main market segments: large organizations, including corporations, government entities, utilities, and educational institutions; service providers, including Internet service providers, telephone and cable companies, and providers of wireless communications; and small and medium-sized businesses whose needs include operating networks, connecting to the Internet, and connecting with business partners. Increasingly, Cisco's products are appearing in the consumer marketplace. Cisco operates globally, deriving roughly 44 percent of its sales from overseas business.

BEGINNINGS IN MULTIPROTOCOL ROUTERS

Cisco Systems was founded in December 1984 in Menlo Park, California, by a husband and wife team from Stanford University, Leonard Bosack and Sandra Lerner. Bosack was the manager of the computer science department's laboratory, and Lerner oversaw the computers at the graduate school of business. At Stanford, Bosack devised a way to connect the two local area networks in the respective departments where he and his wife worked, 500 yards across campus.

Lerner and Bosack initially tried to sell the internet-working technology that Bosack had developed to existing computer companies, but none were interested. They then decided to start their own business, Cisco Systems, based on this technology (they came up with the name, a shortened form of San Francisco, while driving across the Golden Gate Bridge). Bosack and Lerner were joined by colleagues Greg Setz, Bill Westfield, and Kirk Lougheed, as cofounders. Stanford University later tried to obtain $11 million in licensing fees from the new company, because Bosack had developed the technology while an employee at the university, but eventually the university settled for $150,000 and free routers and support services.

The company was established on a very tight budget. In fact, Bosack and Lerner had to mortgage their house, run up credit card debts, and defer salaries to their friends who worked for them in order to get the venture off the ground, and, even after two years of business, Lerner maintained an outside salaried job to supplement the couple's income.

Cisco's primary product from the beginning was the internetworking router, a hardware device incorporating software that automatically selects the most effective route for data to flow between networks. Cisco's routers pioneered support for multiple protocols or data transmission standards, and could therefore link together different kinds of networks, those having different architectures and those built on different hardware, such as IBM-compatible personal computers, Apple Macintosh computers, UNIX workstations, and IBM mainframes. Cisco thus became the first company to provide a commercial multi-protocol router when it shipped its first product in 1986, a router for the TCP/IP (Transmission Control Protocol/Internet Protocol) protocol suite. A year later, Cisco was selling $250,000 worth of routers per month. Sales for the fiscal year ending July 1987 were $1.5 million, and the company had only eight employees at the time.

Cisco initially marketed its routers to universities, research centers, the aerospace industry, and government facilities by contacting computer scientists and engineers via ARPANET, the precursor to what would become the Internet. These customers tended to use the TCP/IP protocols and UNIX-based computers. In 1988, the company began to target its internetworking routers at mainstream corporations with geographically dispersed branches that used different networks. To that end, Cisco developed routers serving an even greater array of communications protocols and subsequently distinguished its routers by enabling them to support more protocols than those of any other router manufacturer. By the late 1980s, when the commercial market for internetworking began to develop, Cisco's reasonably priced, high-performance routers gave it a head start over the emerging competition.

Although Cisco had a high rate of sales growth, the young company was still short of cash; in 1988 Bosack and Lerner were forced to turn to a venture capitalist, Donald T. Valentine of Sequoia Capital, for support. Valentine, however, required that the owners surrender to him a controlling stake in the company. Valentine thus became chairperson and then hired an outsider, John Morgridge, as the company's new president and chief executive officer. Morgridge, who had an M.B.A. from Stanford University, was chief operating officer at laptop computer manufacturer GRiD Systems Corp. and prior to that had spent six years as vice-president of sales and marketing at Stratus Computer. Morgridge replaced several Cisco managers, who were friends of Bosack and Lerner, with more qualified and experienced executives. In February 1990, Cisco went public, after which Bosack and Lerner began selling their shares. Sales for the fiscal year ending July 1990 were $69.8 million, net income was $13.9 million, and the company had 254 employees.

Under Morgridge, Bosack had been given the title of chief scientist and Lerner was made head of customer service. However, Lerner reportedly did not get along well with Morgridge and, in August 1990, she was fired, whereupon Bosack also quit. When they left the company, Bosack and Lerner sold the remainder of their stock for $100 million, for a total divestiture of about $200 million. The couple subsequently gave away the majority of their profits to their favorite charities.

COMPANY PERSPECTIVES

A new way to connect. To interact, open a dialogue, spark an idea, or nurture a society. The power of individual imaginations coming together in the network. At the point where technology and people touch, Cisco invents new ways to multiply and enhance the power of the network. Information and creative energy. Converged systems and personal services. Universal links and close relationships. Communication and community. The network powered by Cisco is changing the way we work, live, play, and learn. Everywhere you look.

EARLY 1990S: RAPID GROWTH AS NETWORKS PROLIFERATE

Meanwhile, Morgridge built up a direct sales force to market the products to corporate clients. At first, Cisco's corporate clients were the scientific departments of companies which already maintained large internal networks. Later, Cisco was able to market its products to all kinds of major corporations to help them link the computer systems of their headquarters, regional, and branch offices. As Cisco's client base grew, the company's greatest challenge became meeting customer support service needs. The large size of the network systems for which Cisco supplied products made the user support task especially complex.

The company grew at a tremendous rate as its market rapidly expanded. In the early 1990s, companies of all sizes were installing local area networks (LANs) of personal computers. As such, the potential market for linking these networks, either with each other or with existing minicomputers and mainframe computers, also grew. Cisco's sales jumped from $183.2 million in 1991 to $339.6 million in 1992, and net income grew from $43.2 million to $84.4 million during the same period. In 1992, Fortune magazine rated Cisco as the second fastest growing company in the United States. In its role as the leading internetworking router provider, Cisco could redefine and expand the market as it grew.

While new communications technologies became widespread, Cisco adapted and added the capabilities of handling new protocols to its products. In the fall of 1992, Cisco introduced Fiber Distributed Data Interface (FDDI) and Token-Ring enhancements to its high-end router. Around the same time, the company also introduced the first Integrated Services Digital Network (ISDN) router for the Japanese market.

Until 1992, Cisco's products had not addressed IBM's System Network Architecture (SNA), a proprietary network structure used by IBM computers. In September 1992, however, after IBM announced plans to license its Advanced Peer-to-Peer Networking (APPN) protocol used for SNA, Cisco responded by announcing plans for a rival Advanced Peer-to-Peer Internetworking (APPI) protocol for supporting SNA. By August 1993, Cisco had decided not to develop a rival protocol, because IBM made it clear that APPN would be a more open, multivendor protocol than originally intended. Cisco then proceeded to work with IBM on further defining the APPN standard and bought a license to use APPN technology.

The emergence of asynchronous transfer mode (ATM) technology as a new standard method for multi-protocol data communications posed a challenge to Cisco and the router industry. ATM is a cell-switching technique that can provide high-speed communications of data, voice, video, and images without the use of routers. In early 1993, Cisco entered into a joint development project with AT&T and StrataCom to develop standards that would ensure that ATM operated within existing Frame Relay networks. Cisco also became one of the four founding members of the ATM Forum to help define the emerging standard. In February 1993, Cisco announced a strategy to include ATM among the protocols supported by its products. In 1994, Cisco introduced its first ATM switch.

In January 1993, Cisco introduced a new flagship product, the Cisco 7000 router, which featured a 50 percent improvement in performance over the AGS+, Cisco's existing high-end router. In June of that year, Cisco introduced a new low-end, lower-priced product line, the Cisco 2000 router family. The Cisco 2000 was aimed at companies desiring to link their smaller, remote branches or even remote individual employees, but unwilling to pay a premium price. Also during this time, the first network with over 1,000 Cisco routers was created.

KEY DATES

1984:
Cisco Systems, Inc. is founded by Leonard Bosack and Sandra Lerner.
1986:
Company ships its first product, a router for the TCP/IP protocol suite.
1988:
Donald T. Valentine, a venture capitalist, gains control of the company; John Morgridge is named president and CEO.
1990:
Company goes public; Lerner is fired and Bosack quits.
1993:
Cisco completes its first acquisition, that of Crescendo Communications.
1994:
Revenues exceed $1 billion for the first time.
1995:
John T. Chambers is named CEO.
1996:
Company acquires StrataCom, Inc., maker of switching equipment, for $4.67 billion.
1998:
Cisco's market capitalization passes the $100 billion mark.
1999:
Company acquires 17 businesses, including Cerent Corporation, maker of fiber-optic networking equipment, for $7.2 billion.
2000:
Company's market capitalization reaches $450 billion.
2003:
Cisco acquires Linksys Group, beginning a push into the consumer marketplace.
2005:
The $6.9 billion acquisition of Scientific-Atlanta, Inc. is announced.

International sales became an important part of Cisco's business. Subsidiaries were established in Japan and Australia, and a European Technical Assistance Center was established in Brussels, Belgium. In March 1993, Cisco Systems (HK) Ltd. became a new subsidiary in Hong Kong. International sales steadily increased, accounting for 35.6 percent of sales in 1991, 36 percent in 1992, 39 percent in 1993, and 41.9 percent in 1994. Most of Cisco's international sales were through distributors, whereas in the United States the majority of sales (65 percent in early 1994) were made directly to the end users.

Cisco also began to market its technology, especially its software, more aggressively to long-distance telephone companies, as the deregulation of U.S. telephone carriers enabled these companies to provide more kinds of data communications products and services. For example, Cisco entered into a joint marketing agreement with MCI International to integrate Cisco's routers into end-to-end data networks over telephone lines. In 1992, Cisco entered new distribution agreements with Bell Atlantic Corp. and U.S. West Information Systems Inc. Cisco also signed marketing agreements in 1993 with Pacific Bell, whereby Cisco became a preferred router supplier for the company's network systems.

Cisco similarly began contracting with major European telecommunications companies at about the same time. British Telecom became an original equipment manufacturer (OEM) client of all of Cisco's products. Other European telecommunications companies that entered into OEM relationships with Cisco included Alcatel of France and Siemens A.G. of Germany. Olivetti of Italy agreed to market Cisco's products under a value-added reseller agreement late in 1992.

Cisco made other strategic alliances to position itself better in the maturing internetworking market. To reach out to less technical clients, Cisco entered into joint agreements with Microsoft Corporation to market Cisco's first PC-based router card with Microsoft's Windows NT Advanced Server networking software through Microsoft's marketing channels. Similarly, Cisco established a partnership with Novell to integrate Cisco's routers with Novell's Netware network software so as to provide links between Netware and UNIX-based networks. Additionally, Cisco began working with Lan-Optics Ltd. to develop remote-access products.

199394: FIRST WAVE OF ACQUISITIONS

In September 1993, Cisco made its first acquisition. For $95 million, it acquired Crescendo Communications, which had pioneered products for a new technology called Copper Distributed Data Interface (CDDI). Crescendo's development of ATM technology was also a leading reason for the acquisition. Crescendo Communications was renamed the Workgroup Business Unit, and its switching technologies under development were later incorporated into Cisco's routers. Cisco made its second acquisition, that of Newport Systems Solutions for $93 million in stock, in August 1994. Newport Solutions sold the LAN2LAN product line, software used in linking local area networks.

Early in 1994, Cisco announced a new networking architecture, CiscoFusion, to provide clients with a gradual transition from routers to the new switched networking technologies of ATM and LAN switching. CiscoFusion allowed users to take advantage of both routing and switching techniques. As part of this architecture, several new switching products were introduced in March 1994, including the ATM Interface Processor and the Catalyst FDDI-to-Ethernet LAN switch. The latter was the first new product of the Workgroup Businesses Unit since the acquisition of Crescendo.

During this time, Cisco moved its headquarters from one end of Silicon Valley to the other, from Menlo Park to a newly constructed office building complex in San Jose, California. The growing size of the company had necessitated larger office space. The company's workforce had grown from 1,451 in July 1993 to 2,262 in July 1994, as Cisco hired talent from smaller, struggling networking companies which were laying off personnel. In 1994, Cisco topped $1 billion in sales, ending the year on July 31, 1994, with $1.24 billion in net sales, a 92 percent increase over the previous year, and $314.9 million in net income, 83 percent more than in 1993. Later in 1994, in October, Cisco completed two more acquisitions of firms involved in the switching sector. It spent $240 million for Kalpana, Inc., a maker of Ethernet switching products; and $120 million for LightStream Corp., which was involved in ATM switching and Ethernet switching and routing.

ASTOUNDING GROWTH UNDER JOHN CHAMBERS STARTING IN 1995

In January 1995 John T. Chambers was named CEO of Cisco, with Morgridge becoming chairman and Valentine vice-chairman. Chambers, who had previous stints at IBM and Wang Laboratories before joining Cisco in 1991, stepped up the company's acquisition pace to keep ahead of its rivals and to fill in gaps in its product line, aiming to provide one-stop networking shopping to its customers. The company completed 11 acquisitions in 1995 and 1996, including Grand Junction, Inc., maker of Fast Ethernet and Ethernet switching products, purchased for $400 million in September 1995; and Granite Systems Inc., a maker of high-speed Gigabit Ethernet switches, bought for $220 million in September 1996.

The largest deal during this period, however, was that of StrataCom, Inc., a $4.67 billion acquisition completed in April 1996. StrataCom was a leading supplier of ATM and Frame Relay WAN switching equipment capable of handling voice, data, and video. The addition of Frame Relay switching products to the Cisco portfolio was particularly important as that technology was being rapidly adopted by telecommunications companies needing to increase the capacity of their networks. The deal was also a key step in Cisco's attempt to move beyond its core customer area of "enterprise" customers (large corporations, government agencies, utilities, and educational institutions) into the area of telecommunications access providers, an area in which it faced entrenched and formidable competition in the form of such giants as Alcatel, Lucent Technologies Inc., and Nortel Networks Corporation.

Cisco continued its blistering acquisitions pace in 1997 and 1998, completing 15 more deals. The largest of these was the April 1998 purchase of NetSpeed, Inc., a specialist in digital subscriber line (DSL) equipment, an emerging technology providing homes and small offices with high-speed access to the Internet via existing telephone lines. Another emerging networking technology was that of voice-over-IP (Internet Protocol), which essentially enables the routing of telephone calls over the Internet. The acquisitions of LightSpeed International, Inc. in April 1998 and Selsius Systems, Inc. in November 1998 helped Cisco gain a significant presence in the Internet telephony sector. The areas of DSL and voiceover-IP provided additional examples of Cisco's strategy of acquiring its way into emerging networking sectors.

By the late 1990s Cisco Systems was the undisputed king of the networking world. In July 1998 the company's market capitalization surpassed the $100 billion mark, just 12 years after its initial public offering, a time frame believed to be a record for achieving that level. Revenues reached $12.15 billion by 1999, a more than sixfold increase over the 1995 result of $1.98 billion. During 1999 Cisco became even more acquisitive, snatching up an additional 17 companies, in the process gaining presences in two more emerging areas: fiber-optic networking and wireless networking. Several fiber-optic companies were acquired, including start-up Cerent Corporation, which was purchased for about $7.2 billion in the company's largest acquisition yet. Fiber-optic networks were particularly being built by telecommunications firms aiming to take advantage of their capacity for handling massive quantities of voice, video, and data, making Cisco's entry into this segment of vital importance.

In late 1999 Cisco announced that it would acquire the fiber-optic telecommunications equipment business of Italy's Pirelli S.p.A. for about $2.2 billion, gaining Pirelli gear that takes a beam of light and breaks it into as many as 128 "colors," each of which can carry a separate stream of voice, data, or video. Cisco's key wireless acquisition also came in late 1999 with the announcement of the $800 million purchase of Aironet Wireless Communications, Inc., maker of equipment that creates LANs without wires in small and medium-sized businesses. The technology was also expected to be transferred to the home environment, where Cisco aimed to capture what was predicted to be an area of rapid early 21st century growth: the networked home.

During 1999 Cisco also acquired GeoTel Communications Corp., a maker of software for routing telephone calls, for about $1.9 billion.

By early 2000, following 1999's frenzied bull market in high-tech stocks, Cisco's market value surpassed $450 billion, making it the third most valuable company in the world, behind Microsoft and General Electric Company (for a brief period in late March, Cisco actually ranked as the most valuable company in the world, with a total market capitalization of $555 billion). Revenues were soaring, as were earnings, which reached $906 million for the second quarter of the 2000 fiscal year alone. Rather than slowing it down, Chambers planned to increase the company's acquisition pace, with the addition of as many as 25 companies during 2000. Through acquisitions and strategic alliances with such industry giants as Microsoft, Hewlett-Packard Company, and Intel Corporation, Chambers aimed to increase Cisco Systems' revenues to $50 billion by 2005.

TRANSFORMATION IN EARLY 2000S

Chambers only made it halfway toward his financial goal by 2005, but the fact that Cisco doubled its revenue volume during the first part of the decade represented a remarkable achievement considering the prevailing conditions in the technology sector. Chambers, described as irrepressibly optimistic and relentlessly upbeat by industry observers, was slow to react to what became the most severe downturn in the history of the industry. Rivals Lucent Technologies and Gateway, Inc., among others, slashed overhead and trimmed their operations as market conditions soured, but Chambers remained sanguine until he was forced to recognize the severity of the situation. During a two-week trip abroad in March 2001, he met with numerous customers, hearing from each that spending was to be drastically reduced in the coming months. Chambers returned home and began what he referred to as "the most challenging time in my business career," in a November 24, 2003 interview with Business Week. He laid off 8,500 workers, nearly one-fifth of Cisco's payroll, and implemented sweeping changes throughout the company, reigning in the freewheeling attitude toward expansion that had led to the acquisition of 73 companies between 1993 and 2000 and replacing it with discipline, order, and restraint. "Process was a dirty word at Cisco, including for the CEO," Chambers conceded in his interview with Business Week.

Although Chambers admitted he was late in recognizing the seriousness of the situation, his actions ensured that further layoffs were not needed. The company, adhering to a more austere, focused strategy, made great gains as conditions in the technology sector began to improve. Between 2001 and 2003, Cisco's share of the $92 billion communications-equipment market increased from 10 percent to 16 percent, the biggest increase in the company's history. Significantly, the return of favorable economic conditions did not signal the end of wholesale changes at Cisco. Chambers began steering Cisco in a new direction following the downturn in the technology sector, opening a new avenue of growth for the company to exploit in the years ahead.

Throughout its development, Cisco had shied from entering the consumer market, preferring the stability and relatively higher profit margins enjoyed by selling networking equipment to corporations and communications providers. In 2003, Chambers began to change tack, beginning with the purchase of Linksys Group, a manufacturer of wireless routers for consumers. The foray proved successful, encouraging Chambers, who was back to his ebullient self, to delve deeper into the consumer market. In July 2005, he purchased a manufacturer of networked DVD players named KISS Technology, a small acquisition that served as a stepping stone for a massive acquisition announced later in the year. In November 2005, Cisco announced it was acquiring Scientific-Atlanta, Inc., a Lawrenceville, Georgia, manufacturer of cable television set-top boxes. Cisco agreed to pay $6.9 billion for Scientific-Atlanta, which generated $1.9 billion in revenue in 2005, using the purchase to complete what industry insiders referred to as the "quadruple play" package. Cable and telephone companies were interested in providing a bundle of services to their customers, a package of converged networks that included broadband Internet access, Internet-based telephone service, wireless calling, and video services such as video-on-demand. Cisco was well equipped to provide the first three types of services, but it lacked the ability to provide anything substantial in the video realm. The purchase of Scientific-Atlanta gave Chambers quadruple play capabilities, opening a new, vast market for the company. "Once you add video," Chambers explained in a November 21, 2005 interview with Business Week Online, "not just in products, but in being able to integrate them all together, that gives us leadership that is very, very unique."

As Cisco prepared to enter what was being billed as the "bundle wars," the company stood poised to reap the benefits of Chambers bold move.

                                   Heather Behn Hedden

                  Updated, David E. Salamie; Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

Cisco Systems Canada Limited; Cisco Systems Europe, S.A.R.L. (France); Cisco Systems Import/Export Corporation (U.S. Virgin Islands); Cisco Systems Belgium, S.A.; Cisco Systems Limited (U.K.); Cisco Systems Australia PTY. Limited; Nihon Cisco Systems, K.K. (Japan); Cisco Systems de Mexico, S.A. de C.V.; Cisco Systems New Zealand Limited; Cisco Systems (HK) Limited (Hong Kong); Cisco Systems GmbH (Germany); Cisco Systems (Italy) Srl; Cisco Systems GmbH (Austria); Cisco do Brasil Ltda. (Brazil); Cisco Systems (Korea) Ltd.; VZ, Cisco Systems, C.A. (Venezuela); Cisco Systems South Africa (Pty) Ltd.; Cisco Systems Sweden Aktiebolag; Cisco Systems (Switzerland) AG; Cisco Systems Capital, B.V.; Cisco Systems International Netherlands, B.V.; Cisco Systems Czech Republic, s.r.o.; Cisco Systems Spain, S.L.; Cisco Systems Argentina S.A.; Cisco Systems Chile, S.A.; Cisco Sistemas de Redes S.A. (Costa Rica); Cisco Systems Malaysia, Sdn. Bhd.; Cisco Systems (USA) Pte. Ltd., Singapore; Cisco Systems Thailand, Ltd.; Cisco Systems Peru, S.A.; Cisco Systems Greece, S.A.; Cisco Systems Poland, Sp. zo.o; Cisco Systems Israel, Ltd.; Cisco Systems Internet-working Iletsim Hizmetlieri Ltd. Sirketi (Turkey); Cisco Systems (India), Ltd.; Cisco Systems Capital Corp.; Cisco Systems (Taiwan), Ltd.; Cisco Systems (Colombia), Ltda.; Cisco Technology, Inc.; Cisco Systems Sales & Service, Inc.; Cisco Systems Co. (Canada); Telebit Corporation; Cisco Systems Danmark AS (Denmark); Cisco Systems Norway AS; Cisco Systems Hungary, Ltd.; Cisco Systems Management B.V.; Cisco Systems (Puerto Rico) Corp.; Cisco Systems Finland Oy; Cisco Systems (China) Networking Technologies Ltd.; Cisco Systems Romania SRL; Cisco Systems Croatia Ltd. for Trade; Cisco Systems Slovakia, spol. sr.o; Latitude Communications Pte. Ltd. (Singapore); Protego Networks LLC; Radiata, Inc.; Telebit Corporation; Topspin Communications LLC.

PRINCIPAL COMPETITORS

ADC Telecommunications, Inc.; Alcatel; Cabletron Systems, Inc.; Compaq Computer Corporation; D-Link Corporation; ECI Telecom Ltd.; Fujitsu Limited; Hewlett-Packard Company; Intel Corporation; International Business Machines Corporation; Juniper Networks, Inc.; Kingston Technology Company; Lucent Technologies Inc.; Madge Networks N.V.; Microsoft Corporation; Motorola, Inc.; MRV Communications, Inc.; NEC Corporation; Network Associates, Inc.; Newbridge Networks Corporation; Nokia Corporation; Nortel Networks Corporation; Novell, Inc.; Sterling Software, Inc.; Telefonaktiebolaget LM Ericsson; 3Com Corporation.

FURTHER READING

Baker, Stephen, "Cisco's Telecom Two-Step in Europe," Business Week (international edition), October 11, 1999.

Baum, Geoff, "John Chambers," Forbes ASAP, February 23, 1998, pp. 52-53+.

Burrows, Peter, "Cisco's Comeback, "Business Week, November 24, 2003, p. 116.

Byrne, John A., "The Corporation of the Future," Business Week, August 31, 1998, pp. 102+.

Carlsen, Clifford, "Rolling on the Info Superhighway," San Francisco Business Times, August 20, 1993, p. 6A.

Carroll, Paul B., "Cisco Systems Will Acquire StrataCom, Computer Switch Maker, for $4 Billion," Wall Street Journal, April 23, 1996, p. A3.

"Cisco's Bold New TV Bet," Business Week Online, November 21, 2005.

Clark, Don, "Cisco Is Buying GeoTel for $1.92 Billion in Stock," Wall Street Journal, April 14, 1999, p. A3.

Daly, James, "John Chambers: The Art of the Deal," Business 2.0, October 1999.

Deagon, Brian, "High-Tech Industry Returns to Mergers As Growth Strategy," Investor's Business Daily, November 30, 2005, p. A4.

Donnelly, George, "Acquiring Minds: Cisco and Lucent Buy into the Telecom Revolution with Strategies That Clash and Converge," CFO Magazine, September 1999.

Emigh, Jacqueline, "Cisco Unveils ATM Interfacing Router," Telephony, February 1, 1993, pp. 24+.

Goldblatt, Henry, "Cisco's Secrets," Fortune, November 8, 1999, pp. 177-78+.

Gomes, Lee, "Cisco Tops $100 Billion in Market Capital," Wall Street Journal, July 20, 1998, p. B5.

Hutheesing, Nikhil, and Jeffrey Young, "Curse of the Market Leader," Forbes, July 29, 1996, pp. 78+.

Ingram, Matthew, "Cisco's Purchase of TV Box Maker Either Bold or Desperate," New Zealand Herald, December 6, 2005.

Kupfer, Andrew, "The Real King of the Internet," Fortune, September 7, 1998, pp. 84-86+.

Mardesich, Jodi, "Cisco's Plan to Pop Up in Your Home," Fortune, February 1, 1999, pp. 119-20.

Maurer, Harry, "Cisco Dials Scientific-Atlanta," Business Week, December 5, 2005, p. 32.

Mullaney, Timothy J., "Cisco: Paging Dr. Info Tech," Business Week, July 11, 2005, p. 78.

Musich, Paula, "Cisco Chief Plots Router Course: Outlines Plans for ATM Technology," PC Week, September 13, 1993, pp. 49+.

, "Cisco Revamps Router Strategy: Shifts Product, Distribution Tactics for Maturing Market," PC Week, November 22, 1993, p. 123.

, "Cisco, Wellfleet Ride Router Market to Success," PC Week, December 14, 1992, pp. 163+.

Osterland, Andrew, "No Kidding. Cisco Isn't Done Yet," Financial World, January 21, 1997, pp. 62-64, 66.

Pitta, Julie, "Long Distance Relationship," Forbes, March 16, 1992, pp. 136+.

Poe, Robert, "Cisco Strikes the Mother Lode with New Router," America's Network, June 15, 2004, p. 8.

Reinhardt, Andy, "Meet Mr. Internet," Business Week, September 13, 1999, pp. 128-31+.

Reinhardt, Andy, Peter Burrows, and Amy Barrett, "Cisco Crunch Time for a High-Tech Wiz," Business Week, April 28, 1997, pp. 80+.

Schlender, Brent, "Computing's Next Superpower," Fortune, May 12, 1997, pp. 88-90+.

Schonfeld, Erick, "Cisco and the Kids: Are They As Scary As They Look?," Fortune, April 14, 1997, pp. 200-02.

Thurm, Scott, "Cisco to Acquire Networking Firm Cerent," Wall Street Journal, August 26, 1999, p. A3.

, "For Cisco, Focus on Small Companies Pays Off," Wall Street Journal, May 27, 1999, p. B8.

, "Joining the Fold: Under Cisco's System, Mergers Usually Work; That Defies the Odds," Wall Street Journal, March 1, 2000, pp. A1, A12.

Thurm, Scott, and Deborah Ball, "Cisco to Buy a Pirelli Unit for $2 Billion," Wall Street Journal, December 20, 1999, p. A3.

Tully, Shawn, "How Cisco Mastered the Net," Fortune, August 17, 1998, pp. 207-08, 210.

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Cisco Systems, Inc.

Cisco Systems, Inc.

170 West Tasman Drive
San Jose, California 95134-1706
U.S.A.
Telephone: (408) 526-4000
Toll Free: (800) 553-6387
Fax: (408) 526-4100
Web site: http://www.cisco.com

Public Company
Incorporated: 1984
Employees: 26,140
Sales: $12.15 billion (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: CSCO
NAIC: 334210 Telephone Apparatus Manufacturing; 334418 Printed Circuit Assembly (Electronic Assembly) Manufacturing; 334419 Other Electronic Component Manufacturing; 511210 Software Publishers; 541512 Computer Systems Design Services

Cisco Systems, Inc. is the worlds leading supplier of computer networking products, systems, and services. The companys product line includes routers, switches, remote access devices, protocol translators, Internet services devices, and networking and network management software, all of which link together geographically dispersed local area networks (LANs), wide area networks (WANs), and the Internet itself. Cisco serves three main market segments: large organizationsincluding corporations, government entities, utilities, and educational institutionsneeding complex networking solutions that typically bridge multiple locations; service providers, including Internet access providers, telephone and cable companies, and providers of wireless communications; and small and medium-sized businesses whose needs include operating networks, connecting to the Internet, and/or connecting with business partners. The company is increasingly developing expertise in the area of fiberoptic networking as well as the concomitant expertise in multiservice networks, which offer video and voice capabilities in addition to the traditional data capability.

Beginnings in Multiprotocol Routers

Cisco Systems was founded in December 1984 in Menlo Park, California, by a husband and wife team from Stanford University, Leonard Bosack and Sandra Lerner. Bosack was the manager of the computer science departments laboratory, and Lerner oversaw the computers at the graduate school of business. At Stanford, Bosack devised a way to connect the two local area networks in the respective departments where he and his wife worked, 500 yards across campus.

Lerner and Bosack initially tried to sell the internetworking technology that Bosack had developed to existing computer companies, but none were interested. They then decided to start their own business, Cisco Systems, based on this technology (they came up with the name, a shortened form of San Francisco, while driving across the Golden Gate Bridge). Bosack and Lerner were joined by colleagues Greg Setz, Bill Westfield, and Kirk Lougheed, as cofounders. Stanford University later tried to obtain $11 million in licensing fees from the new company, because Bosack had developed the technology while an employee at the university, but eventually the university settled for $150,000 and free routers and support services.

The company was established on a very tight budget. In fact, Bosack and Lerner had to mortgage their house, run up credit card debts, and defer salaries to their friends who worked for them in order to get the venture off the ground, and, even after two years of business, Lerner maintained an outside salaried job to supplement the couples income.

Ciscos primary product from the beginning was the internetworking router, a hardware device incorporating software that automatically selects the most effective route for data to flow between networks. Ciscos routers pioneered support for multiple protocols or data transmission standards, and could therefore link together different kinds of networks, those having different architectures and those built on different hardware, such as IBM-compatible personal computers, Apple Macintosh computers, UNIX workstations, and IBM mainframes. Cisco thus became the first company to commercially provide a multiprotocol router when it shipped its first product in 1986, a router for the TCP/IP (Transmission Control Protocol/Internet Protocol) protocol suite. A year later, Cisco was selling $250,000 worth of routers per month. Sales for the fiscal year ending July 1987 were $1.5 million, and the company had only eight employees at the time.

Cisco initially marketed its routers to universities, research centers, the aerospace industry, and government facilities by contacting computer scientists and engineers via ARPANET, the precursor to what was later known as the Internet. These customers tended to use the TCP/IP protocols and UNIX-based computers. In 1988, the company began to target its internetworking routers at mainstream corporations with geographically dispersed branches that used different networks. To that end, Cisco developed routers serving an even greater array of communications protocols and subsequently distinguished its routers by enabling them to support more protocols than those of any other router manufacturer. By the late 1980s, when the commercial market for internetworking began to develop, Ciscos reasonably priced, high-performance routers gave it a head start over the emerging competition.

Although Cisco had a high rate of sales growth, the young company was still short of cash; in 1988 Bosack and Lerner were forced to turn to a venture capitalist, Donald T. Valentine of Sequoia Capital, for support. Valentine, however, required that the owners surrender to him a controlling stake in the company. Valentine thus became chairperson and then hired an outsider, John Morgridge, as the companys new president and chief executive officer. Morgridge, who had an M.B.A. from Stanford University, was chief operating officer at laptop computer manufacturer GRiD Systems Corp. and prior to that had spent six years as vice-president of sales and marketing at Stratus Computer. Morgridge replaced several Cisco managers, who were friends of Bosack and Lerner, with more qualified and experienced executives. In February 1990, Cisco went public, after which Bosack and Lerner began selling their shares. Sales for the fiscal year ending July 1990 were $69.8 million, net income was $13.9 million, and the company had 254 employees.

Under Morgridge, Bosack had been given the title of chief scientist and Lerner was made head of customer service. However, Lerner reportedly did not get along well with Morgridge and, in August 1990, she was fired, whereupon Bosack also quit. When they left the company, Bosack and Lerner sold the remainder of their stock for $100 million, for a total divestiture of about $200 million. The couple subsequently gave away the majority of their profits to their favorite charities.

Early 1990s: Rapid Growth As Networks Proliferate

Meanwhile, Morgridge built up a direct sales force to market the products to corporate clients. At first, Ciscos corporate clients were the scientific departments of companies which already maintained large internal networks. Later, Cisco was able to market its products to all kinds of major corporations to help them link the computer systems of their headquarters, regional, and branch offices. As Ciscos client base grew, the companys greatest challenge became meeting customer support service needs. The large size of the network systems for which Cisco supplied products made the user support task especially complex.

The company grew at a tremendous rate as its market rapidly expanded. In the early 1990s, companies of all sizes were installing local area networks (LANs) of personal computers. As such, the potential market for linking these networks, either with each other or with existing minicomputers and mainframe computers, also grew. Ciscos sales jumped from $183.2 million in fiscal 1991 to $339.6 million in 1992, and net income grew from $43.2 million to $84.4 million during the same period. In 1992, Fortune magazine rated Cisco as the second fastest growing company in the United States. In its role as the leading internetworking router provider, Cisco could redefine and expand the market as it grew.

While new communications technologies became widespread, Cisco adapted and added the capabilities of handling new protocols to its products. In the fall of 1992, Cisco introduced Fiber Distributed Data Interface (FDDI) and Token-Ring enhancements to its high-end router. Around the same time, the company also introduced the first Integrated Services Digital Network (ISDN) router for the Japanese market.

Until 1992, Ciscos products had not addressed IBMs System Network Architecture (SNA), a proprietary network structure used by IBM computers. In September 1992, however, after IBM announced plans to license its Advanced Peer-to-Peer Networking (APPN) protocol used for SNA, Cisco responded by announcing plans for a rival Advanced Peer-to-Peer Internetworking (APPI) protocol for supporting SNA. By August 1993, Cisco had decided not to develop a rival protocol, because IBM made it clear that APPN would be a more open, multivendor protocol than originally intended. Cisco then proceeded to work with IBM on further defining the APPN standard and bought a license to use APPN technology.

The emergence of asynchronous transfer mode (ATM) technology as a new standard method for multiprotocol data communications posed a challenge to Cisco and the router industry. ATM is a cell-switching technique that can provide high-speed communications of data, voice, video, and images without the use of routers. In early 1993, Cisco entered into a joint development project with AT&T and StrataCom to develop standards that would ensure that ATM operated within existing Frame Relay networks. Cisco also became one of the four founding members of the ATM Forum to help define the emerging standard. In February 1993, Cisco announced a strategy to include ATM among the protocols supported by its products. In fiscal 1994, Cisco introduced its first ATM switch.

Company Perspectives:

Cisco is better positioned than ever before to lead the Internet economy and help change the way we work, live, play, and learn.

In January 1993, Cisco introduced a new flagship product, the Cisco 7000 router, which featured a 50 percent improvement in performance over the AGS+, Ciscos existing high-end router. In June of that year, Cisco introduced a new low-end, lower-priced product line, the Cisco 2000 router family. The Cisco 2000 was aimed at companies desiring to link their smaller, remote branches or even remote individual employees, but unwilling to pay a premium price. Also during this time, the first network with over 1,000 Cisco routers was created.

International sales became an important part of Ciscos business. Subsidiaries were established in Japan and Australia, and a European Technical Assistance Center was established in Brussels, Belgium. In March 1993, Cisco Systems (HK) Ltd. became a new subsidiary in Hong Kong. International sales steadily increased, accounting for 35.6 percent of sales in fiscal 1991, 36 percent in fiscal 1992, 39 percent in fiscal 1993, and 41.9 percent in fiscal 1994. Most of Ciscos international sales were through distributors, whereas in the United States the majority of sales (65 percent in early 1994) were made directly to the end users.

Cisco also began to market its technology, especially its software, more aggressively to long-distance telephone companies, as the deregulation of U.S. telephone carriers enabled these companies to provide more kinds of data communications products and services. For example, Cisco entered into a joint marketing agreement with MCI International to integrate Ciscos routers into end-to-end data networks over telephone lines. In 1992, Cisco entered new distribution agreements with Bell Atlantic Corp. and U.S. West Information Systems Inc. Cisco also signed marketing agreements in fiscal 1993 with Pacific Bell, whereby Cisco became a preferred router supplier for the companys network systems.

Cisco similarly began contracting with major European telecommunications companies at about the same time. British Telecom became an original equipment manufacturer (OEM) client of all of Ciscos products. Other European telecommunications companies that entered into OEM relationships with Cisco included Alcatel of France and Siemens A.G. of Germany. Olivetti of Italy agreed to market Ciscos products under a value-added reseller agreement late in 1992.

Cisco made other strategic alliances to position itself better in the maturing internetworking market. To reach out to less technical clients, Cisco entered into joint agreements with Microsoft Corporation to market Ciscos first PC-based router card with Microsofts Windows NT Advanced Server networking software through Microsofts marketing channels. Similarly, Cisco established a partnership with Novell to integrate Ciscos routers with Novells Netware network software so as to provide links between Netware and UNIX-based networks. Additionally, Cisco began working with LanOptics Ltd. to develop remote-access products.

1993-94: First Wave of Acquisitions

In September 1993, Cisco made its first acquisition. For $95 million, it acquired Crescendo Communications, which had pioneered products for a new technology called Copper Distributed Data Interface (CDDI). Crescendos development of ATM technology was also a leading reason for the acquisition. Crescendo Communications was renamed the Workgroup Business Unit, and its switching technologies under development were later incorporated into Ciscos routers. Cisco made its second acquisition, that of Newport Systems Solutions for $93 million in stock, in August 1994. Newport Solutions sold the LAN2LAN product line, software used in linking local area networks.

Early in 1994, Cisco announced a new networking architecture, CiscoFusion, to provide clients with a gradual transition from routers to the new switched networking technologies of ATM and LAN switching. CiscoFusion allowed users to take advantage of both routing and switching techniques. As part of this architecture, several new switching products were introduced in March 1994, including the ATM Interface Processor and the Catalyst FDDI-to-Ethernet LAN switch. The latter was the first new product of the Workgroup Businesses Unit since the acquisition of Crescendo.

Key Dates:

1984:
Cisco Systems, Inc. is founded by Leonard Bosack and Sandra Lerner.
1986:
Company ships its first product, a router for the protocol suite.
1988:
Donald T. Valentine, a venture capitalist, gains control of the company; John Morgridge is named president and CEO.
1990:
Company goes public; Lerner is fired and Bosack quits.
1993:
Cisco completes its first acquisition, that of Crescendo Communications.
1994:
Revenues exceed $1 billion for the first time.
1995:
John T. Chambers is named CEO.
1996:
Company acquires StrataCom, Inc., maker of switching equipment, for $4.67 billion.
1998:
Ciscos market capitalization passes the $100 billion mark.
1999:
Company acquires 17 businesses, including: GeoTel Communications Corp., a maker of software for routing telephone calls, for $1.9 billion; Cerent Corporation, maker of fiber-optic networking equipment, for $7.2 billion; Aironet Wireless Communications Inc., maker of wireless LAN equipment, for $800 million; and the fiber-optic telecommunications equipment business of Italys Pirelli S.p.A. for about $2.2 billion.
2000:
Companys market capitalization reaches $450 billion.

During this time, Cisco moved its headquarters from one end of Silicon Valley to the other, from Menlo Park to a newly constructed office building complex in San Jose, California. The growing size of the company had necessitated larger office space. The companys workforce had grown from 1,451 in July 1993 to 2,262 in July 1994, as Cisco hired talent from smaller, struggling networking companies which were laying off personnel. In fiscal 1994, Cisco topped $1 billion in sales, ending the year on July 31, 1994, with $1.24 billion in net sales, a 92 percent increase over the previous year, and $314.9 million in net income, 83 percent more than fiscal 1993. Later in 1994, in October, Cisco completed two more acquisitions of firms involved in the switching sector. It spent $240 million for Kalpana, Inc., a maker of Ethernet switching products; and $120 million for LightStream Corp., which was involved in ATM switching and Ethernet switching and routing.

Astounding Growth Under John Chambers Starting in 1995

In January 1995 John T. Chambers was named CEO of Cisco, with Morgridge becoming chairman and Valentine vice-chairman. Chambers, who had previous stints at IBM and Wang Laboratories before joining Cisco in 1991, stepped up the companys acquisition pace to keep ahead of its rivals and to fill in gaps in its product line, aiming to provide one-stop networking shopping to its customers. The company completed 11 acquisitions in 1995 and 1996, including Grand Junction, Inc., maker of Fast Ethernet and Ethernet switching products, purchased for $400 million in September 1995; and Granite Systems Inc., a maker of high-speed Gigabit Ethernet switches, bought for $220 million in September 1996. The largest deal during this period, however, was that of StrataCom, Inc., a $4.67 billion acquisition completed in April 1996. StrataCom was a leading supplier of ATM and Frame Relay WAN switching equipment capable of handling voice, data, and video. The addition of Frame Relay switching products to the Cisco portfolio was particularly important as that technology was being rapidly adopted by telecommunications companies needing to increase the capacity of their networks. The deal was also a key step in Ciscos attempt to move beyond its core customer area of enterprise customersi.e., large corporations, government agencies, utilities, and educational institutionsinto the area of telecommunications access providers, an area in which it faced entrenched and formidable competition in the form of such giants as Alcatel, Lucent Technologies Inc., and Nortel Networks Corporation.

Cisco continued its blistering acquisitions pace in 1997 and 1998, completing 15 more deals. The largest of these was the April 1998 purchase of NetSpeed, Inc., a specialist in digital subscriber line (DSL) equipment, an emerging technology providing homes and small offices with high-speed access to the Internet via existing telephone lines. Another emerging networking technology was that of voice-over-IP (Internet Protocol), which essentially enables the routing of telephone calls over the Internet. The acquisitions of LightSpeed International, Inc. in April 1998 and Selsius Systems, Inc. in November 1998 helped Cisco gain a significant presence in the Internet telephony sector. The areas of DSL and voice-over-IP provided additional examples of Ciscos strategy of acquiring its way into emerging networking sectors.

By the late 1990s Cisco Systems was the undisputed king of the networking world. In July 1998 the companys market capitalization surpassed the $100 billion mark, just 12 years after its initial public offeringa time frame believed to be a record for achieving that level. Revenues reached $12.15 billion by fiscal 1999, a more than sixfold increase over the fiscal 1995 result of $1.98 billion. During 1999 Cisco became even more acquisitive, snatching up an additional 17 companies, in the process gaining presences in two more emerging areas: fiberoptic networking and wireless networking. Several fiber-optic companies were acquired, including start-up Cerent Corporation, which was purchased for about $7.2 billion in the companys largest acquisition yet. Fiber-optic networks were particularly being built by telecommunications firms aiming to take advantage of their capacity for handling massive quantities of voice, video, and data, making Ciscos entry into this segment of vital importance. In late 1999 Cisco announced that it would acquire the fiber-optic telecommunications equipment business of Italys Pirelli S.p.A. for about $2.2 billion, gaining Pirelli gear that takes a beam of light and breaks it into as many as 128 colors, each of which can carry a separate stream of voice, data, or video. Ciscos key wireless acquisition also came in late 1999 with the announcement of the $800 million purchase of Aironet Wireless Communications, Inc., maker of equipment that creates LANs without wires in small and medium-sized businesses. The technology was also expected to be transferred to the home environment, where Cisco aimed to capture what was predicted to be an area of rapid early 21st century growth: the networked home. During 1999 Cisco also acquired GeoTel Communications Corp., a maker of software for routing telephone calls, for about $1.9 billion.

By early 2000following 1999s frenzied bull market in high-tech stocksCiscos market value surpassed $450 billion, making it the third most valuable company in the world, behind Microsoft and General Electric Company (for a brief period in late March, Cisco actually ranked as the most valuable company in the world, with a total market capitalization of $555 billion). Revenues were soaring, as were earnings, which reached $906 million for the second quarter of the 2000 fiscal year alone. Rather than slowing it down, Chambers planned to increase the companys acquisition pace, with the addition of as many as 25 companies during 2000. Through acquisitions and through strategic alliances with such industry giants as Microsoft, Hewlett-Packard Company, and Intel Corporation, Chambers aimed to increase Cisco Systems revenues to $50 billion by 2005. Ciscos presence in nearly every networking sector, the speed with which it typically entered emerging areas, and its proven ability to absorb and expand acquired companies provided evidence that the company was likely to reach this lofty goal and to continue in its role as the undisputed leader of the networking equipment industry.

Principal Subsidiaries

Cisco Systems Canada Limited; Cisco Systems Europe, S.A.R.L. (France); Cisco Systems Import/Export Corporation (U.S. Virgin Islands); Cisco Systems Belgium, S.A.; Cisco Systems Limited (U.K.); Cisco Systems Australia PTY. Limited; Nihon Cisco Systems, K.K. (Japan); Cisco Systems de Mexico, S.A. de C.V.; Cisco Systems New Zealand Limited; Cisco Systems (HK) Limited (Hong Kong); Cisco Systems GmbH (Germany); Cisco Systems (Italy) Sri; Cisco Systems GmbH (Austria); Cisco do Brasil Ltda. (Brazil); Cisco Systems (Korea) Ltd.; VZ, Cisco Systems, C.A. (Venezuela); Cisco Systems South Africa (Pty) Ltd.; Cisco Systems Sweden Aktiebolag; Cisco Systems (Switzerland) AG; Cisco Systems Capital, B.V.; Cisco Systems International Netherlands, B.V.; Cisco Systems Czech Republic, s.r.o.; Cisco Systems Spain, S.L.; Cisco Systems Argentina S.A.; Cisco Systems Chile, S.A.; Cisco Sistemas de Redes S.A. (Costa Rica); Cisco Systems Malaysia, Sdn. Bhd.; Cisco Systems (USA) Pte. Ltd., Singapore; Cisco Systems Thailand, Ltd.; Cisco Systems Peru, S.A.; Cisco Systems Greece, S.A.; Cisco Systems Poland, Sp.zo.o; Cisco Systems Israel, Ltd.; Cisco Systems Internetworking Iletsim Hizmetlieri Ltd. Sirketi (Turkey); Cisco Systems (India), Ltd.; Cisco Systems Capital Corp.; Cisco Systems (Taiwan), Ltd.; Cisco Systems (Colombia), Ltda; Cisco Technology, Inc.; Cisco Systems Sales & Service, Inc.; Cisco Systems Co. (Canada); Telebit Corporation; Cisco Systems Danmark AS; Cisco Systems Norway AS; Cisco Systems Hungary, Ltd.; Cisco Systems Management B.V.; Cisco Systems (Puerto Rico) Corp.; Cisco Systems Finland Oy; Cisco Systems (China) Networking Technologies Ltd.; Cisco Systems Romania SRL; Cisco Systems Croatia Ltd. for Trade; Cisco Systems Slovakia, spol. sr.o.

Principal Competitors

ADC Telecommunications, Inc.; Alcatel; Cabletron Systems, Inc.; Compaq Computer Corporation; D-Link Corporation; ECI Telecom Ltd.; Fujitsu Limited; Hewlett-Packard Company; Intel Corporation; International Business Machines Corporation; Juniper Networks, Inc.; Kingston Technology Company; Lucent Technologies Inc.; Madge Networks N.V.; Microsoft Corporation; Motorola, Inc.; MRV Communications, Inc.; NEC Corporation; Network Associates, Inc.; Newbridge Networks Corporation; Nokia Corporation; Nortel Networks Corporation; Novell, Inc.; Sterling Software, Inc.; Telefonaktiebolaget LM Ericsson; 3Com Corporation.

Further Reading

Baker, Stephen, Ciscos Telecom Two-Step in Europe, Business Week (international edition), October 11, 1999.

Baum, Geoff, John Chambers, Forbes ASAP, February 23, 1998, pp. 52-53 +.

Byrne, John A., The Corporation of the Future, Business Week, August 31, 1998, pp. 102 +.

Carlsen, Clifford, Rolling on the Info Superhighway, San Francisco Business Times, August 20, 1993, p. 6A.

Carroll, Paul B., Cisco Systems Will Acquire StrataCom, Computer Switch Maker, for $4 Billion, Wall Street Journal, April 23, 1996, p. A3.

Clark, Don, Cisco Is Buying GeoTel for $1.92 Billion in Stock, Wall Street Journal, April 14, 1999, p. A3.

Daly, James, John Chambers: The Art of the Deal, Business 2.0, October 1999.

Donnelly, George, Acquiring Minds: Cisco and Lucent Buy into the Telecom Revolution with Strategies That Clash and Converge, CFO Magazine, September 1999.

Emigh, Jacqueline, Cisco Unveils ATM Interfacing Router, Telephony, February 1, 1993, pp. 24 +.

Goldblatt, Henry, Ciscos Secrets, Fortune, November 8, 1999, pp. 177-78 +.

Gomes, Lee, Cisco Tops $100 Billion in Market Capital, Wall Street Journal, July 20, 1998, p. B5.

Hutheesing, Nikhil, and Jeffrey Young, Curse of the Market Leader, Forbes, July 29, 1996, pp. 78 +.

Kupfer, Andrew, The Real King of the Internet, Fortune, September

7, 1998, pp. 84-86+.

Mardesich, Jodi, Ciscos Plan to Pop Up in Your Home, Fortune, February 1, 1999, pp. 119-20.

Musich, Paula, Cisco Chief Plots Router Course: Outlines Plans for ATM Technology, PC Week, September 13, 1993, pp. 49 +.

, Cisco Revamps Router Strategy: Shifts Product, Distribution Tactics for Maturing Market, PC Week, November 22, 1993, p. 123.

, Cisco, Wellfleet Ride Router Market to Success, PC Week, December 14, 1992, pp. 163 +.

Osterland, Andrew, No Kidding. Cisco Isnt Done Yet, Financial World, January 21, 1997, pp. 62-64, 66.

Pitta, Julie, Long Distance Relationship, Forbes, March 16, 1992, pp. 136 +.

Reinhardt, Andy, Meet Mr. Internet, Business Week, September 13, 1999, pp. 128-31 +.

Reinhardt, Andy, Peter Burrows, and Amy Barrett, Cisco Crunch Time for a High-Tech Wiz, Business Week, April 28, 1997, pp. 80 +.

Schlender, Brent, Computings Next Superpower, Fortune, May 12, 1997, pp. 88-90 +.

Schonfeld, Erick, Cisco and the Kids: Are They As Scary As They Look?, Fortune, April 14, 1997, pp. 200-202.

Thurm, Scott, Cisco to Acquire Networking Firm Cerent, Wall Street Journal, August 26, 1999, p. A3.

, For Cisco, Focus on Small Companies Pays Off, Wall Street Journal, May 27, 1999, p. B8.

, Joining the Fold: Under Ciscos System, Mergers Usually Work; That Defies the Odds, Wall Street Journal, March 1, 2000, pp. Al, A12.

Thurm, Scott, and Deborah Ball, Cisco to Buy a Pirelli Unit for $2 Billion, Wall Street Journal, December 20, 1999, p. A3.

Tully, Shawn, How Cisco Mastered the Net, Fortune, August 17, 1998, pp. 207-8, 210.

Heather Behn Hedden

updated by David E. Salamie

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Cisco-Linksys LLC

Cisco-Linksys LLC

121 Theory Drive
Irvine, California 92612
U.S.A.
Telephone: (949) 261-1288
Toll Free: (800) 326-7114
Fax: (949) 823-3002
Web site: http://www.linksys.com

Wholly Owned Subsidiary of Cisco Systems, Inc.
Incorporated:
1988 as DEW International
Employees: 400
Sales: $1 billion (2006 est.)
NAIC: 334119 Other Computer Peripheral Equipment Manufacturing

A subsidiary of Cisco Systems, Inc., Irvine, California-based Cisco-Linksys LLC is the worlds leading provider of wireless and Ethernet networking, as well as Internet telephony (VoIP) devices for use in homes and small businesses. For consumers Linksys also offers such products as game adapters, media center extenders, music systems, storage devices, and a wireless Internet video camera to allow people to monitor their homes, children, and pets. For business users, Linksys offers a range of secure routers (linking multiple computers to a network), switches to expand the number of network users, and storage devices. Products are mostly sold through such major retailers as Best Buy, Office Depot, and Radio Shack, broadband Internet providers, and online retailers such as Amazon.com. Linksys maintains 23 offices spread across North and South America, Europe, the Middle East, Africa, and Asia.

GARAGE ORIGINS IN 1988

Linksys was founded in 1988 by husband and wife Victor and Janie Tsao, both born in Taiwan. They met at Tamkang University in Taiwan, where they received undergraduate degrees. They then came to the United States where Victor earned a masters degree at the Illinois Institute of Technology, followed by a masters of business administration at Pepperdine University. The couple harbored ideas of starting a business but in the meantime launched information technology careers. Janie worked as a systems analyst for the business credit department at TRW Inc. and later became a system manager at Carter Hawley Hale, while Victor served as a software engineer and system manager at a number of companies, including TRW and Kraft Foods, before becoming director of MIS Strategic Systems Development at Taco Bell Corp. in 1985. As they approached 40 years of age (Victor was 38, Janie 35) they decided the time had come to satisfy their urge to be entrepreneurs. Victor remained at Taco Bell to maintain an income stream, and Janie quit her job to run their business, DEW International, launched in 1988 out of the couples Irvine, California, garage.

Taking advantage of their Taiwanese background, the Tsaos essentially served as a middleman between U.S. technology companies and Taiwanese manufacturers, who could produce electronics products more economically than in America. In its first year in business the company generated revenues of $500,000. DEW expanded beyond its role as an intermediary when a Taiwanese friend told Victor of a product he had developed that his company needed help in marketing in the United States. At the time, the cables that linked printers to personal computers were limited to lengths less than 15 feet. To prevent the loss of data beyond that distance, the Taiwanese manufacturer developed a system that could not only extend the reach to 100 feet, it relied on standard telephone wire. DEW began marketing the device and then expanded its offerings when the Taiwanese manufacturer developed Multishare, a product that could simultaneously connect several computers to a variety of printers. DEW underwent a name change to Linksys and enjoyed enough success that in 1991 Victor was able to quit his job at Taco Bell and work alongside his wife full-time in growing the business.

The Tsaos invested just $7,000 to launch Linksys, but as the company increased sales, mostly through catalogs such as Black Box, it generated enough cash flow to allow it to move out of the family garage and into a 2,000-square-foot office. Nevertheless, Linksys was still very much a hand-to-mouth affair. Janie served as the head of business development, drumming up sales, while Victor kept a watchful eye over their operations and finances as Linksys chief executive officer, regularly working 100-hour weeks. He drew no salary until 1994, the family living on the $2,000 a month Janie received in salary.

Revenues grew slowly in the early 1990s, reaching $1.5 million in 1991 and improving to $6.5 million in 1994. It was at this point that the company expanded beyond the printer connection business into an area with greater potential: PC-to-PC Ethernet hubs, cards, and cables. Xircom Inc. had pioneered the technology of networking computers, developing circuit boards and a networking standard, but it marketed the products direct to business customers and was slow to make them available to retail channels. Linksys exploited this gap, contracting some Taiwanese manufacturers to produce networking cards for sale under the Linksys label. As a result, Linksys was the first product readily available, allowing the brand to carve out a share of the market and gain an edge that it never relinquished.

WINDOWS 95 SPURS BUSINESS

Linksys was targeting small businesses, and to a lesser extent residential computer owners, who wanted to network two or more computers, primarily to share printers at this stage, but the demand for the product was limited, however, because a network was difficult to set up and required the installation of software. In 1995, however, Microsoft introduced Windows 95, which included networking capabilities, greatly simplifying the creation of small networks and opening up the market for Linksys products.

With an increasing range of potential customers, Janie Tsao began looking beyond catalogs to retailers. She visited a Frys Electronic store, a supermarket for everything a computer programmer or electronics enthusiast might need, including high-caffeine soft drinks and razor blades, and witnessed lines of people with shopping carts filled with all manner of electronic gear. While Frys was a West Coast phenomena, a geek paradise in the words of U.S. News & World Report, Janie Tsao was still very much impressed with the potential of selling Linksys products in stores.

Frys became the first retailer to carry Linksys products in 1995, when sales jumped to $10.7 million, but Frys operated only a handful of stores and Janie was determined to gain national distribution for Linksys. She targeted the Best Buy discount chain, but because Linksys was still a minnow her telephone calls proved unsuccessful. In order to make her pitch to Best Buys buyer, Wayne Inouye, she tried to make contact during scheduled sessions held at a 1996 trade show, RetailVision, which brought together manufacturers and retail buyers, but once again she failed. Undeterred, she finally waylaid Onouye at his hotel room, where she and a sales associate finally made their presentation. He agreed to take on Linksys, placing an initial order of $2 million in products. It was the break the company needed to reach the next level in its growth. In 1997 revenues increased to $32.1 million, and the company employed 60 people. A year later sales more than doubled to $65.6 million. Although Victor Tsao was now the CEO of a thriving company he was not the most highly paid employee, nor would he ever receive a raise for his efforts.

COMPANY PERSPECTIVES

Linksys worldwide presence is built on a strong foundation of technological leadership and rapid time-to-market, which is reflected in its extensive selection of award-winning Wireless and Ethernet networking products.

In the late 1990s home computers were becoming commonplace and broadband Internet access was also gaining a foothold in the market. Victor Tsao sensed that consumers would soon be the owners of more than one computer and that they would want them to share the bandwidth of their expensive high-speed Internet access between them. What was required to link multiple computers was a router connected to the modem, providing several ports from which connecting cable could be run. Routers were already available, but they were expensive, prices starting around $500, and they were difficult for a home-user to configure. Linksys was quick to seize the opportunity, and in 1999 introduced a $199 four-port cable/DSL router. Once again the company gained a head start of several months over its rivals and firmly established itself in the Home Networking market, which soon began to explode. Linksys revenues improved to $107.6 million in 1999 and soared to $206.5 million in 2000.

While Linksys expanded domestic sales channels, it also began looking to international markets, beginning in 1999 with sales to the United Kingdom. Linksys built on the four-port broadband router by adding related products, such as the first Ethernet PCMCIA Card for notebook computers. In 2000 the company also introduced an eight-port router and a new USB ADSL modem. Such add-ons were merely a curtain raiser for the next major product line from Linksys, one that would provide exponential sales growth: the wireless router.

WIRELESS PRODUCTS HIT MARKET: 2001

In 2000 a wireless transmission standard, 802.11b, more popularly known as WiFi, was established. Linksys introduced a line of wireless routers and related computer cards in January 2001. Although the company failed to come to market first with wireless products, it benefited from the brands penetration and quickly carved out more than a third of the retail market to earn the top spot. Linksys shipped 1 million cable/DSL routers in 2001, resulting in a surge in revenues to $346.7 million.

Linksys also introduced a new line of high-speed networking products for small businesses in 2001. The following year, more new products were introduced. This time Linksys was first to sell a new series of wireless routers and computer cards employing the faster 802.11g standard, which was not even finalized when the company rushed to market. The gamble paid off, and Linksys sold 300,000 units well before its competitors could launch their lines three months later. Also in 2002 Linksys unveiled a new VPN router, which helped businesses using remote networks to provide better performance and greater security. Linksys also began selling its products in more foreign markets, including France, German, and the Nordic countries. The company shipped 2.3 million routers in 2002 and recorded an increase in sales to $430 million.

Linksys had reached a watershed moment in its history by 2002. The company had enjoyed spectacular success but there was no guarantee that it would continue. The router market was catching the attention of such giants as Microsoft, Hewlett-Packard, and Dell. Linksys had to grow even larger even more quickly. Because 90 percent of its revenues came from the United States and Canada, international expansion was the likely answer, but to establish a far-flung operation would require a great deal of cash, more than Linksys had at its disposal. Victor met with Credit Suisse First Boston to consider taking Linksys public and raising funds through an initial public offering of stock, but the bankers offered an alternative idea: sell the company.

While the Tsaos considered selling the business that had dominated their lives for the last 15 years, a suitor stepped forward in Cisco Systems in the fall of 2002. Initially Cisco approached Linksys because it wanted to learn more about the consumer market. At one time Cisco had built products for the small business and home office market, but had dropped out because of the sectors fierce competition and slim profits in order to focus on corporate clients. Strong growth in the consumer market for networking, however, made the business more attractive and for about a year Cisco pondered a return. Cisco and Linksys began talking in earnest and in March 2003 a deal was struck: Cisco agreed to buy Linksys for $500 million in stock. The company was allowed to operate as a stand-alone unit, the first time that Cisco had ever agreed to such a condition in its history, and the Tsaos agreed to stay on for two years to run the business.

KEY DATES

1988:
Company is formed as DEW International by Victor and Janie Tsao.
1994:
Ethernet hubs are introduced.
1999:
Four-port cable/DSL router are introduced.
2001:
Linksys begins selling wireless routers.
2003:
Cisco Systems acquires Linksys.
2006:
The founders, the Tsaos, resign from the company.

With a new corporate parent, Linksys continued its strong growth. Sales topped the $500 million mark in 2003. A year later Linksys added a line of VoIP products to become involved in the emerging Internet telephony market. It also introduced the SpeedBooster line of faster wireless routers and began working with Boingo Wireless to establish a network of commercial WiFi hot spots at airports, hotels, and other places where individuals could tap into the Internet through wireless connections.

Ciscos deep pockets were dipped into in 2005 when Cisco made a pair of acquisitions to expand the Linksys product line. In April 2005, $68 million was spent to add Sipura Technology, the company that had designed the VoIP equipment Linksys sold. Then, in July 2005, Cisco spent another $61 million to add Copenhagen-based KiSS Technologies, which produced networked DVD players and other products. The KiSS acquisition was made in anticipation of entertainment media converging.

While WiFi had become commonplace in linking home computers, soon it was believed that other entertainment electronics would be connected together and share content, either between devices or with the Internet. In this way, music on computer could be transferred to an MP3 players and played through a stereo, or a DVD player in one room could play a movie in another. In short, Linksys was taking steps to make sure it became a leader in the digital living room of the future. In 2006 Cisco completed another acquisition to add to Linksys capabilities, purchasing Ashley Laurent, Inc., an Austin, Texas, company that developed and marketed BroadWay Integrated Service Software (ISS), a fully integrated networking, security, convergence, and management system.

In May 2006 the Tsaos resigned their positions at Linksys, turning over control to Mike Pocock, the former CEO of Polaroid who had turned around that troubled brand. He would not need to revive Linksys, which was poised to top the $1 billion mark in sales in 2006. The Tsaos were not leaving Cisco, however. They were able to realize another cherished dream, moving to China to search out new business opportunities for Cisco.

Ed Dinger

PRINCIPAL COMPETITORS

Belkin Corporation; D-Link Corporation; NETGEAR, Inc.

FURTHER READING

Angell, Mike, A Combined Cisco and Linksys Could Wield Some Clout, Investors Business Daily, March 27, 2001, p. A10.

, In Bid for Consumer Networking Market, Cisco to Buy Linksys, Investors Business Daily, March 21, 2003, P. A04.

, Linksys Taps into Home Networking Trend, Investors Business Daily, March 4, 2003, p. A04.

Chuang, Tamara, Linksys Changes Chiefs, Orange County Register (Santa Ana, Calif.), May 11, 2006.

Ciscos Link to Your Living Room, Business Week Online, August 5, 2005.

Mount, Ian, Be Fast, Be Frugal, Be Right, Inc., January 2004, p. 64.

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Cisco Systems, Inc.

Cisco Systems, Inc.

170 West Tasman Drive
San Jose, California 95134-1706
U.S.A.
(408) 526-4000
Fax: (408) 526-4100

Public Company
Incorporated:
1984
Employees: 2,262
Sales: $1.24 billion
Stock Exchanges: NASDAQ
SICs: 3577 Computer Peripheral Equipment, Not Elsewhere
Classified

Cisco Systems, Inc. is the worlds leading supplier of high-performance internetworking products for a growing market in which computer and telecommunications technologies converge. The companys product line includes routers, bridges, switches, protocol translators, internetwork management software, and communication servers, all of which link together geographically dispersed local area networks (LANs) and wide area networks (WANs) of computers. In particular, Cisco is the world leader in multi-protocol routers, which permit the linkage of different kinds of networks with different data communications protocols. Cisco maintained over 50 percent market share in multi-protocol routers in the eight years since introducing them in 1986 and still had a 40 percent share in 1994. In its first ten years, Cisco has sustained uninterrupted high growth in sales and profits.

Cisco Systems was founded in December 1984 in Menlo Park, California, by a husband and wife team from Stanford University, Leonard Bosack and Sandra Lerner. Bosack was the manager of the computer science departments laboratory, and Lerner oversaw the computers at the graduate school of business. At Stanford, Bosack devised a way to connect the two local area networks in the respective departments where he and his wife worked, 500 yards across campus.

Lerner and Bosack initially tried to sell the internetworking technology that Bosack had developed to existing computer companies, but none were interested. They then decided to start their own business, Cisco Systems, based on this technology. Bosack and Lerner were joined by colleagues Greg Setz, Bill Westfield, and Kirk Lougheed, as cofounders. Stanford University later tried to obtain $11 million in licensing fees from the new company, because Bosack had developed the technology while an employee at the university, but eventually the university settled for $150,000 and free routers and support services.

The company was established on a very tight budget. In fact, Bosack and Lerner had to mortgage their house, run up credit card debts, and defer salaries to their friends who worked for them in order to get the venture off the ground, and, even after two years of business, Lerner maintained an outside salaried job to supplement the couples income.

Ciscos primary product from the beginning was the internetworking router, a hardware device incorporating software that automatically selects the most effective route for data to flow between networks. Ciscos routers pioneered support for multiple protocols or data transmission standards, and could therefore link together different kinds of networks, those having different architectures and those built on different hardware, such as IBM-compatible personal computers, Apple Macintosh computers, UNIX workstations, and IBM mainframes. Cisco thus became the first company to commercially provide a multiprotocol router when it shipped its first product in 1986, a router for the TCP/IP (Transmission Control Protocol/Internet Protocol) protocol suite. A year later, Cisco was selling $250,000 worth of routers per month. Sales for the fiscal year ending July 1987 were $1.5 million, and the company had only eight employees at the time.

Cisco initially marketed its routers to universities, research centers, the aerospace industry, and government facilities by contacting computer scientists and engineers via ARPANET, the precursor to what was later known as the Internet. These customers tended to use the TCP/IP protocols and UNIX-based computers. In 1988, the company began to target its internetworking routers at mainstream corporations with geographically dispersed branches that used different networks. To that end, Cisco developed routers serving an even greater array of communications protocols and subsequently distinguished its routers by enabling them to support more protocols than those of any other router manufacturer. By the late 1980s, when the commercial market for internetworking began to develop, Ciscos reasonably priced, high-performance routers gave it a head start over the emerging competition.

Although Cisco had a high rate of sales growth, the young company was still short of cash, and, in 1988 Bosack and Lerner were forced to turn to a venture capitalist, Donald T. Valentine of Sequoia Capital, for support. Valentine, however, required that the owners surrender to him a controlling stake in the company. Valentine thus became chairperson and then hired an outsider, John Morgridge, as the companys new president and chief executive officer. Morgridge, who had an M.B.A. from Stanford University, was chief operating officer at a laptop computer manufacturer GRiD Systems Corp. and prior to that had spent six years as vice-president of sales and marketing at Stratus Computer. Morgridge replaced several Cisco managers, who were friends of Bosack and Lerner, with more qualified and experienced executives. In February 1990, Cisco went public, after which Bosack and Lerner began selling their shares. Sales for the fiscal year ending July 1990 were $69.78 million, net income was $13.90 million, and the company had 254 employees.

Under Morgridge, Bosack had been given the title of chief scientist and Lerner was made head of customer service. However, Lerner reportedly did not get along well with Morgridge, and, in August 1990, she was fired, whereupon Bosack also quit. When they left the company, Bosack and Lerner sold the remainder of their stock for $100 million, for a total divestiture of about $200 million. The couple subsequently gave away the majority of their profits to their favorite charities.

Meanwhile, Morgridge built up a direct sales force to market the products to corporate clients. At first, Ciscos corporate clients were the scientific department of companies which already maintained large internal networks. Later, Cisco was able to market its products to all kinds of major corporations to help them link the computer systems of their headquarters, regional, and branch offices. As Ciscos client base grew, the companys greatest challenge became meeting customer support service needs. The large size of the network systems for which Cisco supplied products made the user support task especially complex.

The company grew at a tremendous rate as its market rapidly expanded. In the early 1990s, companies of all sizes were installing local area networks of personal computers. As such, the potential market for linking these networks, either with each other or with existing minicomputers and mainframe computers, also grew. Ciscos sales jumped from $183.18 million in fiscal 1991 to $339.62 million in 1992, and net income grew from $43.19 million to $84.39 million over the same year. In 1992, Fortune magazine rated Cisco as the second fastest growing company in the United States. As the leading internetworking router provider, Cisco could redefine and expand the market as it grew.

As new communications technologies became widespread, Cisco adapted and added the capabilities of handling new protocols to its products. In fall 1992, Cisco introduced Fiber Distributed Data Interface (FDDI) and Token-Ring enhancements to its high-end router. Around the same time, the company also introduced the first Integrated Services Digital Network (ISDN) router for the Japanese market.

Until 1992, Ciscos products had not addressed IBMs System Network Architecture (SNA), a proprietary network structure used by IBM computers. However, in September 1992, after IBM announced plans to license its Advanced Peer-to-Peer Networking (APPN) protocol used for SNA, Cisco responded by announcing plans for a rival Advanced Peer-to-Peer Internetworking (APPI) protocol for supporting SNA. By August 1993, Cisco had decided not to develop a rival protocol, because IBM made it clear that APPN would be a more open, multi-vendor protocol than originally intended. Cisco then went on to work with IBM on further defining the APPN standard and bought a license to use APPN technology.

The emergence of asynchronous transfer mode (ATM) technology as a new standard method for multi-protocol data communications posed a challenge to Cisco and the router industry. ATM is a cell-switching technique that can provide high-speed communications of data, voice, video, and images without the use of routers. In early 1993, Cisco entered into a joint development project with AT&T and StrataCom to develop standards that would ensure that ATM operated within existing Frame Relay networks. Cisco also became one of the four founding members of the ATM Forum to help define the emerging standard. In February 1993, Cisco announced a strategy to include ATM among the protocols supported by its products. In fiscal 1994, Cisco introduced its first ATM switch.

In January 1993, Cisco introduced a new flagship product, the Cisco 7000 router, which featured a 50 percent improvement in performance over the AGS +, Ciscos existing high-end router. In June of that year, Cisco introduced a new low-end, lower priced product line, the Cisco 2000 router family. The Cisco 2000 was aimed at companies desiring to link their smaller, remote branches or even remote individual employees, but unwilling to pay a premium price. Also during this time, the first network with over 1,000 Cisco routers was created.

International sales became an important part of Ciscos business. Subsidiaries were established in Japan and Australia, and a European Technical Assistance Center was established in Brussels, Belgium. In March 1993, Cisco Systems (HK) Ltd. became a new subsidiary in Hong Kong. International sales steadily increased, accounting for 35.6 percent of sales in fiscal 1991, 36 percent in fiscal 1992, 39 percent in fiscal 1993, and 41.9 percent in fiscal 1994. Most of Ciscos international sales were through distributors, whereas in the United States the majority of sales (65 percent in early 1994) were made directly to the end-users.

Cisco also began to market its technology, especially its software, more aggressively to long-distance telephone companies, as the deregulation of U.S. telephone carriers enabled these companies to provide more kinds of data communications products and services. For example, Cisco entered into a joint marketing agreement with MCI International to integrate Ciscos routers into end-to-end data networks over telephone lines. In 1992, Cisco entered new distribution agreements with Bell Atlantic Corp. and U.S. West Information Systems Inc. Cisco also signed marketing agreements in fiscal 1993 with Pacific Bell, whereby Cisco became a preferred router supplier for the companys network systems.

Cisco similarly began contracting with major European telecommunications companies at about the same time. British Telecom became an Original Equipment Manufacturer (OEM) client of all of Ciscos products. Other European telecommunications companies that entered into OEM relationships with Cisco included Alcatel of France and Siemens A.G. of Germany. Olivetti of Italy agreed to market Ciscos products under a Value-Added Reseller agreement late in 1992.

Cisco made other strategic alliances to position itself better in the maturing internetworking market. To reach out to less technical clients, Cisco entered into joint agreements with Microsoft Corp. to market Ciscos first PC-based router card with Microsofts Windows NT Advanced Server networking software through Microsofts marketing channels. Similarly, Cisco established a partnership with Novell to integrate Ciscos routers with Novells Netware network software so as to provide links between Netware and UNIX-based networks. Additionally, Cisco began working with LanOptics Ltd. to develop remote-access products.

In September 1993, Cisco made its first acquisition. For $100 million, it acquired Crescendo Communications, which had pioneered products for a new technology called Copper Distributed Data Interface (CDDI). Crescendos development of ATM technology was also a leading reason for the acquisition. Crescendo Communications was renamed the Workgroup Business Unit, and its switching technologies under development were later incorporated into Ciscos routers. Cisco made its second acquisition, that of Newport Systems Solutions for $90.8 million in stock, in August 1994. Newport Solutions sold the LAN2LAN product line, software used in linking local area networks.

Early in 1994, Cisco announced a new networking architecture, CiscoFusion, to provide clients with an gradual transition from routers to the new switched internetworking technologies of ATM and LAN switching. CiscoFusion allowed users to take advantage of both routing and switching techniques. As part of this architecture, several new switching products were introduced in March 1994, including the ATM Interface Processor and the Catalyst FDDI-to-Ethernet LAN switch. The latter was the first new product of the Workgroup Businesses Unit since the acquisition of Crescendo.

During this time, Cisco moved its headquarters from one end of Silicon Valley to the other, from Menlo Park to a newly constructed office building complex in San Jose, California. The growing size of the company had necessitated larger office space. The companys work force had grown from 1,451 in July 1993 to 2,262 in July 1994, as Cisco hired talent from smaller, struggling internetworking companies which were laying off personnel.

In fiscal 1994, Cisco topped $1 billion in sales, ending the year on July 31, 1994, with $1.24 billion in net sales, a 92 percent increase over the previous year, and $314.87 million in net income, 83 percent more than fiscal 1993. Industry observers noted that in the internetworking business, clients tended to stick with a given vendor for all their internetworking products and that the companies that had entered the router business early tended to be the ones to survive and grow stronger; Cisco thus seemed poised for continued success.

Principal Subsidiaries

Cisco Systems Canada Limited; Cisco Systems de Mexico S.A. de C.V.; Cisco Systems Europe s.a.r.l. (France); Cisco Systems GmbH (Germany); Nihon Cisco Systems K.K. (Japan); Cisco Systems Hong Kong, Ltd.; Cisco Systems Australia Pty., Ltd.

Further Reading

Carlsen, Clifford, Rolling on the Info Superhighway, San Francisco Business Times, August 20, 1993, p. 6A.

Emigh, Jacqueline, Cisco Unveils ATM Interfacing Router, Telephony, February 1, 1993, pp. 24+.

Musich, Paula, Cisco Chief Plots Router Course: Outlines Plans for ATM Technology, PC Week, September 13, 1993, pp. 49+.

Musich, Paula, Cisco Revamps Router Strategy: Shifts Product, Distribution Tactics for Maturing Market, PC Week, November 22, 1993, p. 123.

Musich, Paula, Cisco, Wellfleet Ride Router Market to Success, PC Week, December 14, 1992, pp. 163+.

Pitta, Julie, Long Distance Relationship, Forbes, March 16, 1992, pp. 136+.

Heather Behn Hedden

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Cisco Systems Inc

CISCO SYSTEMS INC.

With 34,000 employees, Cisco Systems was the world's largest manufacturer of routers and switches in the early 2000s. Both form an integral part of the networking technology used to connect users to the Internet. Roughly 80 percent of the firm's revenues stem from transactions completed on Cisco's Web site, which is considered to be one of the most successful business-to-business sites in the world. Although sales in 2001 grew 17.8 percent to $22.2 billion, Cisco posted a loss of more than $1 billion. Management blamed this on a steep drop in ordersfueled by cuts in spending, particularly in the telecommunications sectorwhich left the firm with high levels of inventory.

EARLY HISTORY

Two Stanford University computer scientistsLeonard Bosack and Sandra Lernerestablished Cisco Systems in December of 1984. The new company began marketing the internetworking technology Bosack had developed while at Stanford to universities, research centers, and government agencies. The following year, Stanford asked Cisco for $11 million in licensing fees, arguing that Stanford held rights to Bosack's technology since it had been developed at the University. Stanford accepted a settlement of $150,000 and free products and support services in 1986. That year, Cisco became one of the first networking technology firms to develop a router, a device linking a number of local area networks (LANs), compatible with Transmission Control Protocol/Internet Protocol (TCP/IP).

Sales reached $1.5 million in 1987, and Cisco began marketing its networking products to businesses with offices in a wide range of locations. To fund future growth, Cisco conducted its initial public offering (IPO) in 1990. Sales that year grew to $70 million and more than doubled in 1991 to $183 million. Pacific Bell began purchasing the bulk of its routers from Cisco in 1992. New product developments that year included integrated services digital routers, as well as upgrades to fiber distributed data interface (FDDI) and token ring technologies. International expansion was launched via an original equipment manufacturer (OEM) agreement with British Telecom, and Cisco also started to market its routers to U.S. long-distance providers. After revenues surged to $340 million, Forbes ranked Cisco number two on its list of the fastest growing companies in the United States.

When the development of asynchronous transfer mode (ATM) technologies threatened to render router technology obsolete in 1993, Cisco developed routers that could assist ATM transmissions. International expansion continued with the establishment of Cisco Systems HK Ltd. in Hong Kong and new units in Europe, Japan, and Australia. AT&T Corp. and Strata-Com agreed to work with Cisco to foster compatibility among rival protocols.

GROWTH VIA ACQUISITION

Cisco launched an acquisition spree in 1993, paying $100 million for Crescendo Communications, creator of copper distributed data interface technology. Setting the stage for how future acquisitions would be integrated into existing operations, Cisco retained Crescendo head Mario Mazzola and all of his employees. Eventually, Crescendo served as the foundation for a unit of Cisco that brought in roughly one-third of total revenues. Success with this purchase prompted Cisco to continue paying for companies with products and services in high growth areas, rather than spending money on research and development to create its own products. In essence, Cisco started looking for a startup to purchase any time management determined that a rival had gotten a considerable jump start in an area the firm wanted to pursue.

Cisco paid $91 million for LAN technology developer Newport Systems Solutions in 1994. In October, the firm beat out IBM Corp. with a $204 million bid for Ethernet switch maker Kalpana Inc. When Kalpana executive Mimi Gigoux criticized Cisco's integration efforts, the firm appointed her an integration specialist. She eventually headed up a team of 11 employees dedicated to making the integration process for Cisco's many acquisitions as smooth as possible. Eventually, Kalpana's team was responsible for reducing the turnover rate of employees gained via takeovers to roughly two percent, compared to an average rate throughout the networking industry of 20 percent.

Also in 1994, the firm released its newest networking technology, dubbed CiscoFusion, which eventually included an ATM interface processor and Catalyst FDDI-to-Ethernet LAN switching technologies. By then, Cisco held a 57-percent share of the worldwide multiple protocol networking market, and its routers had started being used to power the Internet. Sales exceeded $1 billion for the first time. Although shareholders protested a proposed $348 million takeover of Ethernet switch maker Grand Junction Networks Inc., and expressed their support of internal research and development rather than continued purchases, Cisco continued to seek growth via acquisitions. It completed the takeover of Grand Junction networks the following year. In fact, it was these aggressive acquisition tactics that were later credited for Cisco's astronomical growth well into the late 1990s.

U.S. Robotics and Cisco inked a technology sharing alliance in 1995. By the following year, Cisco's routers were considered an integral part of the Internet. Making its largest purchase to date, Cisco paid roughly $4 billion for Stratacom Inc. in 1996. The firm also paid $100 million for Nashoba Networks, a maker of token-ring network hubs; $79 million for NetSys Technology Inc., a networking technology vendor; and $220 million for Granite Systems, a manufacturer of gigabit Ethernet technologies. As a result, Cisco ended up owning plants manufacturing three rival Ethernet switching systems. Although Cisco's Internet-related activities thrived, the anticipated threat of emerging low-cost routers prompted the firm to continue its efforts to grow via acquisition.

CONDUCTING BUSINESS VIA THE INTERNET

The 1997 purchases of Ardent Communications Corp. and Global Internet Software Group elevated Cisco to the number one spot among worldwide networking equipment makers, with an 80-percent share of the Internet router market. That year, the firm sold nearly $1 billion worth of networking equipment via its Web site, one of the earliest business-to-business sites to prove successful. By 1998, Internet sales accounted for more than 40 percent of Cisco's $3.6 billion in annual revenues, which grew 44 percent from the previous year (earnings jumped 55 percent over the same time period). According to a March 1998 article in InternetWeek, Cisco's Web site went well beyond simply allowing clients to place orders and make payments. It explained: "The site provides online documentation, order updates, design tools and help-desk support. Cisco delivers the tools to cut the time required for negotiating contracts, determining pricing, calculating lead times, checking on status and verifying shipment dates." In December, the firm established its Internet Business Solutions Group after clients began asking Cisco for helping with setting up their own Internet-based business ventures.

Also in 1998, Cisco attained a market capitalization of $100 billion, setting a record for reaching that milestone less than nine years after completing an IPO. Microsoft Corp., which had set the previous record, took 11 years to reach the $100 billion mark. Acquisitions that year included American Internet Corp., Pipelinks Inc., Clarity Wireless Corp., and NetSpeed Inc., a converter of traditional phone lines into digital subscriber lines (DSL). Qwest Communications International Inc. joined forces with Cisco in 1999 to create one of the largest Internet-based networks in the United States. In doing so, roughly 80 percent of Quest's transmissions began using Cisco lines.

With a 50-percent share of the $21 billion networking devices industry, Cisco boasted sales and earnings far above those of competitors 3Com Corp., Bay Networks, and Cabletron. Looking for new growth areas, the firm decided to diversify into the $250 billion telephone equipment industry and compete with the likes of Lucent Technologies Inc. and Nortel Networks. The first step in this strategy called for the acquisition of three fiber-optics developers. In August of 1999, Cisco bought Monterey Networks Inc. for $500 million in stock, gaining access to the high-speed optical internetworking technology Monterey used to process traffic at a network hub. Three months later, Cisco superceded its $4 billion Stratacom purchase with the $7 billion acquisition of Cerent Corp., a manufacturer of fiber-optic network equipment serving metropolitan areas. In December, Cisco paid $2 billion for the optical systems unit of Italy's Pirelli SpA. Cisco hoped to use Pirelli's dense wave division multiplexing (DWDM) technology to transmit data between network hubs and end users in metropolitan areas.

Since its acquisition spree began in 1993, Cisco had spent nearly $19 billion on 42 companies by the beginning of 2000. Spending continued that year, when Cisco paid $5.7 billion in stock for ArrowPoint Communications Inc., a maker of network switches, and completed 19 additional purchases. By then, Internet sales accounted for roughly 80 percent of Cisco's total revenues. The firm's continued success selling its technology via the Web fueled the growth of its Internet Business Solutions Group, whose clients included Lands' End, The Gap, and WalMart. According to the unit's managing director, Mohsen Moazami, as quoted in Chain Store Age Executive, "We're not only selling a lot online. We're profitable. We have a networked supply chain where forecasting accuracy has increased, and inventories have decreased. Cisco has very credible business practicesnot only when it comes to selling online, but deep into the back end of fulfillment, manufacturing and materials sourcing. A lot of retailers want to see how we do it. They're looking for the secret sauce." Cisco served as a model of e-business efficiency. Its accounting practices were so automated that the firm was able to operate with several hundred less accountants than other firms its size. Merely four auditors handled Cisco's travel and expense reports, compared to the roughly 40 auditors employed by comparable firms. Also, more than 90 percent of customer service requests were taken care of on the firm's Web site. Productivity gains in 1999 allowed Cisco to save $825 million, and savings the following year reached $1.35 billion. In April of 2000, Cisco achieved a market capitalization of $550 billion, usurping both Microsoft and General Electric as the world's most highly valued company.

Despite its continued success, Cisco also found itself vulnerable to competition from smaller, more nimble rivals. The firm saw its market share for Internet-only traffic routers, known as "core" routers, fall from 80 percent in 2000 to 69 percent in 2001, due mainly to competition from Juniper Network, which developed an Internet traffic router in 1996 that was faster than any of Cisco's offerings. Hoping to speed its diversification efforts, in 2000 Cisco funneled considerable resources into developing its recently acquired telecommunications equipment operations. To sell its innovative IP-based telecommunications products, the firm tended to rely on the upstarts that had emerged in the telecommunications industry since 1996. According to a May 2001 article in Fortune, "deregulation in the U.S. telecommunications industry, enacted in 1996, coupled with a robust stock market and the boom of the Internet, prompted the creation of hundreds of new companies, all eager to build new networks and swipe business from established players like the Bell telephone companies, AT&T and WorldCom." As a result, the telecommunications market began growing at nearly twice its average rate. By mid-2000, startups accounted for half of Cisco's telecommunications revenues.

When the U.S. economy buckled later in the year, many of these young businesses began to slow spending, and in several cases they simply declared bankruptcy. Consequently, Cisco saw a large portion of its orders dissolve virtually overnight. To make matters worse, the firm had spent the last several months beefing up its inventory in an effort to fill customer orders more quickly. As a result, Cisco announced its intent to take a one-time $2.5 billion charge to write off its inventory glut. The company also cut roughly 8,000 jobs in March 2001, which amounted to nearly 17 percent of its workforce. Acquisitions ground to a near halt as Cisco executives pondered how to best prepare the firm for an anticipated economic rebound. Looking to the future, several analysts believed the firm would make a major strategic shift by paring down non-core operations and increasing internal research and development efforts.

FURTHER READING:

"Cisco Fractures Its Own Fairy Tale." Fortune. May 14, 2001.

"Cisco Systems Inc." In Notable Corporate Chronologies. Farmington Hills, MI: Gale Group, 1999.

Goldblatt, Henry. "Cisco's Secrets." Fortune. November 8, 1999.

Hardy, Quentin. "Cisco Kidding?" Forbes. May 14, 2001. Available from www.forbes.com.

Moazami, Mohsen. "The Web's Largest Store." Chain Store Age Executive. August, 2000.

Nee, Eric. "Cisco: How It Aims to Keep Right on Growing." Fortune. February 2, 2001.

Rodriguez, Karen. "Cisco Keeps Growing and Growing." The Business Journal. March 17, 2000.

Walsh, Brian. "Best Site for Business-to-Business Commerce." InternetWeek. March 9, 1998.

Yang, Dori J. "Cisco's Spectacular Slide from Stardom." U.S. News & World Report. April 16, 2001.

SEE ALSO: Business-to-Business (B2B) E-Commerce; Hardware; Internet Infrastructure

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