By Erin Griffith
May 2, 2017

This article first appeared in Term Sheet, Fortune’s newsletter on deals and dealmakers. Sign up here.

Cisco is an acquisition machine, having done nearly 200 deals in its history. The company’s last minute acquisition of AppDynamics in January is arguably the most exciting deal of 2017. On Monday, the company announced its second deal of the year, paying $610 million acquisition of Viptela, a cloud-based SD-WAN company based in San Jose. (Fortune’s Jonathan Vanian has more about that deal here.)

Over two interviews, Fortune spoke with Rob Salvagno, head of corporate development and Cisco investments, about Viptela, valuations, “needle-moving M&A,” and why Cisco is one of the few players still investing in silicon. The conversation as been lightly edited for clarity and length.

This is the fourth installment in Term Sheet’s series of interviews with dealmakers at the tech industry’s most active acquirers. See past interviews with dealmakers at Microsoft, Google and Salesforce.

Fortune: What was so compelling about Viptela, and how does it fit into Cisco’s strategy?

Rob Salvagno: We’re seeing a big inflection point in the market. I would make it analogous to some of the changes we saw in the data centers five-plus yeas ago when SDN [software-defined networking] was a big trend within the data center. We have been following this market transition for awhile. We have made some other investments in the space. We felt now was the time the market itself has reached an inflection point. Cisco has some of its own offerings in the space, but we felt we needed to accelerate and complete our portfolio and that’s what attracted us to Viptela.

Have you invested in any companies that compete with Viptela?

The SD-WAN [software-defined wide area network] space has attracted a lot of venture money, so I want to say there are more than a dozen companies we are tracking in this space. We made an investment in a company called VeloCloud 18 months ago. It’s a big space. We felt Viptela was best suited for what we wanted to own.

How do they feel about this?

I can’t comment on how they might feel but we make lots of investments and acquisitions under the same team here at Cisco. I think it puts us in a good position to figure out whether it’s a market for Cisco to participate in and whether it may be the best choice for us. VeloCloud is a good company, it’s a great team, and that’s why we made the investment. It’s a multi-billion market and an exciting opportunity for many vendors, not just Cisco and Viptela.

Viptela’s co-founder is ex-Cisco, as is its new CEO. How much does that play into your M&A decisions?

I would say the biggest factor is the culture in general. When we talk about doing acquisitions, the team is absolutely critical for us. It’s the most important factor, sowe do want to see a strong cultural fit and that’s one of the things that made us feel like Viptela was the right choice for us.

Viptela’s co-founder is ex-Cisco, as is its new CEO. How much does that play into your M&A decisions?

I would say the biggest factor is the culture in general. When we talk about doing acquisitions, the team is absolutely critical for us. It’s the most important factor, sowe do want to see a strong cultural fit and that’s one of the things that made us feel like Viptela was the right choice for us.

One knock an investor made about this deal: It’s the “old buying the old.”

First I would say Cisco’s heritage is in the networking space. We built the company around switching and routing – it’s a very large market that over the years we have seen different transitions occur. SD-WAN is just an example of one segment of this market that’s starting to go through a transition. The reason we liked Viptela it versus other choices is the cloud-first approach they have taken, which also happens to be very software-centric. From the Viptela perspective, I see them as one of the leading companies leading the transition. From the cisco perspective, it’s a model that embraces this cloud-first and software-centric recurring revenue model – so that’s where we are trying to go as a company.

We make acquisitions that get us into very new markets. AppDynamics was a great example of that. And we also make acquisitions in areas that are transitions within markets we already participate in. Viptela is more representative of the latter. Look at other acquisitions that fit those categories. Meraki is the transition with cloud networking. Insieme Networks was about SDN in the data center. What we’ve learned is Cisco has a proven model for driving a lot of value in markets we understand that are undergoing transition, and that’s what we plan to do with Viptela.

Fortune: From what I understand, AppDynamics is just one part of the overall monitoring software puzzle. What other pieces do you need to fill it out?

The quick answer is all of the above. What makes AppDynamics unique as a platform is that they monitored things through the application view and tied that together with the business value associated with those applications. For all these transformational opportunities, we think about what Cisco can bring to the table – extending that intelligence across multiple layers, going from the apps through the rest of the infrastructure, data center security, or the network. Those areas are really a strong suit of Cisco.

Last year you did seven deals. Do you expect to keep up that pace?

Acquisitions have always been a big piece of how we think about innovation. With Appdynamics, we have acquired 194 companies [195 with Viptela, though that is not closed]. If I focus on a more recent period at least, since [CEO] Chuck [Robbins]’s tenure — it’s maybe 18 companies since he was announced as CEO – that represents the high end of the pace we’ve seen across our history. Going forward, M&A will always be a piece we focus on.

In February one of the analysts covering you said the company needs “needle-moving M&A” and that the old playbook of tuck-in acquisitions wouldn’t work.

When I talk about transformational deals, I talk about opportunities that represent a certain scale, but also a certain capability that they’re bringing Cisco from a market or tech standpoint. If I spoke to some historical examples, I would say historical examples for Cisco are deals like Sourcefire, OpenDNA, Jasper and now AppDynamics. We have done one transformational deal a year. That could accelerate or pull back depending on what we see around specific opportunities.

That’s not the mega-scale. We believe there are so many challenges with mega-scale M&A. These are on average $1-$2-$3 billion deals, and we have a proven model to make those successful at Cisco.

The $3.7 billion AppDynamics deal shows you’re willing to pay up. How do you justify that valuation?

The valuations are ultimately going to be determined by the market climate. Because we are a constant acquirer, we’re operating within whatever the market climate is. For every transformational deal I’ve named where we’re able to converge on price, I can think of a similar example where we weren’t able to converge on price because of valuations, and moved on. With AppDynamics, it’s based on our confidence that we can add value from a Cisco perspective.

If you picked one category of companies, such as how security companies are trading today versus where they were trading 12 to 18 months ago, valuations have come down. SaaS companies in general, valuations have come down. Do they have more room to go or have they found equilibrium? That part is hard to forecast. We just need to be comfortable with a specific situation that we go after. Our confidence may be at a different level than what other corporations think.

Does that mean higher?

We invest $100 million to $200 million in startups a year. Situations like AppDynamics and Meraki show we can move at a pace that is really unequal by other people and that we have a playbook to make those successful that is also unrivalled. When we acquired Meraki 4 years ago [for $1.2 billion], it was at a $100 million bookings rate. Today it’s exceeding a $1 billion booking rate.

We can anticipate where the market is going bc of that lens we have as investors. We pioneered the spin-in model and did our first set of divestitures, and we are beginning to build that muscle up.

How do your investment portfolio companies feel about your acquisitions?

It comes down to setting the right expectations. Both sides understand that we do have this unique aspect of being both an investor and an acquirer. We’ve been a corporate investor as long as we’ve been a corporate acquirer. There’s often a big benefit.

OpenDNS [acquired by Cisco for $635 million in 2015] is a recent example. A number of years ago, we were looking into cloud security. We decided we wanted to partner in that area first, and through our knowledge of the startup space, we focused on openDNS and decided to invest in the company. Twelve-plus months later, as cloud security increased in its adoption and the partnership took off, that we decided to move from being an investor to making OpenDNS part of Cisco. We’re mindful of trying to not create conflict situations, but we believe as company that that ability [for the corporate venture team] to invest alongside the same team that does acquisitions puts us in a unique strategic position.

You have six priority areas: Data center, cloud, big data, security, Internet of Things and core networking. Which of those are you feeling most aggressive on?

Cisco’s priorities are really indicative of Cisco’s strategy. We’re in a position to accelerate those strategies. The strategy dictates where my team spends its time, not the other way around. If I look back over the last 12-18 months, we’ve acquired 12 and 15 companies and they’re equally represented across those six areas. In some areas we’re still digesting, in others we’re ready to move on to the next opportunity.

The analyst I mentioned also suggested Cisco could double down on data center infrastructure or take a hard pivot toward software, or dive deeper into cybersecurity. Which of those are most appealing?

Software is definitely a focus and security is one of those six priority areas and has probably been one of our most active areas. All of those 16 acquisitions but one were software-centric. The only one that wasn’t was Leaba Semiconductor, which was silicon. Everything else was pure software or pure software-centric. For security, we have acquired three security companies in the last 12 months.

What doesn’t appeal to you?

Companies that require an expensive go-to-market engine, or aren’t thinking cloud-centric from the start. Those to me would be the two red flags. Whether you ultimately adopt something as a customer that is on-premise or the cloud, you need to be cloud-ready. Thinking about cloud at the onset is a requirement today. If it requires you to build a traditional sales force in order to market your technology, the level of capital required to get there is going to make you uncompetitive with other models out there.

We’ve seen the success of those models – Meraki is a great example. It built itself around a demand generation model that was then fulfilled through an indirect sales force. That allowed them to have a velocity and cost of sales that allowed them to scale the business correctly.

Any particular sectors you’re interested in?

Within the Internet of Things, connected vehicles is one example. Within collaboration, we’re looking at how AI and machine learning can be adopted. Within security we’re looking at the intersection of security and other are like IoT leading to the need for technology in areas that didn’t exist a few years ago.

And silicon is a key area where we differentiate. A lot of traditional venture industry has really pulled back from silicon investing. They view more attractive opportunities. What makes Cisco’s strategic investment approach unique is that we invest in opportunities that are both tied to our business today or are focused on next horizon opportunities. So for Cisco, Silicon is a core differentiator for our business today. We are investing there and we have a themed fund around silicon specifically.

How big is that fund?

We have not publicly stated the amount, but across the different thematic areas, it totals north of $300 million.

And how many silicon deals have you done?

Over the last 12 to 18 months, probably about half a dozen silicon and optics investments.

Are you the only game in town? If you’re a silicon startup, how many doors do have to knock on?

You may have 30 different venture funds focused around areas like big data or data centers, but you have a much smaller subset when you talk about venture firms that would make silicon investments. There are still financial VCs and we partner with them, and you will likely see all of them in the opportunities we invest in.

Why have venture investors pulled out?

As process technologies for basic development have become more and more expensive, it’s just harder in terms of capital requirements and other challenges to build a silicon startup today than it may have been five to ten years ago. The second piece is there has been a lot of consolidation in the industry and that adds to a different market environment. We’re just one part of the market ecosystem and we believe it’s a long game.

We invested in a company called Aquantia in 2004 – 10 years later Cisco continues to be an investor in Aquantia and participate as they’ve raised different rounds over the last 10 years. We want to be both a good partner and a good investor.

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