PUTTING THE SILICON IN SILICON VALLEY
Today we have another installment in Term Sheet’s series of interviews with dealmakers at the tech industry’s most active acquirers. 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. Yesterday, 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. (My colleague Jonathan Vanian has more about that deal here.)
I 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. Here’s an excerpt:
Term Sheet: 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 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 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.
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 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.
Any particular sectors?
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. 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 back from silicon investing?
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.
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. 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.
Read the entire interview here.
Find past interviews with dealmakers at Microsoft, Google and Salesforce.
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