Mergers and Acquisitions: Cisco Acquires LinkedIn

Introduction

In an article published online at TechCrunch.com, Kelly Porter, an M&A expert at Woodside Capital Partners, proposed the acquisition of LinkedIn by Cisco as one of the top ten acquisition candidates for 2010 (Schonfeld, 2010). The rationale of such a choice was explained through the possibility of LinkedIn extending Cisco’s strategy of pursuing enterprise communication (Schonfeld, 2010). LinkedIn recently showed enormous growth in its user base in the last two years, while Cisco’s recent acquisitions demonstrated the company’s objectives of expanding its user base globally, for which unique applications could be developed. The analysis of such potential acquisition can be used to demonstrate the acquisition strategy that Cisco is likely to follow. In that regard, the present paper provides an extensive analysis of the aforementioned potential acquisition, in terms of strategy, integration, and implementation, evaluating the overall success of such a business deal.

Strategy

The strategy of mergers and acquisitions varies in different ways. The choice of the merger strategy depends on the companies which have decided to unite, on the market situation, and the financial possibility of the companies. Cisco is the company that deals with communication technologies and services, with the network, and with consumer electronics. LinkedIn is a business-oriented company related to social networking sites. The merger of those two companies is a great opportunity for both of them.

One is an experienced and big corporation, Cisco, and another, LinkedIn, being young and enthusiastic, due to the relatedness in business can merger and exist even better than now. It will be possible to create new and unique applications using new divisions and the capabilities of those companies.

Dwelling upon the strategies the companies should use to unite, the acquisition is considered to be the best variant. The main reason for Cisco to buy LinkedIn, not merger on equal terms, is to achieve a higher position on the world market and create a unique product that will be without a rival. The positive feature of acquisition in this situation is the ability of the experienced company to run the business of the new and inexperienced one.

The acquisition is considered to be the process when “one firm buys a controlling, or 100 percent, interest in another firm with the intent of marketing and acquired firm a subsidiary business within its portfolio” (Hitt, Ireland, & Hoskisson, 2009, p. 184). The main difference between acquisition and merger is that merger implies the friendly union of two companies which are considered to be equal in rights, while acquisition presupposes the reports of the acquired firm to the acquiring.

The acquisition is possible for several reasons. Cisco is a company that has established a reputation as a competitive and powerful player on the world market. LinkedIn is a young company but its development is rather dynamic and successful. The companies work in similar fields but do not compete due to the difference of the targets and market interests. The acquisition will make it possible to create the strongest company with the greatest clients’ base and potential.

Bid tactics

The choice of the bid tactics should come out of the specifics of the companies’ relations and the value of each one. Both, the buyer and the seller want to get the highest profit from the acquisition. Having considered different bid tactics, namely aggressive, defensive, and negotiated, it was concluded that negotiated one is going to be the best choice in the situation of LinkedIn acquisition by Cisco. To be more precise, the difference between those bid tactics is going to be considered. The aggressive tactics presuppose the individual offers to stockholders who are able either to accept those or not “in the face of strong opposition from the target company’s board of directors” (Coyle, 2000, p. 94).

The defensive one is the possibility to accept the director’s offer to buy the company on the conditions suitable for both companies to protect the seller from the too-low price offered by another buyer. The negotiated bid tactic is the one that makes it possible for the parties to negotiate for the price.

Cisco and LinkedIn are two companies that can agree on the price of the acquisition. First, Cisco is the company that can afford such a purchase, especially after the analysis of the future revenue, predicted after the acquisition. Second, LinkedIn is not going to state too high a price due to the realistic assessment of the company’s valuation. Still, the future income should be taken into account. The acquisition will positively affect the financial situation of Cisco and the income is going to increase. Thus, the bid tactics are one of the central topics related to the acquisition of LinkedIn by Cisco. The problem remains crucial for both companies as there were no concrete offers and the real value of the company is not considered yet.

Overpaying

Considering the bid tactics and the valuation of the company, it is impossible to reject the overpaying in the situation in its negative meaning. The buyer should conduct thorough research and check whether the acquisition is worth the price the seller offers. Sometimes, overpaying may be justified. The great potential of the acquired company may not correspond to the current market share and cap, while the future income may be too high. Furthermore, the profit from the acquisition as the type for the company’s merger should be also considered.

Being aware of its potential, LinkedIn is not going to ask for the real price of the company. Furthermore, Cisco’s directors understand it and will not quarrel too much about the price. It is possible to mention that Cisco understands that the acquisition is a great opportunity. The demand to pay more than the real market price of the company may be justified.

Cisco and LinkedIn know the great benefit of the merger and each company wants to protect its interests. The great strategic extension for Cisco and the creation of the new and unique product (which is considered to be possible with the union of the company’s capabilities) does not leave any alternative to Cisco than to overpay. At the same time, the company is not going to spend too much cash for buying LinkedIn, as it is stated by Kelly Porter when she points to the ten greatest acquisitions for 2010 (Schonfeld, 2010).

Integration

Integration is considered to be one of the problems to which less attention is paid. Still, it is wrong. Integration between two companies after the acquisition may be complicated by several factors. The company managers should consider the tactics and the strategy for companies’ integration in advance. Cisco and LinkedIn are companies that work in the same sphere but have different specializations.

After the acquisition, Cisco should pay more attention to human capital as much knowledge is concentrated there. Cisco should remember that the personnel of LinkedIn should not be ignored. The failure to provide good human resource management may lead to big problems in the future (Hitt, Ireland, & Hoskisson, 2009).

Cisco should pay attention to the following items to provide a good integration without negative effects. First of all, the company should plan the integrating program. Such actions will make it possible to get to know the company’s staff and values faster and with higher effectiveness. Cisco can also pay attention to leadership and the flow of information. This will allow the company to implement new rules faster and more effectively. The common field of operation is considered to be a positive feature while companies’ integration after acquisition. Specialists from business-related social networks and professionals from networking and communication technologies are going to work together on a common and new product.

The common interest and the involvement in the working process are aimed at improving the integration in the company after the acquisition. The process of integration, if effectively implemented, will positively influence the whole working process. Furthermore, the future situation in the company, the collaboration of the whole staff, and the ability to do the common work support the companies’ integration (Hitt, Ireland, & Hoskisson, 2009).

Implementation

It can be stated that the Cisco LinkedIn acquisition is based on a strategic goal, rather than merely financial. Thus, the acquisition can be paralleled to a previous deal in which Cisco acquired Five Across, Inc., also a social networking service, in 2007. The rationale for both acquisitions can be seen as largely identical, which in the case of Five Inc. was focused on “helping its customers evolve their website experience into something more relevant and valuable to the end-user” (Cisco Systems, 2007).

Having a history of success built on acquisitions, where through the period between 1993 and 2001 Cisco acquired more than 70 companies. Thus, outlining the implementation process of the acquisitions, it can be stated that there are key elements that are likely to be followed, which were identified through the company’s past acquisitions. The process of implementation can be outlined through several steps.

Assuming that the company already identified the candidate in LinkedIn, through a screening process in which the compatibility between the two firms was determined, a q valuation process should be followed. The last valuation of LinkedIn was estimated at approximately $1 billion, which should be no problem for Cisco’s “$138 billion market cap and $35 billion in cash and short-term equivalents” (Schonfeld, 2010). Accordingly, as the next section will explain, a friendly negotiation would occur, in which Cisco makes an approach toward LinkedIn and provide a tender offer to LinkedIn.

The negotiations process will begin in which not only the financial part of the deal will be discussed, but also the operational aspects of the cooperation between the two companies. Such operational aspects might include the method of cooperation between companies, warranties, and liabilities. Other important dimensions of acquisition implementation, specific for high-tech firms, include the issue of autonomy of the acquired company, retention, and the speed and pace of integration (Ranft & Lord, 2002). After an agreement would be reached between the companies, closing shall take place. Closing is the stage at which a transaction is consummated, funds are transferred, if applicable, and the documentation is delivered and executed.

Is it a Friendly Acquisition?

The evaluation of the friendliness of acquisition is concerned with assessing the approach taken by the acquiring company toward the transaction method. A friendly takeover can be defined as an acquisition in which the management board of the acquired company will be receptive to the idea, recommending the approval of the shareholder (DePamphilis, 2008). A hostile takeover, on the other hand, occurs when the target company was not seeking a deal at the time, resulting in a change of control and an unsolicited initial approach, contested by the management (DePamphilis, 2008).

Evaluating the potential acquisition by Cisco, it can be stated that it is likely to be a friendly acquisition. The latter is specifically emphasized by the fact that the acquisition is mainly a conglomerate, i.e. due to the different industries in which both companies operate they will be managed as separate businesses independently (Coyle, 2000). Being a suitable platform for Cisco’s equipment, it can be stated that the acquisition is not connected to competition issues. The companies do not share customers, buyers, and suppliers, where they merely have unique capabilities (Schonfeld, 2010), which one of them wants to utilize to its advantage.

The friendliness of the Cisco potential acquisitions can be seen through the analysis of Cisco’s rich history of acquisitions. A hostile takeover eliminates many of the objectives of an acquisition, and in the case of Cisco, it is stated that it “has no interest in taking over a company that does not want to be acquired” (Paulson, 2001, p. 174). Accordingly, it can be seen that the target resource of LinkedIn, which will serve as the basis for Cisco’s communication strategy lies within LinkedIn’s current profile of operations and knowledge.

Thus, assessing the possibility of changing management at LinkedIn, it can be stated that such process is highly unlikely, as “executives from acquired firms are an intrinsic component of the acquired firms’ resource base, and that their retention, therefore, is an important determinant of post-acquisition performance” (Ranft & Lord, 2000, p. 299). Nevertheless, the friendliness of Cisco’s acquisition does not erase the fact that it was known as an aggressive acquirer in the 1990s (Ranft & Lord, 2000).

Shareholders

In the context of acquisitions, the shareholder issues that might occur might vary across industries. In general, it is expected that the acquisition of LinkedIn will largely pay off for the shareholders. The shareholders in the target company might receive a price premium for their shares, the amount of which is dependent on whether the acquisition was friendly or hostile. In that regard, a review of the empirical evidence of abnormal returns to acquired and acquiring companies’ shareholders indicates that the largest gains are realized at the beginning of a takeover bid (DePamphilis, 2008).

It should be noted that in the case of LinkedIn high returns might be received by their shareholder, regardless of whether the bid made by Cisco was successful or not. Shareholders will be in a win situation, as the agreement for acquisition should be made based on the goal of creating value for them. Thus, the differences might be seen in whether the acquisition will result in a short win situation or a long one. The latter might be seen in the kind of financial transaction agreed between the two companies.

Success

Evaluating the success of the potential acquisition venture, it can be stated that LinkedIn is a good target for Cisco’s communication strategy. The success, in that regard, can be measured through post-acquisition integration processes. An analysis of 700 most expensive international acquisitions outlined several principles of success, among which are the involvement of directors, setting the directions for the new business, understanding emotional and political issues, focus on customers, and flexibility (Nguyen & Kleiner, 2003).

In that regard, it can be stated that the history of Cisco’s acquisitions implies that those principles are followed. The focus on the customer should be specifically mentioned as a contributing factor to the success of the acquisition. The focus on the customer is an essential part of the company’s communication strategy, with the capabilities of Cisco and LinkedIn will “allow very cool and unique new applications could be created” (Schonfeld, 2010).

As a general strategy, the benefit to the company was always connected to doing the right things for their customers (Paulson, 2001). Accordingly, an essential element contributing to the success of the acquisition, specifically in regards to high-tech firms, is employees retention. A study showed that retaining employees throughout the acquired organization was found to be a prerequisite for the promotion of a successful transfer (Ranft & Lord, 2000). For Cisco, such a factor is common through all their acquisition history, where it is acknowledged that “personnel retention is an earmark of a successful acquisition” (Paulson, 2001, p. 34).

It should be noted that the history of Cisco was always connected to successful acquisition deals, and thus, there is a reason to believe that the acquisition of LinkedIn will prove to be successful. The problem that might occur in such acquisition is likely to be connected to the way the acquired knowledge resource will be integrated. As common practice shows, managerial dilemmas, in which it should be determined whether to preserve valuable knowledge or integrate it as a resource, are common.

Conclusion

In conclusion, it should be mentioned that the acquisition of LinkedIn by Cisco is considered to be one of the greatest mergers of 2010 by Kelly Porter’s forecast. The main peculiarity of the acquisition is the future capabilities created as the result of the acquisition. Cisco, together with the possibilities of LinkedIn, will be able to unite the business-oriented social network and the communication technologies and services it deals with. This opportunity is given to Cisco Company and it should not waste it.

The creation of an new product is going to be the main result of the acquisition. Cisco’s strategy of pursuing enterprise communication is going to be the crucial target Cisco will be able to implement with the help of the technologies and methods used by LinkedIn. It is also crucial to mention that the acquisition strategy should be used with the negotiated bid strategy. The overpaying should be expected but it can be easily justified using the company’s valuation. The affair is going to be a success as the acquisition should be conducted on friendly terms.

Reference List

1. Cisco Systems. (2007). Cisco Announces Agreement to Acquire Five Across. Cisco Systems Inc.
2. Coyle, B. (2000). Mergers and acquisitions (Library ed.). Chicago: Glenlake Pub. Co. : Fitzroy Dearborn.
3. DePamphilis, D. M. (2008). Mergers, acquisitions, and other restructuring activities (4th ed.). Amsterdam; Boston: Academic.
4. Hitt, M.A., Ireland, R. D., & Hoskisson, R. E. (2009) Strategic management: competitiveness and globalization: concepts & cases. Stamford: Cengage Learning.
5. Nguyen, H., & Kleiner, B. H. (2003). The Effective Management of Mergers. Leadership & Organization Development Journal, 24(8), 447-454.
6. Paulson, E. (2001). Inside Cisco : the real story of sustained M & A growth. New York: Wiley.
7. Ranft, A. L., & Lord, M. D. (2000). Acquiring new knowledge: The role of retaining human capital in acquisitions of high-tech firms. The Journal of High Technology Management Research, 11(2), 295-319.
8. Ranft, A. L., & Lord, M. D. (2002). Acquiring New Technologies: A Model of Acquisition Implementation. Organization Science, 13(4), {Ranft, 2000 #2376}.
9. Schonfeld, E. (2010). Top Ten Digital M&A Deals For 2010. Tech Crunch Web.