Janina Backhaus, Bastian Sagild, George Staruch, Dave Moreno, Samantha Zildjian

Issues  Cisco is acquiring a large mature company with many employees and mature products  The plant is located on the opposite side of the country from Cisco’s base  VCO/Series 80 & VCO/Series 20 are becoming outdated and will soon be obsolete  VCO/Series 4K has ramped up faster than expected and Manchester facility may lack capacity to produce

Solutions  Cisco will need to keep the plant in order to avoid losing valuable employees  To make this profitable and minimize the inefficiencies they’ll need to repurpose the plant  Actively migrate customers from VCO 80 & 20 series to VCO/4K to reduce redundancy and condense return timeline  Outsource 4K production and repurpose plant to design Alpha and serve as an East Coast presence

Cisco Background  Cisco has grown exponentially over the last decade through a highly refined process for acquisitions  They strategically form partnerships and acquisitions to gain access to valuable technology  They have an extensive network of suppliers and distributors

Historical Allocation Structure

Product Overview

Cisco Core Competencies  Cisco has an 8% attrition rate with regards to acquired employees, the same as legacy employees  They have extensive supplier and distributor relationships that have proven reliable in the past.  Their Acquisition structure is refined to reduce inefficiencies and transitional turmoil while maximizing returns

The Acquisition Process MinimizeExpedite

Summa Four Background  Leading provider of open programmable digital switching systems, sold primarily to telecommunications service providers worldwide  Based in Manchester, NH – Access to the thriving New England tech market  Strong culture accustomed to “informal processes” & high energy atmosphere of a small company  Currently designing a revolutionary open program switch code named Project Alpha

Summa Four Current Offerings VCO/Series 80 VCO/Series 20 Same functionality but smaller footprint and rack- mountable design 2,048 timeslots Not Fully- NEBS Compliant VCO/4K World’s highest density open- programmable switch 4,096 timeslots Fully-NEBS Compliant High-density open programmable switch used for application development 2,048 timeslots Fully-NEBS Compliant

Industry’s first standards-based open programmable switch Set to launch in 1 year Key reason why acquisition is attractive Opportunity to be market leader Has potential to make other switches obsolete Project Alpha

Strengths and Weaknesses

Tying Stuff Together  Cisco’s competencies are specifically designed for this situation, they need to structure the acquisition to retain as much talent as possible  Project Alpha is in the perfect stage to be adapted to the Cisco NPI structure  The plant will need to be outfitted with AutoTest and repurposed for the development of the new technology.

Integration Steps

Phasing Out 80 &20 VCO/Series 80 Appeals to smaller companies that can save cost and rely on the flexibility from lack of standards Slow phase out in anticipation of Alpha Keep for a period of 12 months for small cost sensitive firms Offer extensive training and PR for Alpha at these locations to encourage upgrading VCO/Series 20 Rapid phase out of the outdated model 6 month period Offer a rebate program to encourage trade-ins and increase loyalty through transition

Outsourcing the 4k  Sell off excess machinery unnecessary for prototyping  Sanmia currently contracted to do sub- assembly on the 4K, move final assembly to California  Sanmia to also handle the production, fulfillment and after-sale support of Summa Four’s mature products  Given that these are being phased out there is no reason to move this

Alpha  Alpha is trickier. While there is excess capacity in CA, moving the project risks losing a large percent of the integral development employees  3 CA plants have excess capacity and Auto test infrastructure in place, but you lose all of the momentum the project has gained thus far

Manchester Plant Allocation  The plant is clean, orderly, and efficient—much better than many other plants Cisco acquires  By keeping the Manchester plant, eliminate risk of losing top employees 65 development engineers & 23 manufacturing employees The engineers and patents are essentially what Cisco is paying for  Streamline Plant and focus on Project Alpha Mitigate risk of losing engineers through improved compensation and continued autonomy Encourage & expedite Project Alpha (6 months) Build foundations for an extensive East coast presence  Requires investment into the Autotest system

NPV Sales decreases of 15% first year due to loss of customers Sales increase of 25%,10%, 25%, and 30% for 1999, 2000, 2001, 2002 respectively due to cross selling efforts, higher price points, and forced upgrades Maintaining Current Product Line Year Cash Inflows42,39350,87070,114100,000145,000 Operating Cash Outflows19,63121,43729,36044,02465,276 Net Total Cash Flows22,76229,43340,75455,97679,724 *1998 Summa Four projected Income Statement Product Phase Out Year Cash Inflows33,91463,58877,125125,000188,500 Operating Cash Outflows15,70526,79632,29652,82981,595 Net Total Cash Flows18,21036,79144,82972,171106,905 Year Net Total Cash Inflow Difference(4552) WACC8.28% NPV$35,324.08

Risk Mitigation: Maturity Mature Product Line The extant product line is well past Cisco’s usual comfort level and Mitigation By phasing out the 20 and the 80 in a staggered pattern with a structured format while outsourcing the 4k Cisco can avoid legacy costs without disrupting business Expected Result This will condense the timeline of Cisco’s return with only a marginal increase in customer loss and allow Cisco to repurpose the factory without needing to expand capacity too extensively

Risk Mitigation: Suppliers Extensive and Inefficient Supply Chain Summa Four has 85 suppliers Cisco has no relationship with and sole sources 200 parts, creating price and continuity risk Mitigation Cisco’s current supply chain should be more than adequate to handle most supply needs. The analysis and redistribution of this process is already an inherent portion of their acquisition process Expected Result By consolidating to the Cisco supply chain efficiencies of scale and well developed relationships can be leveraged to negotiate more favorable terms

Risk Mitigation: Employee Attrition Transitional Friction Employees are concerned about a change in their working environment and compensation systems. Should they leave Cisco will be losing a significant portion of the value they purchased. Mitigation Cisco’s HR department is already well versed with this particular set of issues, provided employees don’t have to move and retain some autonomy and an equivalent or better compensation package it is unlikely they will leave Expected Result The experienced and oriented engineers remain and continue to work on Project Alpha without any significant transitional disruptions, they are trained on the new testing system and the development process is altered organically.

Plan Summary  Phase out legacy products, upgrade existing customers to newer offerings with loyalty rewards  Outsource development of 4k and move final assembly to California  Repurpose Manchester plant to develop Project Alpha, retain engineers and East Coast presence

Appendix A: WACC Calculation CategoryNumberExplanation Long Term Debt938Balance sheet Shareholder Equity44,238Balance sheet Total45,176Balance sheet Beta1Assumed Risk Free Rate1.35%5 yr Treasury MRP7%Assumed Tax30%Assumed Weight of Debt2% Weight of Equity98% Cost of Debt7%Approximation of 5 yr BB rated Bond yield Cost of Equity8.35% WACC8.28%

Graphic Citations  Case Study: Cisco Acquisition, Djadja Achmad Sardjana ○ cisco-acquisition cisco-acquisition