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SUMMA FOUR ACQUISITION
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VCO/Series 80 & VCO/Series 20 are becoming outdated and will soon be obsolete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
Minimize Expedite
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 OfferingsV
CO
/Ser
ies
80
VC
O/S
erie
s 20
Same functionality but smaller footprint and rack-mountable design
2,048 timeslots
Not Fully-NEBS Compliant
VC
O/4
K 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
1260 93
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 LineYear 1998 1999 2000 2001 2002
Cash Inflows 42,393 50,870 70,114 100,000 145,000Operating Cash Outflows 19,631 21,437 29,360 44,024 65,276Net Total Cash Flows 22,762 29,433 40,754 55,976 79,724*1998 Summa Four projected Income Statement
Product Phase Out Year 1998 1999 2000 2001 2002
Cash Inflows 33,914 63,588 77,125 125,000 188,500Operating Cash Outflows 15,705 26,796 32,296 52,829 81,595Net Total Cash Flows 18,210 36,791 44,829 72,171 106,905
Year 1998 1999 2000 2001 2002Net Total Cash Inflow Difference (4552) 7358 4075 16195 27181
WACC 8.28%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
Q&A
Appendix A: WACC Calculation
Category Number ExplanationLong Term Debt 938 Balance sheetShareholder Equity 44,238 Balance sheetTotal 45,176 Balance sheetBeta 1 AssumedRisk Free Rate 1.35% 5 yr TreasuryMRP 7% AssumedTax 30% Assumed
Weight of Debt 2%Weight of Equity 98%
Cost of Debt 7% Approximation of 5 yr BB rated Bond yield Cost of Equity 8.35%
WACC 8.28%
Graphic Citations
Case Study: Cisco Acquisition,Djadja Achmad Sardjana
○ http://www.slideshare.net/djadja/case-study-cisco-acquisition