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VCO/Series 80 & VCO/Series 20 are becoming outdated and will soon be obsolete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

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