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Cisco Rode Internet On A 118,741% Climb

Cisco Systems (CSCO) got its start in 1984 by selling routing equipment that helped computer networks made by various manufacturers talk to each other and exchange information quickly.

That helped solve a growing problem in the nascent computer networking field.

But Cisco, which launched its IPO in 1990, didn't stop there.

Cisco Systemsused acquisitions, partnerships, internal innovation and marketing savvy to grow into a multibillion-dollar global powerhouse that became synonymous with the backbone of the Internet.

Cisco capitalized on companies' demand for equipment to connect computers and users within an office and, later, over vast distances. Much of its growth was fueled by the early surge of the Internet, years before its "Internet of Everything" marketing campaign, David Bunnell and Adam Brate say in the book "Making the Cisco Connection: The Story Behind the Real Internet Superpower.

"It developed a once derided, now renowned, strategy of innovation by acquisition and it correctly identified the Internet as the wave of the future and leaped on top," they wrote.

Investors responded in kind. Shares soared 118,741% from their October 1990 low to their all-time high on March 27, 2000.

Cisco's equipment helped pave the Internet's information super highway, allowing consumers to surf the Web, exchange emails and share photos in seconds, setting the stage for an explosion in other Web-delivered services.

Revenue jumped 155% to $69 million in 1990, and with earnings up 188%, 189% and 150% in the first three quarters, the stock broke out that fall.

Over the '90s, revenue grew at least 32% and as much as 163% each year, hitting $18.9 billion in 2000. Earnings growth continued, averaging 40% from 1996 to early 2000.

But Cisco shares slid in the early 2000s as the economy, the dot-com bust and a saturated market for the company's core business of routers and switches put a stop to its sharp growth.

"They were hit with a double whammy," said Shebly Seyrafi, an analyst at FBN Securities. "There was a dot-com crash, so there was a big slowdown in technology spending, which exacerbated their growth rates on the downside. Once that dot-com crash went away, they were still faced with a slowing and mature switching and routing market.

Innovation was a key to Cisco's jump on early rivals such as Wellfleet Communications, says Carlos Dominguez, senior vice president in the office of Cisco CEO John Chambers. Dominguez joined San Jose, Calif.-based Cisco in 1992 as one of the first employees in the New York office.

"It was really all about the software," he said. "We could support all of these protocols that nobody else did.

Chambers' vision for Cisco extended beyond routers.

In 1993 the company paid $97 million for Crescendo Communications to enter the switching market. While routers directed information flow on a network, adding switches helped move data faster.

"That was really a turning point," Dominguez said. "You would not have been able to scale the networks to the size they are today (without switches).

Cisco bought nine companies from 1993 to 1996. They included Kalpana, a maker of Ethernet switches, and LightStream, which developed a way to send data in fixed packets across a network.

The deals were key to providing a complete end-to-end product for customers' computer networks, say Bunnell and Brate.

"Chambers believed that in order to grow at the pace needed to remain a market leader, he would need to buy these ideas and their companies rather than relying on internal research and development," they wrote.

In the 1990s, Cisco saw the need to expand offshore but didn't have a network of global offices. In 1994 it forged alliances with 13 large Japan-based companies to help push its products offshore. The companies, including SoftBank, Hitachi and Fujitsu, invested $40 million in Cisco's Japanese unit.

"A year later Cisco enjoyed a 60% market share in each of its business segments, one of the few foreign companies to succeed on Japanese soil," Bunnell and Brate wrote.

Cisco's routing equipment gave the company the edge in becoming a leader in local area networks within a company office or other geographically limited area.

Expanding to wide area networks, where data could be moved quickly across state and country lines, took additional technology.

In 1996 Cisco paid $4.5 billion to buy StrataCom, another provider of packet transfer technology.

StrataCom's technology wasn't the only draw, Dominguez says.

"We were interested in the service provider business, getting into large carriers like Verizon (VZ), AT&T (T) and others, and StrataCom was playing in that space," he said.

Cisco used acquisitions to gain instant footholds in other markets, including transmitting phone calls on Internet lines and optical internetworking, an advanced wide area network technology.

In 1999 it paid $7.4 billion to acquire Cerent and Monterey Networks. Cerent produced devices for carrying voice, data and video over fiber optic cables. Monterey made products for increasing optical network capacity.

Cisco was under tremendous pressure to keep up with customer demands for speedier information delivery, particularly from service providers, Dominguez said. "The Internet (usage) is growing at 300% to 400% (annually), so the demand on the service providers to create more efficient networks was really important.

The acquisition strategy hinged on Cisco's ability to retain workers, say Bunnell and Brate.

"The secret was to make sure the technologists stayed on after an acquisition so they could keep on making innovations in their product lines," the pair wrote. "Otherwise, they would probably go off and start new companies that would compete with Cisco.

Cisco's own Internet operating system software acted as a sort of glue between all of its acquired products to make sure they worked together seamlessly.

"That played a very critical role because our clients were able to buy a variety of different products from us, and yet the look and feel of the interface and programmability of the products had a very common feel and user experience," Dominguez said.

Cisco has kept on its acquisition path in recent years. Much of the activity has been directed at developing new lines of business to offset slowing growth in its core groups.

But in its last quarterly report, only its emerging data center server and security units posted year-over-year revenue growth.

"They have retained market share," said Rohit Mehra, an analyst for market tracker IDC. "But ... the markets have not grown, plus Cisco has not found new segments to go after that could have provided that incremental boost that it was quite used to in the 1990s," he said.

Last month, Cisco said it plans to invest $1 billion to expand in cloud computing, where firms store and access data over the Internet.

Though Cisco is expected to get a revenue surge from the release of new routers, a return to double-digit annual revenue growth appears unlikely, with its revenue declining by 8% in its latest Q2 vs. the year-earlier period, Seyrafi says.

"Just three or four years ago Cisco's (annual revenue growth) target was 12% to 17%, and no analyst believed it," he said. "Their target now is 5% to 7%. That is achievable, but it's still going to be challenging because the recent growth rates have been declining."