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Mixed Results: What Exactly Is It?

The saga of Andiamo Systems illustrates well the organizational twists and financial contortions that companies were willing to endure to the end of innovation. Silicon Valley–based Andiamo was founded in January 2001. The company developed intelligent data switches that enabled many disparate storage systems to communicate and unify as one. Most people had probably never even heard of Andiamo before Cisco Systems acquired it for $750 million in February 2004. This was not a typical Cisco acquisition.

It's complicated. The Andiamo transaction represented the culmination of a significant venture investment and ongoing alliance between Cisco Systems and Andiamo. Cisco already owned 44 percent of Andiamo at the time of the acquisition. Moreover, Cisco had been Andiamo's sole venture funder; Cisco initially had loaned the startup $42 million and subsequently agreed to provide additional funding of $142 million.

For these funds, Cisco had bought the rights to acquire the portion of Andiamo that it did not already own, at some future date. The purchase price might be as much as $2.5 billion in stock, depending on the success of Andiamo's technology and revenues. The acquisition agreement was also cleverly structured to vary along with Cisco's own market capitalization and revenue so as to minimize any potential impact on Cisco's financials.

Beyond the technology and cash, Cisco otherwise had strong connections with Andiamo. In an unusual arrangement, Andiamo and most of its 300-plus employees (many on leave from Cisco) worked in Cisco buildings on Cisco's main San Jose campus. Under various agreements with Andiamo, Cisco was the exclusive manufacturer and distributor of all Andiamo products. Cisco had even been expensing its cash investments in Andiamo as ongoing R&D costs since its original infusion in 2001.

It was a strong and close partnership. Many of the complexities of the relationship were revealed only after accounting rule changes in 2002 required Cisco to more fully disclose its various linkages with Andiamo. It was such a close partnership, in fact, that new SEC rules required Cisco to account for Andiamo as if it had consolidated the company since its initial investment in 2001.

A bit of background is useful to understand these novel arrangements. Prior to the founding of Andiamo in 2001, much of the start-up's top management, including CEO Buck Gee, had been Cisco executives. In fact, founding Andiamo was largely their idea, even while still working for Cisco. They also eventually ended up the primary holders of the 56 percent of Andiamo's equity that Cisco did not own. In fact, other than Cisco, Andiamo employees were the only other equity holders. In turn, many of them returned to roles as Cisco executives after the acquisition deal closed. By the time the acquisition was finalized, Cisco hinted that Andiamo's core market and revenues had both been disappointing. Nonetheless, in cashing out their equity stakes, many Andiamo employees effectively received a rich signing bonus for returning to their "former" employer. Of course, "returned" is also a curious term in this case; after all, they never left Cisco's main campus.

Cisco's Andiamo exercise is a fitting example of how far companies were willing to go in pursuit of innovation. Andiamo combined a bit of corporate venturing and corporate venture capital with the concept of the spinout—in spirit, anyway, even if it never actually left the premises. Cisco and Andiamo tied it all together with an ongoing, on-site R&D and manufacturing alliance. Finally, they finished it all with a spin-in acquisition. Companies were willing to try extraordinary things in order to foster and procure new ideas and new technologies.

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