Avram Miller: Why Intel Failed to Acquire Cisco.

Sam Fried

Table of Contents A Short History of NetworkingCan’t Afford Anything We Want. Don’t Want Anything We Can Afford.Betting on BroadbandA Day Late and $20 Million Short Companies have a number of options for expansion. I concluded that networking could become a formidable business for Intel. Intel’s semiconductor strength combined with its software […]

Companies have a number of options for expansion. I concluded that networking could become a formidable business for Intel. Intel’s semiconductor strength combined with its software skills could play an important role in developing a leadership position in the nascent computer-networking business. Furthermore, the development of computer networks would also help accelerate the adoption of personal computers to the benefit of Intel’s main microprocessor business.

At first, it seemed an ideal area to explore. I realized that, while Intel had many of the technical skills to develop networking products, it lacked the marketing and business expertise required. It was doubtful that Intel had the time to develop those skills internally before other companies achieved strong positions. I wanted to acquire a company that could jump-start the process, that could form the nucleus of a networking business.

Buy Avram’s Book!The Flight of a Wild Duck

 

A Short History of Networking

Before personal computers and local area networks, there was time-sharing. Individuals might use a terminal connected to a mainframe or minicomputer. Terminals normally only had an alphanumeric, monochromatic display. They connected to computers by serial port. The display speed was very slow by today’s standards; you could see each character written one at a time on the screen. When personal computers were first introduced into businesses, they used a serial port to connect a PC to the time-sharing computers and ran terminal-emulation software. As more and more PCs appeared within the organization, people sought to find a faster way to connect them to what we would now call servers, developing the concept of a client/server network.

Initially, computer networking was developed to allow mainframe and minicomputers to communicate with each other. In 1975, for example, to connect PDP-11s together, Digital Equipment developed DECnet, a very powerful set of software protocols that could have become the standard for computer networking had Digital not kept it proprietary. Networked systems included computers that were located near each other, computers that were located within a campus, and, eventually, computers that were located remotely from one another. The Internet evolved from a way to connect computers that were both local and remote. The key to the Internet became the router, a device that can pass information from one computer to another via many paths.

I wanted to acquire a company that could jump-start the process, that could form the nucleus of a networking business.

A number of competing technologies developed and deployed in the early 1980s, called local area networks (LAN), could connect computers and devices located within a relatively small geographical area. One of these technologies, Ethernet, was first developed by Bob Metcalfe at the Xerox Palo Alto Research Center. Later supported by Digital Equipment and Intel, Ethernet came to dominate LAN technology and became the way computers would attach themselves to routers. Servers were developed around the same time to support email and shared printers.

Connectivity across large geographical areas, called wide area networks (WAN), developed much earlier in response to the need to connect mainframe and minicomputers to each other over large distances. Much of the technology now used for Internet communication came out of this. Using this same technology, clusters of local area networks could be connected together.

If you have high-speed Internet in your home, for instance, you’ll notice that your router has one port labeled “WAN” and a bunch of ports labeled “LAN.” This is the same general architecture as was first developed for enterprises. In 1999, Wi-Fi was introduced, with Apple offering the first commercial product. This would prove consequential in the proliferation of computing but did not play a role in my thinking at the time.

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Can’t Afford Anything We Want. Don’t Want Anything We Can Afford.

While Ethernet provided a very effective way for computers located close to each other to communicate, other technologies would be needed to let computers connect both to other local computers but also computers that were located remotely. The router is what makes all this possible. While there were a number of router companies, I was convinced that Cisco, formed in 1984, would be the winner in this new market.

So in 1988, I wanted Intel to buy Cisco, which was still small then. We might have bought them for less than $100 million, but Intel CEO Andy Grove thought that was too expensive. Cisco went public in 1990 at a valuation of $224 million. Sometime in 1994 or 1995, Intel took a look once more at Cisco. Once again, Andy passed at the opportunity, saying that Cisco at $4 billion was too expensive. I then bet Andy that one day Cisco would be worth more than Intel. He laughed at the thought. On May 2nd, 1998, Cisco passed Intel in market capitalization.

Andy thought they were a “piece of crap.”

Looking back, I may not have done a good job of explaining why Cisco would be so successful. Most likely, I did not appreciate how little understanding Andy had about networking. That’s on me. But it was very hard to “teach” Andy anything, at least in my experience. My boss, Les Vadász, one of the most senior executives in Intel, was the opposite. He really wanted to understand, and he had a big appetite for knowledge.

Having been turned down by Andy with respect to Cisco, I then considered 3Com as a possibility. Ethernet provided a way for multiple computers to all connect to each other over the same network and a small geographical area.  The founder of 3Com was Bob Metcalfe, who had developed Ethernet while at Xerox PARC. I knew Bob from my time at Digital Equipment Corporation when I gave his new company, 3Com, a very large order for Ethernet cards. Though the leader in Ethernet, they were having issues in this market, which was getting to be very competitive.

Cisco would never have been the company they became under Intel ownership.

Andy thought they were a “piece of crap.” When he told me that, I angrily responded: “I got it; you don’t want anything we can afford, and we can’t afford anything you want.” That was pretty much true. Looking back, I don’t think Cisco, 3Com, or any other potential acquisition would have entirely worked out. At that time, though, I was not yet aware of the problems of integrating such acquisitions into a company like Intel.

I believe Cisco would never have been the company they became under Intel ownership. While Cisco had a strong technical capability, they were really customer focused. 3Com might have been a more successful acquisition, but as part of Intel, it would have had difficulties competing with network leaders like Cisco.

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Betting on Broadband

The next company I considered was Sytek, the original broadband company formed in 1980. In 1982, General Instruments (GI), the leading supplier of products to the cable television industry, began a series of key investments in Sytek that led them to own 57 percent of the company. Though Sytek had ample opportunities to raise venture capital, they believed a strategic investment from GI made more sense.

GI was interested in Sytek’s development of MetroNet, one of the company’s main efforts and one with which GI could help directly. Sytek and GI’s collaboration on MetroNet could have been the foundational technology for interactive television and became one of the forerunners of broadband Internet.

Sytek combined off-the-shelf components that were readily available in the television industry, coupled to a key Ethernet component that Intel had developed. There was a demonstration of this technology in Sacramento, California, in 1982. This was the first metropolitan area network, I believe. Later, in 1990, a Boston-based company, LANcity, would do something similar, which they actually brought to market.

Though General Instruments was interested in the residential market, the cost of TV set tops capable of connecting to this network was estimated to exceed $1,500, which made it not viable as a consumer product. Consequently, GI began to lose interest in Sytek. In 1992, Intel and GI would partner, using many of the same concepts to develop the cable modem technology that evolved into what is now utilized by the cable industry for residential broadband.

Image: Wider Vision

Fortunately for Sytek, its executives ran into 12 members of the IBM Personal Computer Group at a networking seminar in 1983. By that time, the IBM PC was doing extremely well and was becoming a significant contributor to IBM’s profitability. The PC group needed LAN technology to serve their market. IBM was in the process of developing its own proprietary network technology called Token Ring, which was meant to compete with Ethernet.

The PC group got tired of waiting for Token to be developed. They decided to use Sytek’s technology because it could be used both to connect local networks but also to connect enterprises including building miles apart. IBM made a small investment in Sytek. The PC group began marking Sytek’s product, which was called LocalNet 2000. IBM and Sytek jointly developed a critical piece of networking software, NetBIOS. Later, Microsoft would incorporate this into their operating system.

Eventually, internal IBM politics killed the Sytek approach and required their PC group to wait for Token Ring. At the same time, the rest of the PC industry moved to Ethernet, which eventually won out and still is the standard for local area networking.

Sytek was in financial trouble once IBM had terminated their purchase agreement and moved to Token Ring. General Instruments, which no longer had any strategic interest, wanted to sell its 57 percent stake. As a result, the Sytek board decided to sell the whole company and engaged an investment banker to conduct an auction.

Intel was contacted by their investment banker in 1989, and we began to evaluate making an offer. Les and I liked Sytek’s CEO, George Klaus, and thought he had the potential to lead an Intel networking business. The company had a number of strong technologists who could have helped Intel a great deal.

After many internal meetings, we finally decided to make an offer. I then learned an important lesson about managing the acquisition process.

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A Day Late and $20 Million Short

Companies up for sale often hire an investment banker to represent them, and the banker may recommend an auction. The banker prepares an initial presentation on the company and reaches out to a number of potential buyers. Next, they narrow it down to a few possible buyers that appear to be very serious and a good fit. Those companies get an opportunity to review a lot more material about the company for sale and meet with all the key employees. The potential acquirers then place bids. The company to be acquired chooses among those bids based on a number of factors, with financial concerns typically prioritized the highest. This process tends to work well for the seller, as buyers who know they have competition will tend to offer more in order to be successful in their bid.

If the potential buyer has a lot of people involved in the deliberations around an acquisition, there is a good chance that someone will say that the price being considered is too high. Usually, then, others will jump on board to say that the price was too high. Later, if you can get the business for the lower price, they will claim they were right. If you lose the bid, they will say the acquirer overpaid. This happened exactly in the case of Sytek. We lost the bid to Hughes Networking, a division of the Hughes Aircraft Company, which later created DirecTV. Sytek became Hughes LAN Systems.

I found this loss very upsetting. It was my real first attempt at an acquisition.

Our bid was $20 million less than the Hughes bid of $87 million. After the acquisition, their focus shifted to using satellites for data communications. Eventually, this part of Hughes, Hughes Communications, was sold to EchoStar.

I found this loss very upsetting. It was my real first attempt at an acquisition. I realized that Intel would probably never successfully bid in an auction because we would always underbid. The process works differently when you reach out to a company that has not been thinking of selling and enter into negotiations.

With the advantage of hindsight, I now think that had we successfully acquired Sytek, the evolution of both the networking business in general and Intel could have proceeded very differently. With Sytek’s talent, we would have developed the semiconductors needed for broadband. Coupled with Intel’s existing Ethernet capabilities, Intel could have become the leading semiconductor supplier in the broadband market, the position later occupied by Broadcom. Perhaps we would have used the knowledge we gained in the acquisition to develop network server technology as well. Sytek would have been a better cultural fit with Intel than the later acquisitions we made.

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Excerpted from The Flight of A Wild Duck: An Improbable Journey Through Life and Technology by Avram Miller. Copyright 2021 Avram Miller. Reprinted with permission. You can read more of Avram’s writing at twothirdsdone.com. If you’d like to get in touch with Avram, be sure to reach out.


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