In looking back almost twenty years, similarities between these two men’s approaches stand out, and those commonalities were a product of the times.
Michael Dell shaped and forged much of the business environment of the 1990s, while Carl Russo, Cerent’s CEO, exploited these environs to make Cerent the hottest commodity of 1999. John Chambers, a business pioneer in his own right, directed his startup, Cisco Systems, along the same lines as Dell and found his kindred spirit in Russo.
All men were “sales” men and all were fixated on revenue as a way of boosting their company’s valuations [1].
All men were “sales” men and all were fixated on revenue as a way of boosting their company’s valuations [1].
Revenue Swelling
Dell and Cisco grew rapidly. Between 1994 and 1999, Dell’s revenue soared by five times, to $18 billion. Similarly, Cisco’s revenue passed the $1 billion mark in 1994, and by 1999, the company’s revenue exceeded $12 billion, a twelve-fold increase.
“In the three years up to 1999, the price of a share of Dell stock soared 4,200 percent,” reported author Barry Lynn, while Cisco saw its share price of $64 at the outset of 1994 soar to $121 at the close of 1999, an 89 percent bump. Although nowhere as impressive as Dell’s rise, Cisco’s valuation passed the 100-billion-dollar mark. Both data points were impressive feats, regardless of how you look at it.
Dell and Cisco grew rapidly. Between 1994 and 1999, Dell’s revenue soared by five times, to $18 billion. Similarly, Cisco’s revenue passed the $1 billion mark in 1994, and by 1999, the company’s revenue exceeded $12 billion, a twelve-fold increase.
“In the three years up to 1999, the price of a share of Dell stock soared 4,200 percent,” reported author Barry Lynn, while Cisco saw its share price of $64 at the outset of 1994 soar to $121 at the close of 1999, an 89 percent bump. Although nowhere as impressive as Dell’s rise, Cisco’s valuation passed the 100-billion-dollar mark. Both data points were impressive feats, regardless of how you look at it.
Cerent rode these coattails, and in some sense, this upstart startup’s leaders in 1998 weren’t even aware of the similarities that these three high-tech companies and their leaders shared.
Outsourcing
“For Dell, manufacturing was not making things,” according to Lynn [2], “it was buying and moving and assembling and delivering things that other companies had manufactured . . . Most important of all was that, relative to his competitors, Dell had much less capital tied up in parts.”
Cisco was on the same page as Dell, with respect to outsourcing, except it plied its trade in telecommunications as opposed to PCs. Carl Redfield drove Cisco’s outsourcing of manufacturing during the 1990s, well before the company made its largest acquisition of an upstart startup, Cerent, in 1999 [3].
“For Dell, manufacturing was not making things,” according to Lynn [2], “it was buying and moving and assembling and delivering things that other companies had manufactured . . . Most important of all was that, relative to his competitors, Dell had much less capital tied up in parts.”
Cisco was on the same page as Dell, with respect to outsourcing, except it plied its trade in telecommunications as opposed to PCs. Carl Redfield drove Cisco’s outsourcing of manufacturing during the 1990s, well before the company made its largest acquisition of an upstart startup, Cerent, in 1999 [3].
Consequently, Dell and Cisco used their available capital more efficiently than their respective competitors allowing them to expand at a much faster clip than their larger rivals: IBM and Apple in the PC sector, as well as Nortel and Lucent in the telecom sector, respectively. “[Dell] was able to jump from the number-five position among PC makers in 1996 to the number-one spot in 2001, without buying a single big competitor,” Lynn wrote. Meanwhile Cisco achieved its number one ranking by 2001 through acquisition and development of small startup companies. Dell grew by leveraging its contract manufacturer’s supply chain and reducing its inventory with a “build to order” model. Cisco grew through acquisition and using its contract manufacturer’s to build a wide variety of disparate products. Cerent, like Dell, used its contract manufacturer to provide a competitive advantage. Cerent promised to ship within ten days after-receipt-of-order (ARO) for ‘454’ systems, and within 48 hours ARO for individual modules.
Going Global Quickly
To succeed globally, corporations during the 1990s adopted the duel mantra of “go global” and “be selfish.” Dell learned this the hard way while Cisco found this one-way track almost at once, even as it tried to scale its business beyond the one-billion-dollar mark.
Going Global Quickly
To succeed globally, corporations during the 1990s adopted the duel mantra of “go global” and “be selfish.” Dell learned this the hard way while Cisco found this one-way track almost at once, even as it tried to scale its business beyond the one-billion-dollar mark.
After trying for a fourth time in its decade-old history, Dell became one of the first companies, as Lynn wrote, “to grow to maturity within a world that had been redefined by three new freedoms. The first two of these . . . were political. These were the freedom to do business wherever in the world a company wished and the freedom to operate only for profit, unburdened by any sense of responsibility to any community or any individual.” Lynn adds, “The third freedom was technological, and it was to use modern logistics to extend the assembly line far further and in more directions than any company had ever dared before.”
Cisco embraced these “freedoms,” and its evangelical leader preached change as a smokescreen for its relentless attack on the circuit-switching world led by Nortel and Lucent, in favor of its packet-switching worldview. Chambers shtick advocated that his brand of change would lead to increased productivity, wealth generation, and improved communications networks for its customers and their customers.
In the process, Dell, Cisco, and other corporations that embraced this 1990s philosophy of globalization, produced a tightly integrated, economic interdependence, among almost every Western country.
Cisco embraced these “freedoms,” and its evangelical leader preached change as a smokescreen for its relentless attack on the circuit-switching world led by Nortel and Lucent, in favor of its packet-switching worldview. Chambers shtick advocated that his brand of change would lead to increased productivity, wealth generation, and improved communications networks for its customers and their customers.
In the process, Dell, Cisco, and other corporations that embraced this 1990s philosophy of globalization, produced a tightly integrated, economic interdependence, among almost every Western country.
Carl Russo Meets Michael Dell – Executive Hobnobbing
Leslie Renshaw, Cerent’s Human Resources leader, from her cubicle next to Carl Russo’s, remembers a time in July 1999 when Carl took a call from Michael Dell: “We had already closed all rounds. We were done taking in any more money.”
But Leslie was aware of Dell’s modus operandi, “Michael Dell only gets involved at the late stage, that’s his thing. I think Carl said, ‘Yes,’ because he just wanted to buddy up to Michael.”
Carl and Michael weren’t already friends, so Leslie believes Carl took the potential funding opportunity from Dell as a chance to get to know him better. Leslie adds, “And then he brought Michael down to his home in the Santa Barbara area and they had a little weekend together. That’s where the deal was done.”
Leslie Renshaw, Cerent’s Human Resources leader, from her cubicle next to Carl Russo’s, remembers a time in July 1999 when Carl took a call from Michael Dell: “We had already closed all rounds. We were done taking in any more money.”
But Leslie was aware of Dell’s modus operandi, “Michael Dell only gets involved at the late stage, that’s his thing. I think Carl said, ‘Yes,’ because he just wanted to buddy up to Michael.”
Carl and Michael weren’t already friends, so Leslie believes Carl took the potential funding opportunity from Dell as a chance to get to know him better. Leslie adds, “And then he brought Michael down to his home in the Santa Barbara area and they had a little weekend together. That’s where the deal was done.”
And what was that deal? It was a financial transaction billed as bridge loan to tide Cerent over during the summer months of 1999 as the IPO process was moving along.
Specifically, on July 20, 1999, Cerent, at the behest of Carl, entered into a convertible note purchase agreement with MSD Capital, L.P., the private investment firm for Michael S. Dell. Pursuant to this agreement, according to the S-1 filing, “Cerent issued $30,000,000 of convertible notes, which will be automatically convertible into shares of Cerent's common stock upon completion of the initial public offering.” The deal was consummated the next day.
Michael was the real winner. Leslie recalls, “It was a sweet deal for Michael because there was no risk for Michael at that point. It was already closed. We weren’t accepting anything and the fact that he accepted showed [Michael had another motive]. That [deal] was all done over cocktails.” Leslie concludes, “He should have turned Michael Dell away.”
The upshot?
Emphasizing rapid revenue growth, outsourcing manufacturing, going global quickly, and building executive relationships drives change and leads to better products for operators and customers.
Dell, Cisco, and Cerent, in their own ways, were significant innovators in their respective fields – PC manufacturing, packet switching, and optical transport, respectively. Their success was validated by the numerous companies that used their offerings and the competitors who copied their methods, and in some cases, their products.
[1] Carl Russo focused on revenue in 1999 as he took over the Cerent leadership role from Mike Hatfield, who had focused on profitability during 1998. As I wrote in my previous BLOG, Carl relished the task as Cerent’s CEO and he “immediately evaluated his management team and key contributors, ensured the culture was conducive to ‘winning’ (as he defined it), and focused on growth over profitability to wow Wall Street and raise Cerent’s valuation in the process. Carl understood that “the lion’s share of value, which lies in innovation and branding,” is enjoyed by creative upstart startups, a notion described by former state department official, Thomas Christensen, in explaining how the U.S. will maintain its technological lead over China.”
[2] End of the Line: The Rise and Coming Fall of the Global Corporation, Barry C. Lynn, 2005, Doubleday, New York, chapters 4 and 5.
[3] Cerent was founded in 1998 without any intention of performing its own manufacturing. A contract manufacturer was hired by Michael Hatfield, Cerent’s chief operating officer, in 1998, to produce Cerent’s popular Cerent 454 product, which achieved its first billion dollar in sales within a year after Cisco acquired Cerent. This factor eased the acquisition process, as Cisco did not need to shed the startup’s manufacturing resources, because there were none.
Specifically, on July 20, 1999, Cerent, at the behest of Carl, entered into a convertible note purchase agreement with MSD Capital, L.P., the private investment firm for Michael S. Dell. Pursuant to this agreement, according to the S-1 filing, “Cerent issued $30,000,000 of convertible notes, which will be automatically convertible into shares of Cerent's common stock upon completion of the initial public offering.” The deal was consummated the next day.
Michael was the real winner. Leslie recalls, “It was a sweet deal for Michael because there was no risk for Michael at that point. It was already closed. We weren’t accepting anything and the fact that he accepted showed [Michael had another motive]. That [deal] was all done over cocktails.” Leslie concludes, “He should have turned Michael Dell away.”
The upshot?
Emphasizing rapid revenue growth, outsourcing manufacturing, going global quickly, and building executive relationships drives change and leads to better products for operators and customers.
Dell, Cisco, and Cerent, in their own ways, were significant innovators in their respective fields – PC manufacturing, packet switching, and optical transport, respectively. Their success was validated by the numerous companies that used their offerings and the competitors who copied their methods, and in some cases, their products.
[1] Carl Russo focused on revenue in 1999 as he took over the Cerent leadership role from Mike Hatfield, who had focused on profitability during 1998. As I wrote in my previous BLOG, Carl relished the task as Cerent’s CEO and he “immediately evaluated his management team and key contributors, ensured the culture was conducive to ‘winning’ (as he defined it), and focused on growth over profitability to wow Wall Street and raise Cerent’s valuation in the process. Carl understood that “the lion’s share of value, which lies in innovation and branding,” is enjoyed by creative upstart startups, a notion described by former state department official, Thomas Christensen, in explaining how the U.S. will maintain its technological lead over China.”
[2] End of the Line: The Rise and Coming Fall of the Global Corporation, Barry C. Lynn, 2005, Doubleday, New York, chapters 4 and 5.
[3] Cerent was founded in 1998 without any intention of performing its own manufacturing. A contract manufacturer was hired by Michael Hatfield, Cerent’s chief operating officer, in 1998, to produce Cerent’s popular Cerent 454 product, which achieved its first billion dollar in sales within a year after Cisco acquired Cerent. This factor eased the acquisition process, as Cisco did not need to shed the startup’s manufacturing resources, because there were none.