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DiggTalk about performance incentives. As this analysis of the deal explains, Cisco's investment in Nuova is actually typical of its pattern of taking executives from inside the company, dedicating them to building startups that technically are standalone businesses but in reality have extremely close ties to the mother ship (in some cases even being headquartered on Cisco's campus), and then buying the company outright at a later date when it is most favorable to do so.
Cisco did the same thing back in 1993 when it bought the networking startup Crescendo, and more recently when it purchased the storage and switch technology maker Andiamo. Cisco has typically drawn on the same core of employees, including its former chief development officer Mario Mazzola, to spearhead these projects, which have come to be known as spin-ins for the way they are nurtured outside of the company and then brought back inside the fold.
The problem? "In a couple of cases those employees holding options in these spin-ins have become very wealthy – a fact that seems to have been lost on Cisco investors but not on other, jealous staff," notes the register.
"Our sources indicated that the Andiamo staff did not even leave Cisco's campus. They, in fact, maintained Cisco security badges through the spin-in process."
After that spin-in was completed, it was widely reported that the Cisco executives who had worked on Andiamo had retired en masse. As it turns out. They were only off to work on another spin-in – this time, Nuova. "Already wealthy, this group of Cisco veterans had enough cash to self-fund Nuova, stopping greedy venture capitalists from diluting their shares," notes the Register.
"According to our sources, the spin-ins are proving painful to Cisco's morale. We've been told that Cisco's board has reprimanded Chambers for the Andiamo deal and his apparent favoritism for Mazzola and his cronies. The wealth accumulated by the spin-in-veterans has made other Cisco employees jealous beyond belief."
Cisco employees left out of these collaborations may not be the only ones that have a problem with the unusual deal structure. "The Andiamo group started inside of Cisco, then 'left' in January of 2001, received $84 million four months later and then received $750 million in 2004 while wearing Cisco security badges, no less," the Register says. That creates some concern for investors who have to wonder whether Cisco rewarded a select few for developing a technology on their own, when it might have made it a companywide effort that would profit everyone, including Cisco's shareholders.
The Register argues that, fine new products notwithstanding, Cisco might have achieved the same results from in-house development efforts. "Why did shareholders essentially pay these guys hundreds of millions for products they already owned? And why is Cisco paying the same group again? The financial terms of the deals coupled with the repeating themes do seem disconcerting." — Andrea Orr
