Can Mike Volpi Make Cisco Sizzle Again?

Without a hot stock, doing deals is going to be a lot harder

John Chambers surely deserves the credit for artfully managing Cisco Systems Inc.'s climb to the top of the networking-equipment world. For 44 consecutive quarters, sales have headed north, making Cisco a pillar of techdom, alongside Microsoft Corp. and Intel Corp. But before all the "attaboys" go to Chambers, consider this: The person who helped stoke much of that growth is little-known Michelangelo "Mike" Volpi. As head of Cisco's acquisition team, Volpi built one of the most effective takeover machines in Corporate America, snapping up more than 42 companies that contribute 40% of Cisco's $25 billion in revenue today. No wonder Chambers calls Volpi his "rising star."

Chambers is going to need that star power--and more. On Feb. 6, the CEO told analysts that sales over the next six months will range from flat to down 5%. For the year, Chambers scaled back his estimates from 50%-60% growth to 40%. Even that isn't a sure thing. As the economy slows, corporate customers are putting the brakes on spending, leaving Cisco with inventories that have doubled, to $2.5 billion, in six months. "It's hard to say where the bottom might be," says analyst Martin Pyykkonen of C.E. Unterberg, Towbin. "It could get worse before it gets better."

Not if Volpi learned a thing or two--or 42--doing all those deals. To lift the company back to its former heights, Chambers is counting on Volpi's expertise gleaned from years of intense research on hundreds of acquisition candidates. Chambers promoted him to chief strategist eight months ago, where Job One is revving up Cisco's revenues. In his new post, Volpi oversees Cisco's acquisition strategy, product development, and a $16 billion war chest of cash and investments. He already is zeroing in on fast-growing markets and hot technology sectors such as optical networking that Cisco needs to stay ahead of the pack. "Mike has the technical knowledge, the strategic vision, and the ability to build a team," says Chambers. "It's a rare combination of skills."

Volpi's skills are going to be put to the test. In the past, Cisco used its high-flying stock to acquire companies that made cutting-edge networking gear. But Cisco's stock, once the darling of tech investors, has lost its luster, falling 47% since the beginning of last year, to 28 1/2. At the same time, the depressed stock is deflating employee morale. Last year, Cisco doubled its workforce, which means that at least half of its employees have options that are under water.

Volpi also is trying to straighten out an earlier financing snafu. A portion of the bundle of cash he controls is for loans to customers that are buying Cisco equipment. But Cisco was forced to triple its reserves for bad loans last quarter, from $75 million to $225 million, as ICG Communications Inc. and several other telecom customers filed for bankruptcy. Alarmed at the amount of risk the company was taking on, Chambers turned financing over to Volpi and told him to scale back this quarter and become more selective about who gets financing.

All this might be enough to rattle a young executive--or send him skedaddling to a hot networking startup. But 34-year-old Volpi shares Chambers' bright outlook for the networking giant. "I give people the pep talk that this is an excellent company--one that will make and has made history," says Volpi. "This is something we will tell our grandchildren about. I really do believe this."

PRESSING GOAL. To ensure his vision, Volpi is putting a wide-ranging game plan into play. For starters, he's pushing the company to clear out swollen inventories by selling high-margin products in regions outside the U.S., where demand is still strong. At the same time, he's targeting four markets that he believes are poised for explosive growth: optical networking, Internet phone calling, wireless networking, and the management of traffic over networks. Last April, Cisco paid $5.7 billion in stock for ArrowPoint Communications Inc., one of the leading startups working on products that handle network traffic.

He's also turning up the heat on the product side. His most pressing goal: creating a product line that will rival offerings by Nortel Networks Corp., the optical kingpin. Cisco needs to take a larger share of the fast-growing optical-equipment market if it's going to sustain its growth. Volpi already is on his way to constructing a formidable product line. In September, 1999, Cisco plunked down $7 billion for optical-equipment maker Cerent Corp. Sales of Cerent products have doubled in one year and already kick in more than $1 billion in sales. That's a good start, but Cisco still lacks a full line of optical products, such as gear that increases the capacity of long-distance networks.

Volpi is even rethinking his past approach to acquisitions. Instead of snapping up big companies, he's setting his sights on small fry that can provide product growth--but without a lot of employees that would raise ongoing costs. He's also moving Cisco into the role of venture capitalist. In the past, Cisco has closely watched upstarts and, once their technology has been proven, swooped in and bought them. Today, though, venture money is harder to come by for networking startups, so Cisco is stepping into the breach. In January, for example, Cisco ponied up $1.05 billion for a venture fund to be run by Softbank Corp. in Asia. It's the first of what will be more venture bets to make sure the pipeline doesn't dry up. "The [capital] markets are not being efficient right now," says Volpi. "Some good ideas are not getting funded."

With workers from all its acquisitions roaming the halls, Cisco sometimes resembles a mini United Nations. It's the perfect environment for Volpi's multicultural upbringing. Born in Milan to Italian parents, he still holds his Italian citizenship. He spent 12 years in Japan--from age 5 to 17--and speaks three languages: English, Italian, and Japanese. His father, Vittorio Volpi, the head of the Japanese subsidiary of Swiss UBS Bank, says his son has learned flexibility from the Italians, subtlety from the Japanese, and pragmatism and fairness from American business culture. "He is an interesting cocktail of cultures," the elder Volpi says.

Although Volpi has become a top-notch dealmaker, he began his career as an engineer. While an undergraduate at Stanford University--where he received two degrees, in manufacturing and engineering--Volpi won an award for designing a sensor for an agriculture sprayer. "He's a damn good engineer," says Bob Bliss, who worked with Volpi on the project. Volpi can still hold his own with the geeks. In a recent session with journalists, he talked about why Internet technologies are winning when it comes to networking traffic--an eye-glazing topic to most in the audience.

Volpi also adapts easily. When he was 12 years old in Tokyo, he wanted to study another Romance language. Instead, his father insisted that he attend a Japanese-language school. In just two years, the young Volpi became so fluent that he finished second in a worldwide English-Japanese translation contest. Now, he needs to learn even more quickly. For Cisco, second may not be good enough.

By John Shinal in San Jose, Calif.

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