November 1998

SAN JOSE, Calif. -- When top executives of Lightspeed International, a maker of software to manage voice transmission over data networks, walked into the headquarters of Cisco Systems Inc. last December, they were expecting to discuss a deal to let Cisco license two of the company's products.

Buying the Building Blocks

Cisco, the largest maker of network routers, which form the backbone of the Internet, has a simple growth strategy: whatever technology its engineers cannot create in-house, it buys. Before 1996, Cisco acquired 8 companies; since then it has added 21.

But Michelangelo Volpi, vice president for business development at Cisco -- the leading maker of electronic routers and other devices that make up the complex hidden plumbing of the Internet -- had something else in mind. He wanted to buy Lightspeed.

With the fresh backing of John T. Chambers, Cisco's chief executive, who had earlier opposed a takeover of the company, Volpi cut right to the chase. Within three hours both sides had agreed to terms. And Lightspeed's managers did not even bother to tell other suitors before the buyout was announced a week later.

"We didn't feel the need to go to anyone else," said Lev Volftsun, then Lightspeed's chief executive.

And why would they? After all, not only is Volpi, who is just 31, uncommonly aggressive in going after what he wants; he is also dealing in one of the most valuable currencies in the technology business today -- Cisco stock. The shares Volftsun and his colleagues received in return for selling their company, worth $196 million when they completed the deal, are now valued at more than $320 million. Indeed, Cisco's performance in the market the last few years has been nothing short of phenomenal: its stock is nearly 500 percent above where it was at the beginning of 1996.

That has put Volpi among the most influential deal makers in technology, giving him, in many ways, more power than the myriad investment bankers and venture capitalists plying their trade in Silicon Valley. He has been instrumental in negotiations for 27 of the 29 companies acquired since 1993 by Cisco -- one of the most active companies in pursuing acquisitions. You can bet his phone calls are returned.

Investment banks peddle him clients, venture capitalists bring start-ups to his attention, and entrepreneurs happily trade autonomy for a little piece of Cisco. "His interest or noninterest means a lot to people," said Vinod Khosla, a venture capitalist at Kleiner, Perkins Caufield & Byers. "He wields power."

Cisco's strategy for growth is simple: whatever research and development its engineers cannot create in-house, it buys. That pays off in a variety of ways. A start-up company on the verge of releasing a new product, for instance, will see it explode onto the market -- under the Cisco name. Cisco also uses acquisitions to gain talent for its entire organization. A case in point is Judy Estrin, a founder of Bridge Communications, who became Cisco's chief technology officer after the company earlier this year acquired Precept Software, where she worked.

Volpi was not always so popular. In his early days at Cisco -- he started four years ago, an eon in the hyper-speed world of Silicon Valley -- Volpi had trouble completing proposed deals, said Barry Eggers, who hired Volpi for his staff when he ran the acquisitions effort for Cisco. His "outward confidence," said Eggers, now a venture capitalist at Weiss, Peck & Greer Venture Partners, was mistaken at times for arrogance.

"The most important part of his development is that he learned power doesn't come from telling people you are powerful," Eggers added. "He went from being a guy driving the deal from his side of the table to the guy who understood the deal from the other side."

Consider Cisco's recent deal with Selsius Systems, a Dallas-based affiliate of Lagardère, a French military and media holding company. When Volpi walked into Selsius's small conference room the morning of Oct. 13 to complete the deal, the lawyers were still bickering over minor points, such as what would happen to shares of stock held jointly by an employee and spouse in the event the employee died.

"There was a lot of frustration," said Daniel Scheinman, vice president for legal and government affairs at Cisco.

Volpi spent the morning on the phone with Scheinman, who was in Washington for meetings with the Federal Trade Commission, and with the company's accountants. But as the discussions with the other side became testier, Volpi finally pulled aside Jacques Payer, an executive representing Largardère, for a private conversation. "I said something like, 'Jacques, we have a handshake,' " Volpi recalled. "Let's get over this and sit down and get this deal done." Within a half-hour, Volpi compromised on some points, signed the documents and was back home in time to attend his wife's childbirth class. (The acquistion is still pending, subject to final approval.)

Volpi is refreshingly candid, a welcome surprise at a corporation that zealously guards its public image. A spokeswoman for Cisco, for example, initially demanded to listen in on interviews with some of Volpi's personal friends. When that failed, these friends were counseled by e-mail on how to answer questions. By contrast, Volpi encouraged his friends to speak freely.

Not that he had anything to worry about. Jane Schuchinski, who met Volpi on their first day of orientation at Stanford Business School in 1992, was gushing in her praise. "He makes the best risotto in the world!" blurted Ms. Schuchinski, who is chief executive of a small software start-up in New Jersey and stays frequently with Volpi and his wife, Toni, at their Los Altos home when she visits Silicon Valley. Volpi spent an evening recently advising her on how to handle the next day's business meetings. "Mike said, 'The best you can do is go in and be true to yourself and everything will be fine,' " she recalled. "That is how he runs his life, too."

Volpi was born in Milan, Italy. His father is a bank executive; his mother a journalist. When he was 6, his family moved to Japan, where he attended a private Roman Catholic boys school. There he perfected the two additional languages -- Japanese and English -- that he knows besides Italian. In 1984, he left Japan for Stanford University to study mechanical engineering. (He got bachelor's and master's degrees.) After a brief stint at Hewlett-Packard, he went to business school and ended up at Cisco.

Despite his first-class American higher education, Volpi is not fully acculturated. "One funny thing is all the innuendos about American television shows he doesn't get," said Gene Frantz, a business school friend. " 'The Brady Bunch'? He has no ability to relate to it at all. Cartoons? He does not get it." When told of the comment, Volpi, still an Italian citizen, laughed in response. "That's O.K.; they don't get my cartoon, either."

In general, Volpi avoids Silicon Valley's trendier byways. "Mike just does his job and goes home and lives a reasonable life," said Gregory Waldorf, an institutional money manager at Pacific Edge Investment Management in Palo Alto, Calif. "That's a powerful contrast to investment bankers in Silicon Valley."

Not all of Cisco's acquisitions have been home runs.

In the last couple of years, Volpi and his team have been on an acquisition spree, buying 8 to 10 companies each year. The companies are typically small in size, usually valued between $50 million and $300 million. And many of their recommendations for acquisitions come from customers.

The March acquisition of Netspeed, a maker of products that give users high-speed Internet access at home, is an example. Solomon D. Trujillo, chief executive of US West, the regional phone company, called Chambers earlier this year to suggest he buy Netspeed, Volpi said. US West wanted to buy Netspeed's products, but did not want to rely on a small supplier. "Chambers said our customer is willing to write a purchase order," Volpi recalled. "You have to do it." The acquisition was announced in March.

Volpi also keeps open a constant dialogue with Silicon Valley venture capitalists. "The tough part is figuring out whom you trust and whom you don't," he said. "If you can't trust them the first time around, you quit sharing information." And he practices what he preaches. Recently, Khosla of Kleiner Perkins asked Volpi why he had not talked to one of his companies before acquiring Netspeed. Instead of dodging the question, Volpi explained the US West connection. "Even when I'm competing I can trust him to be straight," Khosla said.

But while Volpi is straightforward, he does not volunteer competitive information. "If you see he hasn't returned your calls for a few days and then you read in the newspaper he bought your competitor," said Rob Soni, a partner at Bessemer Venture Partners, "then you probably don't care for him too much."

Not all of Cisco's acquisitions have been home runs.

For instance, Granite Systems, a company started by Andreas Bechtolshiem, founder of Sun Microsystems, and which Cisco paid $220 million in stock to buy, has not turned out to be a blockbuster.

And Cisco's unusual decision to back a start-up with the express intent of buying it has not worked out as well as expected. "We had an idea about the product, and we wanted it fast and in Cisco mode," Volpi said. Cisco made an early investment in the company, Ardent Communications, a maker of integrated voice, video and data equipment to hook up company branches with headquarters. It garnered two seats on the board and worked closely with Ardent's engineers. Volpi acknowledges now that Cisco micromanaged the company too much.

"It's a tricky balance between telling them what you want and letting them act as a start-up," he said. "We tried to keep it too tight and the product doesn't have the spark of a typical start-up."

Recently, Cisco ran into trouble with the Federal Trade Commission, which is investigating whether talks Cisco had with Lucent Technologies and Northern Telecom Ltd. in 1997 constituted an illegal effort to carve up the market for Internet equipment. Scheinman said that Cisco, which denies any wrongdoing, was fully cooperating with the investigation and had delivered two boxes of documents to the F.T.C., including e-mail exchanges among the companies.

Despite his attempts to stay out of the limelight, Volpi seems to attract a following all his own. At a charity auction last year, a pair of Tigger the Tiger slippers he liked to wear at home sold for $600. And the mother of one of his best friends bought Cisco stock after Volpi told her over dinner in 1994 that he was taking a job there.

"I don't know what Cisco does," said Vivian Schuchinski, the mother of his friend Jane. "But I wanted to buy a piece of Mike."