A Conversation with Cisco’s Top Dealmaker

Charles Carmel deserves a good dollop of credit for Cisco Systems’ fabled acquisitions prowess and its steady venture hand.

A member of the networking giant’s corporate business development department for nine years and its vice president, Carmel this summer took over responsibility for all day-to-day activities. (His former co-vice president, Hilton Romanski is now vice president of Cisco’s service provider strategy and business development organization.)

Carmel says he expects the pace of Cisco’s M&A machine to remain steady in the year ahead and that its venture investing may increase.

The company today has a venture portfolio of close to $1.6 billion and very deep pockets to add to it. It can draw on a $39 billion balance sheet if opportunities arise.

Carmel says he sees attractive venture investing opportunities in China and in the BRIC countries of Russia and Brazil. Cisco recently increased its commitment to Russia by pledging to invest up to $100 million over the next 10 years. It already has an investment in Almaz Capital, a venture fund it helped to create.

Meanwhile, Cisco is likely to be more active in Brazil, a market where it has not had a strong focus.

Carmel says Cisco’s role as a limited partner is largely honed toward emerging markets where the company hopes to get a foot in the door. It is unlikely to take an LP interest in a U.S. based fund, for instance.

In a recent conversation, Carmel discussed his venture and M&A strategies.

Q: Cash-rich technology companies are thought to be revving up their M&A activities to fill product pipelines. Is that true at Cisco?A: We’re right on pace for a typical year. We’ve announced four acquisitions during the course of this calendar year. We announced seven last year. We have a few things that we’re still working on in the pipeline, and I expect before the end of the year we’ll be right around the same pace.

Q: What about next year?A: If you look historically over the last several years we’ve been right around five to 10 acquisitions a year. I think that level of activity is right where I expect us to be this year and I don’t see any reason for us to be meaningfully off that pace as we go into next year.

Today we have about 70 companies in the [venture]portfolio on a global basis and we have a series of 20-plus investments in funds in a limited partner capacity. We continue to make new investments at a very healthy pace, somewhere in the range of 10 to 15 new investments a year.”

Q: What is Cisco’s present commitment to venture capital?A: Today we have about 70 companies in the portfolio on a global basis and we have a series of 20-plus investments in funds in a limited partner capacity. We continue to make new investments at a very healthy pace, somewhere in the range of 10 to 15 new investments a year.

Q: With so much caution in the venture industry, do you see your investment pace continuing in 2011?A: I expect it will, if not potentially increase. We have been very consistent as a corporate investor. We have played through economic cycles and technology cycles.

Q: When does Cisco like to get involved with companies?A: We’ve done all types of investments, from very early stage A rounds to very late stage pre-IPO and even minority investments [in public companies]. If you look at what’s most frequent, it tends to be companies in the B and C stages of development. The company will have a working technology and some sort of market validation. We come in and add a strategic angle to the company and help accelerate overall development.

Q: What is your average deal size and how much ownership do you like to take?A: Generally in the $5 million to $10 million range. We look to take somewhere between 5% and 20% of companies in most situations.

Q: What’s the reason for the 5% to 20% bracket?A: We think if we have at least 5% of a company then that’s a statement that we matter and we’re going to be relevant. If it is going to be less than that, there has to be a pretty specific reason as to how we’re going to be relevant. We try to stay under 20% because at those levels we can avoid accounting consolidation.

Q: What are your venture returns?A: We have had returns that are at or above industry norms for the venture community. We don’t talk about specific numbers.

Q: On the M&A front, Cisco has made a broad mix of large and small deals over the years. Do you see yourself favoring smaller or larger acquisitions in the future?A: The majority of our acquisitions have been and will continue to be on the smaller end. We think those are more recurring in nature and allow us to continue to accelerate the ongoing programs we have inside the company.

Q: What do you mean by smaller?A: The majority of our deals are sub-$100 million and tend to be earlier stage in nature. But we have a history of doing middle-sized companies and public company deals up to the size of Scientific Atlanta, which was $7 billion.

Q: Are you buying and investing in more companies abroad?A: If you look at the last 10 acquisitions, four were outside of the U.S. I don’t see any reason for the global vs. domestic pace to shift meaningfully over the next few years. Of our last 10 [venture] deals, four were outside the U.S. Today, more than 50% of our new investments are happening outside of the U.S.

Q: On a personal note, what do you like to do in your free time?

If you look at the last 10 acquisitions, four were outside of the U.S. … Of our last 10 [venture] deals, four were outside the U.S. Today, more than 50% of our new investments are happening outside of the U.S.”

A: I’m a father of two little boys, so my biggest priority is getting to spend time with my two sons and my wife. Outside of that I’m a big sports fan—a big basketball fan.

PROFILE: Charles CarmelVP, Corporate Business DevelopmentCisco SystemsAge: 36

Home Town: Los Angeles

Education: Bachelor’s from Tufts University, MBA from Stanford University’s Graduate School of Business

Past Employment: Investment banker in the high tech banking group at Goldman Sachs

Top Deals for Cisco: Linksys, Pure Digital Technologies, Scientific Atlanta, Tandberg and WebEx

Personal Interests: Avid basketball fan

Favorite Team: Los Angeles Lakers

Source: VCJ reporting