Despite the economic downturn and the risks involved, big companies say they'll continue to acquire startups in 2002. For better or worse, they're as likely as not to lose (or fire) the CEOs of the firms they acquire.

An informal survey of high-profile broadband equipment mergers and acquisitions reveals that at least half the CEOs of acquired companies walk after less than a year -- that is, if they choose to stay on with the company at all.

Table 1: Where Are They Now? A CEO Sampling

Many companies view CEOs as key assets to startup firms and frequently ask them to sign employment contracts before the deal is done. In some cases, the acquiring companies may decide they don't want to keep the CEO or other top executives. At any rate, the tendency for executives to walk after acquisitions was noted as a risk by John Chambers, CEO of Cisco Systems Inc. (Nasdaq: CSCO), in a speech to Wall Street analysts this week (see Cisco's See-Saw Day). When asked if he’d use stock or cash to purchase new companies in 2002, he said Cisco would continue to use stock as much as possible, in order to lure top execs and engineers to stay on after the closing.

Despite such measures, analysts say the executive crapshoot comes with the territory. "The types of individuals attached to high-tech startups are typically entrepreneurial," says Lawrence Harris, senior telecom equity analyst at H.C. Wainwright & Co. Inc. If they find themselves in environments that look too much like what they abandoned in order to found their own companies, they walk.

Chambers said in his speech this week that the average tenure of a CEO at any company is four to six years. That is likely to be shortened even more, given the inevitable conflicts of leadership and huge cash payouts that attend most mergers and acquisitions.

In some cases, the cash-and-carry tack can be irresistible. Indeed, in several instances, it appears some executives of acquired startups, such as Claes Rickeby of Qeyton Systems, choose to stop working full time, opting to keep their hand in by serving on the boards of various startups. (Rickeby is now doing board duty for Roxen Internet Software).

In a few instances (not all that rare, given the small universe of people involved), CEOs of highly successful startups go on to take key leadership roles at the acquiring company. This happened when Don Scifres joined JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) with the SDLI acquisition and became second in command. It also happened when Don Smith joined Nortel Networks Corp. (NYSE/Toronto: NT) from Cambrian Systems and went on to found its Optera Metro division, and when Carl Russo, head of Cerent Corp., joined Cisco and went on to found its optical networking strategy.

Still, success didn't keep everyone down on the farm: Smith moved on after a year and a half to rejoin his old pal Terence Matthews at Mitel Networks (see Nortel Buys: Reaping the Whirlwind?, Don Smith's Mitel Shocker, and Don Smith Leaves Nortel). And a little over two years after joining Cisco, it looks like Russo's tiptoeing out the back (see Reorg Rips Through Cisco's Ranks and Calix Boosts Management Muscle).

One could hardly blame executives for moving on in many instances. It's often easy to get lost in the shuffle of a large organization and fade into relative obscurity. This is what appears to have happened to CEOs such as Cheng Wu, the head of ArrowPoint Communications, who is now a VP of content networking at Cisco, and to Dominic Orr, CEO of Alteon WebSystems, who retired after a year at Nortel.

Sometimes the CEO stays on as head of a division that bears the name of his or her former company -- apparently, a nice balance between staying at the helm of a startup and taking a back seat to current management. Such is the case of Parvis Tayebati, presently working at Nortel as president of its CoreTek division, and Greg Reznick, president of Nortel's Xros division. Similarly, Mike Hickey, former CEO of Kymata, the component company bought by Alcatel Optronics (Nasdaq: ALAO; Paris: CGO.PA) in July 2001, has stayed on as CEO of the Optronics division in the U.K.

A few ex-CEOs find they'd rather shepherd new companies as VCs than take the helm again. Such was the case with the controversial Steve Kim of Xylan, who now heads up Alcatel Ventures, the arms-length venture arm of Alcatel SA (NYSE: ALA; Paris: CGEP:PA), and with Fahri Diner, former head of Qtera, who works at the Mayfield Fund.

There are instances in which CEOs find conditions at a new company intolerable, typically due to conflicts over leadership and technology direction. When this happens, litigation almost always results. Such was the case when Bernard Daines fled Alcatel, a state of affairs that resulted in a lengthy legal battle that was settled in September 2001, over two years after the acquisition closed (see Alcatel Settles with Daines).

Another mess resulted when Lucent Technologies Inc. (NYSE: LU) wound up in litigation with Ignitus founder Mukesh Ganmukhi -- a case that was later dismissed (see Lucent, Chromatis & Ignitus: A True Tale?).

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com