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Optical/IP

When the CEO Hits the Road

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
EXECUTIVE ORIGINAL COMPANY SOLD TO MONTHS SPENT AT FOLLOWUP COMPANY (approx.) PRESENT COMPANY
Mike Hickey Kymata Alcatel 0 Alcatel Optronics U.K.
Pearse Flynn Newbridge Networks Alcatel 8 Damovo (spinoff of Ericsson Enterprise Solutions)
Bernard Daines Packet Engines Alcatel 0 World Wide Packets
Steve Kim Xylan Alcatel 34 so far Alcatel Ventures
Alnoor Shivji Cyras Ciena 6 Redwave Networks
Cheng Wu ArrowPoint Communications Cisco 19 so far Cisco
Claes Rickeby Qeyton Systems Cisco 9 ?
H. Michael Zadikian Monterey Networks Cisco 0 Iris Group
Carl Russo Cerent Cisco 26 so far Cisco
Don Scifres SDLI JDSU 11 JDSU
Don Smith Cambrian Systems Nortel 16 Mitel Networks
Dominic Orr Alteon Websystems Nortel 12 Retired
Greg Reznick Xros Nortel 19 so far Nortel
Fahri Diner Qtera Nortel 23 Mayfield Fund
Mory Ejabat Ascend Communications Lucent 0 Zhone Technologies
Bob Barron Chromatis Networks Lucent 11 Lightcross Inc.
Mahesh Ganmukhi Ignitus Communications Lucent 6 Cereva Networks
Mukesh Chatter Nexabit Networks Lucent 11 Axiowave Networks
Allan Wallack Spring Tide Networks Lucent 0 ?
Steve Akers Spring Tide Networks Lucent 16 so far Lucent
Vivek Ragavan Siara Systems Redback 18 Atrica


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
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myresearch 12/4/2012 | 11:04:44 PM
re: When the CEO Hits the Road One type: typically founder and visionary behind the startup, have strong impact on the company. When they leave, it tend to have a major impact on the company, many key technical and management may follow, causing major blow to the product schedule

Another type: CEO is hired for their high profile, and their main job is to raise money and sell the company, once a company is sold, ther eis not much left for the CEO to do. Their departure does not usually impact on the core team and products. Sometimes the CEO is asked to leave.

In any startup, you can identfy a few people (both technical and management) who are the real backbone behind the organization. If any of them leave, there will be a major impact on the technical side or the management side because it is difficult to replace them ... Better make sure that you keep these people
HarveyMudd 12/4/2012 | 11:04:44 PM
re: When the CEO Hits the Road Very Often when a small company is acquired y a largecompany, the managemet skills of the CEO of the acquired company does not fit into that of the acquiring company. Larger companies require a much broader set of skills not usually possesed by an executive company from a smaller company.
Cromwell 12/4/2012 | 11:04:43 PM
re: When the CEO Hits the Road Here is the corrected HarveyMudd post:

GǣOften when a small company is acquired by a large company, the management skills of the CEO of the acquired company do not fit well into that of the acquiring company. Larger companies require a broader set of skills that are not usually possessed by an executive from a smaller company.Gǥ


EnjoyGǪ.Cromwell
switchrus 12/4/2012 | 11:04:42 PM
re: When the CEO Hits the Road Thank you for translating, did you have to attend a special school to pick up that skill? LOL.
optigirl 12/4/2012 | 11:04:42 PM
re: When the CEO Hits the Road No kidding....Thanks for the added clarity.

Mary:

There are a few things that you missed in this story. The CEO of a start-up or small company has a different job depending on the evolution of the company. Early stage means you are more technically oriented and probably belong in the role of CTO given your technology vision. You are not about building a company, rather a product. Later on in the cycle, the job becomes more about raising money and selling the story. When you start shipping product and trying to generate revenues, you tend to have someone who is a real manager/executive.

It also depends on the basis of the company's existance. Was it a technology play geared towards an acquisition? Was it an attempt to build a real company? If it's a tech play and the person is a key member of the technology's development and evolution, then you need to keep them. Give them more toys to build and play with and they'll stay more often than not. If they are a manager/executive type, you try to keep them as well while ascertaining whether or not they are a future Senior executive/CEO. They'll stay if there is room to move up the ladder and lead. The one who sells the story to the acquirer or the financial market is the one you let go of. They have done their job...time to seek out greener pastures.

Another thing, Who would want to stay at LU or Nortel after being bought out given their troubles?
Eric W 12/4/2012 | 11:04:37 PM
re: When the CEO Hits the Road 1. I believe that Chairman Mudd is speaking of, you know, adotibility.

2. Hiring Harvey was quite a coup for RHK
caveman 12/4/2012 | 11:04:37 PM
re: When the CEO Hits the Road Some people want Harvey Mudd to go away. Not me, I enjoy his "logic".

Harvey, don't be deterred by all your detractors. If it weren't for you, Lightreading would be boring.
Laserdude 12/4/2012 | 11:04:37 PM
re: When the CEO Hits the Road Cromwell, could you do me a favor and translate the subject line of the HarveyMudd Post as well? I must confess that I'm stumped.
rafaelg 12/4/2012 | 11:04:33 PM
re: When the CEO Hits the Road Harvey, is that you with a diff. name?

:-)
UncleLeo 12/4/2012 | 11:04:30 PM
re: When the CEO Hits the Road
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