What goes into the thought processes of companies when they're acquiring startups and other firms? We thought it would be insightful for our readers--who are usually looking to get acquired by other companies--on what the thought process of those large companies making those acquisitions are. To do that, we spoke with Vic Alston, the CEO of Calabasas-based Ixia (www.ixiacom.com), a publicly traded maker of network testing equipment and software. Ixia is long past the startup phase, having over the years grown to become a major force in the network testing equipment, and as a publicly traded firm has been in acquisition mode recently. We chatted with Vic before the firm's latest acquisition (announced last week) and after the firm's recent acquisition of Anue Systems, about what goes into the whole process.
For a company like yours, what goes into your acquisition strategy and what thoughts went behind the Anue acquisition?
Vic Alston: We have strategy when we look at acquisitions, where we ultimately want to grow our addressable market. We have a business plan we do every year, and our business plans focuses on areas of key growth, and we look at where we can organically or inorganically grow in those key areas. That's the first focus -- what is the strategy. For us, our strategy has been that one, we've been in leader in pre-deployment testing, a strong growth area for us, at same time, and to significantly move the needle in terms of growth in the next few years, we need to make sure we can get into markets where Ixia's overall addressable market can significantly grow.
We want to grow our company's addressable market by 100 percent in the next two to three years. One of the things the Anue acquisition does, is it brings us into a whole new market, the live network market. It's about 500M in size today, but the key distinction is it's growing pretty fast 30-40% CAGR. It's pretty sustained, strong growth we see there. The other thing we see there, is we don't want to compete with our customers. We've got very strong NEMS (network equipment manufacturers), 65 percent of whom are in the equipment manufacturing business. That's everyone from likes of Cisco to HP, from servers all the way to switches. We do all of that today, and we don't want to compete with that business. Finally, we want to make sure financial market of the companies we acquire is in alignment with our own model today. Want to be accretive pretty quickly, and make sure our margin is not diluted by those acquisition, and where we can still maintain or operating leverage that we can currently get form our core business. Those are the key things we look at when looking at acquisitions.
Do you feel like acquisitions at your stage very important to making growth happen?
Vic Alston: We have got to to do both. We have to acquire to get into some new markets. But we also have to make sure we're competitive in our existing markets. So, as we do acquisitions, we're looking at acquisitions in both places -- in our core business and new business areas. The other thing we do is continue to invest in products and build really new, innovative technology in the markets we already serve. We're also going into these acquisitions in areas we don't have expertise. It takes time to build expertise, and even if we can get that expertise, it takes too long. Time to market would be significant issue if we were to go after new markets. Those are the key reasons we think we need to do acquisitions.
What attracts you to a company, and where do they need to be in their life cycle?
Vic Alston: We primary want to see them in one of two areas. One, is we need something that is strategically very important. I'll give you an example, when we did wireless, it was very important to get wireless technology into company. In many cases when we do those acquisitions, we love to see growth, but we're even doing them without growth, to gain access to intellectual property. They are IP acquisitions with some amount of channel and product, and are really meant as an IP acquisition into our core platform. When we did Catapult, it was a sizeable acquisition for us, as they were $40M in revenue and had a strong customer base. But, most importantly, it gave us entry into wireless. They were not a company that was growing very fast. Then, we have a company like Anue which is growing very fast, and accelerating. We always like to buy companies like Anue. So, we're both buying some companies who are not growing as fast to bring us into strategic areas we really need, for their IP and technology.
You've turned an interesting corner for those of us down here in Southern California, where we're used to companies getting big, and getting bought, rather than what you guys seem to be doing, which is becoming the acquirer. When did that happen for you?
Vic Alston: The rationale is only that we have been doing well enough, and are profitable enough that we're putting out a significant amount of cash every year. Last quarter, we had 35 to 37 million in cash, which is extraordinary. We're able to generate a good amount of cash, and we're able to leverage that into other areas. The overall market that we service is growing, and the whole telecommunications and services industry is growing because of the iPhone explosion. We're benefiting from all of that. We've picked the right market, and are growing well, and are profitable enough to keep cash in the bank.
Is there a challenge taking those companies and working them into organization and dealing with lots of locations?
Vic Alston: We do have a lot of locations now, and it is a challenge. The main challenge for Ixia, however, is although today we've acquired a few companies and locations, our next challenge moving forward is we're going from a one company business, to a multiple company business. That's the next challenging horizon for Ixia. IF we're able to cross that successfully, however, it will allow us to grow faster.
When you look for companies -- do you have a process you go through, or is this where you move when something comes to your eye?
Vic Alston: We certainly haven't mastered the process, and we could improve. Our process right now, is on one axis, we look at our product leaders who are already serving our business and see adjacent opportunities. The other axis, is we have strategic people who are looking at businesses which are not immediate adjacencies, one or two levels away. The third piece, is our sales force and customers, who give us good feedback. Between those three levels of feedback and input, we triangulate, and figure out what makes sense to go after. Some are very clear adjacencies, and are competitors or competitors in an adjacent technology. But, other things, like Anue, are a little out there, and not obvious that we'd go after, are strategic.