Monthly Archives: June 2006

SEC Investigating Redback’s Stock-Option Grants

Companies often try to sneak out bad news on a Friday night, hoping everybody has gone home, begun weekend partying, and generally stopped paying attention to the workaday technology world.

If you were scanning the news wires this evening, however, you would learn that Redback Networks has received a request from the Securities and Exchange Commission (SEC) for information relating to the company’s historical stock-option grant practices. What’s more, the company also has received a subpoena from the United States Attorney for the Northern District of California requesting documents relating to Redback’s stock-option practices, and the company’s board of directors has launched its own investigation into the matter.

Redback joins a growing number of Silicon Valley companies being investigated for so-called backdating of options, which involves retroactively setting option strike prices at the lowest-possible historical levels so that executives and other employees would reap the maximum rewards from their stock-option allocations.

Tucci Defends EMC’s Big Buy

EMC’s shares plunged sharply earlier today, but they regained most of their losses before the trading day came to a close.

The reason? To varying degrees, market analysts and major investors are ambivalent, skeptical, or downright hostile to EMC’s announced acquisition yesterday of RSA Security for $2.1 billion.

There are two basic concerns, both of which are entirely valid. The first concern is that EMC overpaid for RSA. EMC will pay $28 for each share of RSA, a 22-percent premium above the $22.88 price at which RSA’s shares closed Thursday, and 45 percent higher than RSA’s closing price Wednesday, the day before RSA confirmed its involvement in buyout talks. In the post-bubble era, that’s a big premium to pay for any acquisition. It is plausible that EMC CEO Joe Tucci and his executive coterie got caught up in the competitive excitement of back-and-forth auction bids. RSA had put itself up for sale, and Tucci says other bidders were aggressively pursuing his catch.

Given that he is compelled to justify the relatively high price he paid to claim RSA, Tucci rationalized that it was both strategically necessary — “RSA wasn’t going to be around” and would have gone to a rival if EMC hadn’t won the bidding, he said — and that the inherent value represented by RSA, which will allow EMC to sell security as well as storage solutions, will be more than worth the nominally extravagant investment.

The other concern is that EMC, which has bought 25 companies in three years as it expanded into information life-cycle management and related software markets, is losing its focus and might not have the wherewithal to digest RSA, which is the largest company EMC has acquired. Again, this concern is entirely valid.

EMC overpaid, no question. The numbers above tell the story. Even if one of EMC’s rivals was poised to take RSA off the table, EMC had other alternatives than to pay a steep premium to win the bidding war. For example, it could have considered buying one or more of RSA’s competitors at a considerably lower aggregate price; not only would that have been easier on the books, but such bite-size acquisitions would have been easier and faster to assimilate.

But Tucci has made his move. He has no choice but to defend and justify it. As for investors and observers, it’s their prerogative to wonder whether other alternatives might have been explored and pursued.

Zafirovski Plies Nortel Shareholders with Promises of Renewal

Most CEOs view shareholders meetings as necessary evils, onerous obligations that are part of the big-chair mandate.

As CEOs stand before the great unwashed to deliver a hackneyed homily, they invariably wish they were on the golf course, in a customer meeting, or nearly anywhere else than in front of people who think their shares entitle them to a say in how to run the business. The nerve of the common shareholders!

Such was the case yesterday in a suburban Toronto conference hall where Mike Zafirovski, former operational hatchet man at Motorola and now CEO of Nortel Networks, held court before an audience of approximately 350 shareholders, most of whom still haven’t come to emotional or financial terms with Nortel’s implosion from tech-boom darling to telecommunications-equipment has-been. Tremendous amounts of Nortel shareholder wealth have evaporated over the last six years, and the natives are restless. Yes, caveat emptor always applies, in the stock market as well as in any other market, but Nortel didn’t help matters with its seemingly endless accounting chicanery and financial restatements. It’s hard enough for shareholders to know what they’re buying when they plump down money for stock, but it’s next to impossible to make a rational purchase when you can’t even trust the putative fundamentals.

Anyway, Zafirovski struck the stoic pose yesterday, telling shareholders that Nortel “will be a great company again,” though it might take as many as five years to get there. He also said Nortel is committed to business transformation, integrity renewal, and “growth opportunities with moderate investment.” Integrity renewal, though, does not include reviewing a business decision to build out a wireless network along a controversial rail link between China and Tibet, which a dissident shareholder argued would dilute Tibetan culture, facilitate Chinese troop movement, and the resource-constrained Chinese government to plunder Tibet’s natural resources.

Zafirovski attempted to make a silk purse of a sow’s ear when he said Nortel is not for sale and doesn’t need to merge to survive. Although he intimated that companies have made takeover entreaties to Nortel, I seriously doubt that any of the major players in the telecommunications-equipment market has seriously considered buying the embattled former Canadian giant. The company remains a mess, its research development, by Zafirovski’s own account, has failed to meet expectations, and its employee morale has been severely cratered. The best employees have left, and the rest are suffering the death of a thousand cuts. What’s more, the telecommunications sector continues to undergo wrenching structural change, with fewer service providers and carriers translating into a need for fewer equipment suppliers. The circle of life has become the circle of death.

It’s a good thing Zafirovski doesn’t want to sell, because nobody wants to buy what Nortel is offering. Obviously, that wasn’t a message Zafirovski could deliver to shareholders yesterday.

Dvorak Explains Why Microsoft Won’t Acquire Yahoo

Some of his phrasing is glib and he applies broad brush strokes occasionally, but John Dvorak is essentially correct as to why Microsoft should not and will not acquire Yahoo.

I touched on similar points in an earlier post on this forum. The Merrill Lynch analyst’s musings on such a pairing were wet-dream reveries of an investment banker hoping for an early Christmas. It’s not going to happen, folks. If you’re investing in Yahoo, you should have better reasons than wishful thinking about a Microsoft acquisition.

EMC Overpays for RSA

It its continuing acquisition-fueled evolution from hardware purveyor to software and services juggernaut, storage-infrastructure giant EMC agreed to acquire RSA Security for slightly less than $2.1 billion on Thursday.

In announcing the acquisition, EMC’s CEO Joe Tucci said: “EMC is where information lives, and tomorrow EMC will be the company where information lives securely.”

Maybe Mr. Tucci is right, but he was peppered with questions from market analysts who felt the match between EMC and RSA was less than ideal and that EMC overpaid for the privilege of owning its latest corporate bauble. Tucci naturally defended the acquisition, arguing that it was essential for EMC to own RSA rather than allowing it to fall into the hands of dastardly competitors.

EMC has made some clever acquisitions in the past, but I don’t think this one was pursued for the right reasons. As such, I believe it will not produce the ROI Tucci envisions. The fact is, RSA had put itself up for auction a few months ago, hiring investment bankers to solicit bids from the known universe of candidate buyers. Doubtless other vendors were pursuing the company, and EMC got caught up in the competitive excitement of the auction proceedings.

Yes, storage networks should be secure, and EMC is right bolster its security credentials. Was RSA the best acquisition target EMC should have pursued from a value standpoint? Well, I don’t think so, but Tucci is paid the big bucks, and it’s his bet that will count and be scrutinized by EMC shareholders in the months to follow.

IDC Questions YouTube’s Business Prospects

Even though YouTube has about 40 percent of the burgeoning video-sharing market, with more than 13 million people visiting the site every month to watch an eclectic mix of video content, IDC research analyst Josh Martin issued a report today doubting that the service will ever be able to squeeze sufficient revenue from an audience that has gotten used to sampling the goods at no charge.

YouTube executives have indicated the company will sell advertising, which will be introduced gradually to the site during the next few months. The IDC analyst doesn’t think advertising is a sure thing, though, noting that YouTube’s core audience might be alienated by the commercialization of the site.

What’s more, Martin wonders whether advertisers will want to be associated with some of the content on YouTube, which includes amateurish, violent, and sometimes sexually graphic clips. To complicate matters further, there’s the issue of copyrighted material, which is regularly uploaded to the site by its online denizens.

Make no mistake, the challenges and issues raised by Martin are real. YouTube must find a way of matching advertising with appropriate content and of ensuring that its copyright-related legal exposure is mitigated, if not eliminated completely. Still, I am not of the opinion that YouTube will drive away its visitors by introducing advertising. Most people will be willing to view a short advertisement before watching a video clip, especially if the alternative is a subscription-based service that would involve monthly credit-card charges. Advertising will not be perceived as a unacceptable imposition.

YouTube might suffer a modest erosion in monthly traffic, and some content contributors might not attract advertising because their fare finds favor with a negligible demographic. On the whole, though, YouTube would survive, and I believe it can make the transition to an advertising-based business model, challenges notwithstanding.

Executive Tinkering Shows Sun Still Trying to Assimilate StorageTek

Sun Microsystems announced today that is reorganizing its storage division, naming a new vice president to run the storage marketing operation as part of the overhaul.

The company has consolidated its tape, disk, software, storage marketing, and partner-management business units. It also has tapped its Tape Management Group vice president, Nigel Dessau, to serve as vice president of storage marketing and business operations.

It’s an indication that Sun is serious about getting its storage business firing on all cylinders, but it’s also an acknowledgment that the acquisition and assimilation of StorageTek has not gone according to the playbook.

Taylor Speculation Grows; Another Microsoft Defection to Google

As much as Microsoft would like the story to die, speculation persists about the circumstances under which Martin Taylor left the Redmond campus for the last time.

Conjecture at Mini-Microsoft’s blog suggests that Taylor might have been shown the door for having an affair with a subordinate. Other theories are floated, too, some less plausible than others. Meanwhile, Paul McNamara’s blog at NetworkWorld’s website plays up one of the theories floated on the Mini-Microsoft site, namely that Taylor might have transgressed by coining or endorsing the catchy phrase, “Hey Windows Live! Come pimp my office!

That just doesn’t seem a likely reason for Taylor’s spontaneous combustion. If devising or approving egregiously tacky, insipidly crude advertising prose were grounds for dismissal, most of Madison Avenue would be chronically unemployed.

As inquiring minds continue to dig into how Martin Taylor became a former Microsoft executive, the blogosphere is in a veritable buzz over reports that 15-year Microsoft veteran Vic Gundotra, a general manager for platform evangelism, has agreed to join Google after spending a year working on charitable endeavors. A non-compete clause in Gundotra’s employment contract with Microsoft precludes his joining Google for a year, so Gundotra will help others while waiting for that provision to run its course. His future role at Google hasn’t been defined, but I’m sure they’ll find something for him to do.

Writing in eWeek’s Google Watch, Steve Bryant lists five prominent Microsoft employees who have defected to Google. He also lists Martin Taylor, but only to point out that Taylor left for other reasons and did not go to Google.

Microsoft Shuffles More Executives; No Drama this Time

Now that’s more like it.

Unlike the sudden and unexplained departure of Martin Taylor, which was an atypical personnel move for Microsoft in every conceivable respect, the announcement of several executive reassignments that surfaced this evening makes a lot of sense and doesn’t deviate from the written and unwritten rules of the corporate-communications textbook to which Microsoft’s corporate-image guardians rigidly adhere.

Arrivederci for Avici?

There’s a lot of talk on a Light Reading discussion board that router vendor Avici Systems Inc. is on the verge of losing AT&T/SBC’s future patronage as a customer. Considering that AT&T accounted for 94 percent of Avici’s revenue last year, losing that account also is likely to translate into a slow, painful corporate death, even though Avici does have some cash to burn through before it would have to close shop.

As the telecommunications market consolidates, the same fate is being visited upon purveyors of telecommunications equipment. Avici’s market share isn’t significant enough to draw a buyer, and its technology has fallen behind that of market leaders Cisco and Juniper in recent years. There’s no reason to think a white-knight buyer will save the company.

Like many router startups funded by VCs, Avici’s was hunting the great white whale of networking, Cisco Systems. Only Juniper and Avici have been able to make any sort of dent in Cisco’s business, and now Avici looks to be heading for the industry scrap heap. Unlike countless others, however, Avici at least sold products to customer, generated revenue, and even managed an IPO. It accomplished more than most, but now the end is in sight.

Symantec CEO Says Microsoft No Worry

Almost invariably, published interviews with high-technology CEOs are disappointing. They’re disappointing because the CEOs increasingly are being groomed by PR people and “media trainers” to repeat well-worn cliches and meaningless platitudes, and they’re also disappointing because CEOs rarely tell the truth in public, primarily on the advice of their aforementioned PR handlers and image consultants.

A good example is an interview with Symantec CEO John Thompson that can be found today on InfoWorld’s website. When asked whether he and Symantec are concerned about competing with Microsoft in the consumer and enterprise computer-security markets, Thompson says the following:

“I’m not worried about Microsoft at all. Let’s be clear about that. If anything my focus is on making sure we can deliver the level of innovation and the level of visibility or of capabilities that we always have. And to the extent that Microsoft plays fairly, there is a level playing field and I don’t worry about Microsoft. If they do something that is unfair, clearly we will be watching and I’m sure others will as well.”

Microsoft is synonymous with a lot of things in the software and technology industry. Security is not one of them. And they’ve got a long way to go to demonstrate not only capability, but to deliver and build a reputation of being able to support a vast array of users in that regard.”

First of all, Thompson must be concerned about Microsoft. If he weren’t concerned about Microsoft, Symantec’s board of directors would be wheeling his chair out of the boardroom like steroid-enhanced sprinters.

Come on, John. You’re obviously worried about Microsoft. The Veritas merger, controversial to this day in some quarters, was all about diversifying revenue so as not to be financially cratered by Microsoft’s relentless, iterative advance on Symantec’s core business. Everybody knows that Microsoft, now that it has bought most of the functional pieces and gotten lethally serious about security, will keep pounding on doors and working the channel until it gets its fair share of the market spoils. Some of that share will be taken from Symantec. It’s inevitable, like the sun rising in the east and setting in the west.

Contrary to what Thompson suggests, Microsoft need not have the best products on the market to achieve its security-sector objectives. All it needs is the right pricing, a product that is well integrated with Microsoft application environments, and solutions that are “good enough” competitively to hold its own their own against competing products that will, in most cases, be more expensive. Who’s going to punish Microsoft for helping to drive lower prices and greater competition in the overpriced security market? Consumers and businesses won’t be running to the barricades — or to the feds — to defend the security oligopoly, that’s for sure.

Aside from the blather about not being concerned about Microsoft’s incursion into security software, Thompson says Symantec will follow the competitive example that Intuit established in doing battle with the Redmond behemoth. What? Thompson can’t’ believe that, can he? Intuit is and was a vendor of financial and tax-preparation software and related services. Symantec is a vendor of security and storage infrastructure. Other than its size and marketing prowess, Microsoft didn’t have inherent advantages over Intuit in the market for financial and tax-preparation software. Microsoft’s mandate in that market was neither clear nor authoritative.

In security, though, Microsoft’s mandate is clear and it is compelling. This is a job Microsoft should have done in the first place. Microsoft sells operating systems, it sells application software, it sells messaging (email, IM, voice, video) software, it sells web servers, it sells databases. It should have provided adequate security for these products a long time ago. It has belatedly recognized its responsibility to provide security for its own application environments.

Symantec, like McAfee, made a lot of money from Microsoft’s dereliction of duty with respect to security. Those days coming to an end. Microsoft recognizes that the provision of security for its own products is not something it can or should leave for other vendors to address. John Thompson should be concerned about that, and he’s not being honest with us if he says otherwise.

Southern California Catching Up to Northern California in Tech Jobs

The Los Angeles area always had Hollywood glamor, and now it’s gaining in nerd appeal.

According to the California Cybercities 2006 report from AeA (formerly the American Electronics Association), a trade organization for the high-technology industry, Southern California’s technology industry is nearly as large as Northern California’s. The authors of the report say Northern California employs 439,000 technology workers, versus 418,000 high-technology workers in Southern California.

California’s high-technology employment totaled 904,900 in 2004, down 10,600, or about one percent, from the year before. Job losses in California’s technology industry slowed in 2004, compared to the 67,800 jobs lost in 2003 and the 134,400 lost in 2002. That still totals job losses approaching 215,000 over the last three years for which statistical data is available.