Monthly Archives: August 2009

European Regulatory Hurdle Last Obstacle for Oracle’s Sun Acquisition

In what might qualify as its last quarterly financial report as a standalone public company, Sun Microsystems did not defy expectations. Nearly everybody who has been paying attention was anticipating awful numbers, and Sun meekly met the underachiever’s challenge.

The only possible surprise was that Sun didn’t do even worse. After all, we’ve been hearing about the sacking and plundering that IBM and HP have inflicted on Sun’s installed base of customers. If half those reports are credible, Sun is hemorrhaging buckets of future revenue and profits.

That’s Oracle’s problem now, presuming that the European Commission decides to bestow regulatory clearance on the database powerhouse’s $7.4-billion acquisition. We’ll know more about the EC’s intentions when, or shortly after, it meets on September 3. If the EC chooses to investigate further before giving its kind blessings, Oracle might have to wait an additional four months before knowing whether it can take its Java (and JAVA) prize home to Redwoood Shores.

To be sure, Java is one of the issues of concern to the European regulators. There Java concerns, some of which have been fomented by Oracle rivals, relate to Oracle’s potential stewardship of Java and the Java community. Another area of European regulatory interest is the database market and Oracle’s plans for the open-source MySQL database software.

The smart money — well, smarter than mine — is suggesting that the European bureaucrats will give Oracle the all-clear signal on September 3. Oracle is believed to have given strong indications that it will be a responsible and responsive custodian of Java. It also is thought to have signaled its intention to keep MySQL alive, taking it into markets and customer engagements that Oracle does not capture today with its flagship database.

The fate of Sun’s hardware, though not a regulatory concern. will be closely noted by many interested parties, Sun’s server customers among them.

Just after the acquisition was announced, Oracle CEO Larry Ellison indicated that he planned to keep Sun’s server hardware within the Oracle fold, going so far as to suggest that he had ideas about how it could be extended and enhanced in combination with Oracle software. Now, though, the betting line has shifted, with increasing speculation that Oracle will sell Sun’s hardware, perhaps to HP.

If HP acquired Sun’s hardware from Oracle, the regulators might find themselves conducting a different set of due-diligence investigations.

Silicon Valley’s Commercial Real Estate Desperate for Market Rebound

If the economy has hit bottom and a recovery is taking shape, you’d be hard pressed to find signs of it in the market for commercial real estate in Silicon Valley.

As reported by Pete Carey of the San Jose Mercury News:

The credit crunch was followed by rising unemployment, which hit 11.8 percent in the valley in July, with 108,900 people actively looking for work. “Ultimately, commercial real estate is related to employment,” said Dick Scott of Grubb & Ellis. “It’s all about putting bodies in cubes and selling products.”

The valley’s 20.5 percent office vacancy rate is the highest since 2003, according to CB Richard Ellis, and has hit 53.4 percent in Sunnyvale. An 18.9 percent vacancy rate for research and development space — the largest commercial real estate category in the valley — is the highest since early 2006.

At the moment, there are 29.1 million square feet of vacant research and development space and 12.6 million square feet of empty office space in the valley; that includes 277 completely vacant R&D buildings and 39 completely vacant office buildings, according to CB Richard Ellis, which has an office in San Jose.

Depressed global markets have accounted for a lot of the damage, but so have consolidation and M&A activity. In the big picture, however, one could argue that much of the M&A action was facilitated by the worldwide economic downturn, which presented the industry titans with glorious opportunities to pick off rivals or complementary players for bargain-basement prices.

Oracle’s pending acquisition of Sun Microsystems, for example, is likely to add more commercial space to the market. The consolidation wave is still flowing, too. Additional office space will reach market as smaller players are subsumed into the existing commercial real estate of their new corporate paymasters.

It doesn’t help that new office buildings, construction of which commenced before the downturn unleashed its worst carnage, are heading to market. Their appearance will further exacerbate oversupply.

Looking at the situation from the other side of the table, I would imagine that venture capitalists and their startup companies that remain extant aren’t shedding many tears for commercial realtors and real-estate developers. Those seeking office space are well placed to capitalize on the depressed conditions.

Nonetheless, the commercial realtors — some of them, anyway — retain hope. The optimists in their midst think the recovery will comfortably absorb the current oversupply of space, restoring balance to a reeling market.

Japanese Players Talk Handset Merger

Apparently NEC Corp., Hitachi Ltd., and Casio Computer Co. have begun talks about merging their mobile-handset operations, according to a report in the Wall Street Journal.

Details aren’t yet available regarding the mandate or structure of the proposed merger, but the idea makes sense on paper. A combined NEC-Hitachi-Casio would have Japanese market share of about 20 percent, behind Sharp at about 22 percent and ahead of Panasonic Corp. with 16 percent, according to recent numbers from market-research firm BCN Inc.

Mergers and joint ventures are complicated beasts, though. Assuming that NEC, Hitachi, and Casio agree on how to merge their handset operations, the organizational integration wouldn’t proceed seamlessly. The three-into-one handset vendor would likely suffer initial market-share losses as the mergedassets were consolidated and streamlined.

Still, even assuming that hitches will ensue, the merger makes sense. It would reduce development costs for the companies involved, give them a fighting chance to reclaim ground against Sharp in their home market, and put them in a stronger operational position to expand into other Asian markets, including China.

I’d say the talks are justified.

IRS Drops Nasty Surprise on Nortel Creditors

Nortel creditors, already enduring drawn-out auction processes for the bankrupt company’s depreciating business assets, got bad news last week when it was revealed that the USA’s Internal Revenue Services (IRS) filed a claim against Nortel for $3 billion in taxes and interest.

If you listen carefully, you can hear Nortel debtors screaming into the abyss.

According to a Reuters report, the IRS filing lists $2.97 billion in unsecured priority claims and $49.3 million in unsecured general claims. Covering a period from 1998 to 2008, the claim lists taxes due of $1.80 billion and interest due of $1.16 billion.

That’s far from pocket change, which is about all Nortel’s creditors and debt holders might see at the conclusion of bankruptcy proceedings. Much depends on whether Nortel has grounds to challenge the claim. If it does, there’s a possibility an eventual settlement, as decided by the bankruptcy judge, could involve a significantly lower amount than that specified in the IRS claim.

Still, as James Bagnall writes in the Ottawa Citzen, the implications are considerable for Nortel’s creditors in the USA, Britain, and Canada:

If Nortel completes the sale of its global assets as planned, it is expected to have little more than $5 billion (all figures U.S.) in cash to distribute. This is to be applied against more than $10 billion worth of claims arising from creditors in Canada, the U.S., Britain and many other jurisdictions. Claimants — from company suppliers to pensioners — would receive roughly 50 cents on the dollar.

However, if the new demand from the U.S. Internal Revenue Service is added, then the settlement ratio would tumble to less than 40 cents on the dollar.

As Bagnall writes at the end of his story, until the IRS discloses more information about its claim, Nortel creditors will be afflicted by increased anxiety regarding their eventual settlements.

Conjecture on Private-Company Valuations Just Doesn’t Matter

Venture capitalist Fred Wilson isn’t enamored of all the speculative writing on blogs about the estimated market valuations of private companies.

One problem, which Wilson cites, is that private companies don’t have valuations. They’re not public, their shares don’t trade on markets, they frequently don’t have business models or even revenues, and they’re often still growing into their corporate exoskeletons.

That means ascribing valuations to such companies is nothing more than a fantasy parlor game. There’s no way to be right or wrong in one’s opinion. Only the market, comprising buyers and sellers, can decide the valuation, and the market hasn’t been given the opportunity to deliver its verdict. That won’t stop pundits from engaging in hypothetical discussions and debates about whether Facebook is worth $10 billion or Twitter $1 billion.

Obviously these arguments have no practical utility. Until one of these companies goes public or is acquired, no known value can be attributed to any of them.

The whole hypothetical exercise seems to drive Wilson up the wall. As an investor in Twitter, he’s concerned that all the external conjecture about the company’s putative value might distract the firm’s employees from what they ought to be doing: building a business.

Says Wilson:

But I think all the focus on what a company is worth can be bad. These companies are private for a reason. Most of them aren’t mature enough to be public companies. They often don’t have full management teams and some don’t even have revenues. The focus inside these companies needs to be on building the company, the product, and the business. And endless discussions about what their company is worth can be terribly distracting.

I saw this in action back in the late 90s when a bunch of our portfolio companies went public before they were ready. The employees spent too much time focused on the stock price and too little time focused on the business. Many employees starting counting their net worth in stock that was not liquid and eventually was worth pennies on the dollar of what they thought it was worth.

I understand his concern. I can appreciate why he thinks all the idle talk about private-company valuations might be deleterious to his investment in Twitter.

At the end of the day, though, he and Twitter need to focus on what they can control. They shouldn’t worry about things they can’t control — and they can’t control what others will say about them. People will speculate on lots of things, including the imagined valuations of private companies. They’re going to do it, and Wilson needs to get over it.

What he and the folks who run Twitter can do is ensure that the company’s executives, managers, and other employees remain disciplined and focused. If they fail to maintain their focus and execute their plans, they’ll have only themselves to blame for any failure that results.

Vonage Stock Fades Badly to End Surreal Week

Earlier this week, I commented on the bewildering run enjoyed by Vonage’s stock.

Before the surge, the VoIP company made some minor announcements about the extension of a service offering to international markets and its push to get an application on the iPhone, but those didn’t seem to provide sufficient reason for the rip-roaring ride the stock took up the charts.

Vonage’s fundamentals haven’t changed. It’s still a company hard pressed competitively by wireless service providers on one side and triple-play carriers and cable MSOs on the other. If Vonage tries to transform itself into a mobile-VoIP play, it will go up against Google, Skype, and many others. It’s boxed in, and its path to sustainable prosperity isn’t obvious.

Now, after the baffling and blistering rise of its stock, Vonage has seen its shares fade and plummet just as abruptly as they shot skyward.

We can wonder what games, if any, were being played behind the scenes.

Dell Must Offer Enterprises More than PCs

The markets and their murky makers seemed to react too favorably to the second-quarter results Dell posted yesterday, inexplicably just before — and not after — trading halted for the day.

On the surface, there’s not much encouragement to be found in the results. Below the surface, there’s not much that inspires confidence, either.

Yes, Dell is cutting costs, having contracted 40 percent of its manufacturing to third parties. The cost reductions have resulted in better gross margins. Cost cuts, though, don’t help grow the top line, and that’s where Dell will continue to struggle.

The company pointed to sequential revenue growth in a few product categories and market segments, but it cannot deny that, for the fourth straight quarter, it has posted drops in sales and earnings from a year earlier.

Dell says it can resume growth on the strength of a corporate upgrade cycle for PCs. Dell expects that cycle to begin with the release of Windows 7, starting in the USA and then going global.

Says eponymous company CEO Michael Dell:

“The size of the installed base of old hardware has never been greater. I’m here to tell you there’s going to be a refresh cycle next year. It’s not all going to come in the first month or the second month, but over the course of the year.”

I concur, but only to a point.

As Reuters’ Eric Auchard notes, PC refresh cycles have gotten weaker as the justification behind them, the release of new iterations of Microsoft’s Windows, have become less compelling. Dell is counting on corporate CIOs that stuck with Windows XP over the uncertain charms of Windows Vista finally taking the plunge for Windows 7. In some cases, that will happen, but in others it won’t.

For many companies and organizations, economic conditions remain unprecedentedly harsh. Ben Bernanke can tell them happy days are here again, but they won’t believe it until their own fortunes improve. Spending could remain tight, and PCs might not get replaced until they fall apart. If that happens, the corporate upgrade cycle might not be as prompt, sustained, or predicable as Michael Dell would wish.

What about the consumer market? For Dell, it’s just not a strength, and the company doesn’t seem committed to changing the situation. Again, quoting Mr. Dell:

“If current demand trends continue, we expect revenue for the second half of the year to be stronger than the first half. We are expanding our capabilities in enterprise technology and services and investing in or core business to distinguish Dell both with customers and in operating performance.”

Despite distracted and slapdash runs at the consumer space, as evidenced by its strangely half-assed handset for the Chinese market, Dell knows that it has lost the consumer space, that 80 percent of its revenue is derived from the enterprise.

That’s fair enough. Dell’s best chance for redemption lies in the enterprise, not in the consumer sphere.

The key for Dell will be in what it does with its corporate war chest, with the acquisitions it makes in the months ahead. It needs to acquire software and services that will help it capture a bigger share of the efficiency-focused expenditures of enterprise clientele.

Those customers, like Dell itself, are continuing to look for solutions that help them do more with less.

Huawei Bides Time, Disavows Interest in Alcatel-Lucent

Rumors had been circulating that Alcatel-Lucent might be an acquisition target of Huawei, the ambitious and strengthening Chinese telecommunications-equipment vendor.

Well, Huawei has told us not to give that blather a second thought.

Ross Gan, Huawei’s global head of corporate communications, presumably with the approval of those above him in the chain of command, said the following:

“Our customer-centric innovation strategy is driving Huawei’s growth and that remains our strategy. Huawei has no plans to take a stake in Alcatel-Lucent.”

That’s an unambiguous statement, though admittedly Huawei’s plans, like those of any other vendor, are subject to change at later dates.

Considering that the chatter alluded to a potential Chinese acquirer of Alcatel-Lucent, perhaps Huawei’s rival, ZTE Corp., might be sizing up the Franco-American telecommunications-equipment monstrosity (and not in a good way) for purchase.

That, too, is an unlikely scenario. A PR representative from ZTE said the acquisition talk probably was just a rumor. That’ s not an unambiguous denial along the lines of the statement issued by Huawei, but nor is it a strong indication that a deal is in the works.

Consolidation is occurring in a telecommunications-equipment market that has been severely battered by two protracted and punishing downturns in the last decade. Companies have gone out of business, and further M&A activity, driven more by sellers’ desperation than by prospects of market growth, are on the horizon.

Nonetheless, Huawei and ZTE aren’t in a rush to pull out their checkbooks or call their investment bankers. Time, you see, is on their side.

Huawei, after many fits and starts, is finally making tangible sales progress with North American carriers after winning patronage in many European accounts, and ZTE has similar aspirations. Both companies are heading in the right directions, figuratively and geographically.

Why should Huawei, in particular, tilt at regulatory windmills — remember its involvement in the aborted Bain Capital deal for networking-equipment vendor 3Com? — when it can play a patient waiting game? There’s no rush. Alcatel-Lucent, presuming Huawei wants it, isn’t going anywhere. None of the other major telecommunications-equipment vendors seemed poised to take it out.

In Huawei’s collective mind, the regulatory environments in the USA and Europe could evolve. As Huawei becomes more of a known entity, and as the situation worsens for less-fortunate vendors in the telecommunications-equipment space, Huawei might find that regulatory resistance slowly transforms into something approaching an embrace.

Layoffs this Month at Juniper Networks?

I’m writing a brief note on layoffs at a networking vendor, but, no, this time it does not involve Cisco Systems.

Instead, I am hearing rumors of layoffs that have occurred, or are occurring, this month at Juniper Networks. I will try to determine whether there’s fire behind the smoke.

Microsoft Just Doesn’t Get Consumers

I’ve said it beforeinsistently and repeatedly, in fact — and I will say it again here and now: Microsoft doesn’t understand consumers.

Even as it rejigs pricing of the Xbox 360 and prepares the Zune HD for launch in September, I see no evidence that Microsoft can be anything more than awkward second (or third or fourth) banana in the consumer markets in which it competes.

That’s not necessarily because Apple has done everything right in the portable media player space with the iPod and iPod Touch, or because Nintendo outfoxed Microsoft and Sony in the game-console space by stressing an intuitive game interface over graphics-processing brawn. Both those factors are relevant, of course, but Microsoft’s biggest problem is, well, Microsoft.

Put simply, the company doesn’t have the chops to dominate consumer markets. It can superficially compete, it can play a minor or secondary role in those markets, but is that the sort of aspiration that befits a software colossus?

Well, I think not. Microsoft still has plenty it could do to gain more traction in enterprise and SMB markets, especially in emerging global economies. That’s a focus that should be garnering more time and resources at Microsoft’s Redmond headquarters. There’s a lot of business still to be had in leveraging its redoubtable enterprise assets — the Windows and Office franchises — and surrounding them with Exchange servers, front- and back-office applications, new communications capabilities (such as unified communications), web-based applications, and enterprise mobility. Microsoft can actually win those battles.

In the consumer market? It’s an afterthought or an also-ran, looking distracted, out of touch, sadly eccentric.

Now we have the news that Chris Stephenson, the general manager of marketing for the Zune, is abandoning ship immediately before the launch of the touch-screen Zune HD on September 15.

What are we to make of that? By all appearances,Stepeheson is departing of his own volition. Even if that were not true, the development would not reflect well on Microsoft or on the Zune’s woeful market performance as media player.

Earlier this year, Microsoft reported that Zune sales plunged 54 percent from $185 million in the last quarter of 2007 to $85 million during the same quarter a year later. Those numbers speak volumes — and fail to speak of volumes.

Is there any reason to think Zune can pull out of a death spiral? Sure, the situation might get a little better, sales might spike a bit when the Zune HD reaches market, but — honestly — is this where Microsoft thinks it can get the best return on its strategic investments?

Close the retail stores, Microsoft. You’re not Apple. Play to your strengths, not your weaknesses.

Benchmark’s Gurley Explains What’s Happening to VC Industry

If you wish to know why the venture-capital industry is being downsized and reconfigured in ways than would have been unimaginable a decade ago, I advise you to read the dispassionate, logical elucidation published earlier this week by Benchmark Capital’s Bill Gurley.

He begins by noting that many theories attempt to diagnose the affliction that has seemingly debilitated, if not broken, the VC industry. He then patiently explains what he sees happening from his front-row seat as a venture capitalist.

I won’t offer any spoilers. I think it’s well worth your time to amble over to his blog and read the entire post yourself.

Suffice it to say, Gurley follows the money from its well-heeled sources downstream into various asset-allocation vehicles. He explains how, over the years, asset-allocation models have changed and why, and then takes a well-reasoned stab at why he believes a leaner but sufficiently vital VC industry will emerge from all the creative destruction.

Vonage Fails to Explain Head-Spinning Stock Surge

Vonage shares were on a blend of methamphetamine and acid today, gaining an obscene 165 percent in a single session and reminding us all of the late 1990s when this type of thing was as commonplace as active venture capitalists.

But this isn’t the late 1990s, and the Vonage surge can’t last unless there are good reasons for it — and there aren’t.

Vonage was forced to issue a statement tonight to shed light on the share-price madness. Not much light was shed.

Said Vonage:

Three weeks ago, the company announced financial results which included record adjusted EBITDA of $31 million, positive net income for the first time in the company’s history and positive cash flow. Last week, the company launched Vonage World which provides flat rate unlimited calling to over 60 countries with unlimited readable voicemail (visual voicemail). Initial interest has been strong. Additionally, the company previously announced that it expects to enter the mobile applications market, which has garnered a great deal of attention in recent weeks and months.”

That’s not nearly enough to justify what we’ve seen today, nor is it sufficient explanation for the stock’s gain of more than 300 percent in the last six trading session. Either there’s more to the story than Vonage is presenting — and I don’t think there is — or the stock has been possessed by a dark speculative spirit of unknown provenance.

The exorcist might be called overnight, though, and we could see Vonage shares trading sharply lower tomorrow.