Daily Archives: August 31, 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.