Monthly Archives: August 2011

UBS Analyst: Juniper Might be Planning Significant Workforce Reduction

Unconfirmed rumors of significant layoffs at Juniper Networks are making the rounds.

Adding to the speculation is a report by UBS analyst Nikos Theodosopoulos, as reported by Forbes’ Eric Savitz,  that Juniper might be planning “a deeper workforce reduction than previously anticipated, perhaps about 10% of its total headcount . . . .”

Postscript: Earlier today, Om Malik, of the eponymous GigaOm, wrote a post in which Juniper replied to  Theodosopoulos’ report, saying that “rumors today of a 10% reduction to our workforce are grossly overstated and inaccurate.”

What Cisco and Huawei Have in Common

Cisco and Huawei have a lot in common. Not only has Huawei joined Cisco in the enterprise-networking market, but it also has put down R&D roots in Silicon Valley, where it and Cisco now compete for engineering talent.

The two companies have something else in common, too: Both claim their R&D strategies are being thwarted by the US government.

Cisco Hopes for Tax Holiday

It’s no secret that Cisco would like the Obama Administration to deliver a repatriation tax holiday on the mountain of cash the company has accumulated overseas. The vast majority of Cisco’s cash — more than $40 billion — is held overseas. Cisco is averse to bringing it back home because it would be taxed at the US corporate rate of 35 percent.

Cisco would prefer to see a repatriation tax rate, at least for the short term, of a 5.25-percent rate. That would allow Cisco, as well as a number of other major US technology firms, to bring back a whopping war chest to the domestic market, where the money could be used for a variety of purposes, including R&D and M&A.

Notwithstanding some intermittent activity, Cisco’s R&D pace has decelerated.  Including the announced acquisition of collaboration-software vendor Versly today, Cisco has announced just four acquisitions this year. It announced seven buys in 2010, and just five each in 2009 and 2008. In contrast, Cisco announced 12 acquisitions in 2007, preceded by nine in 2006 and 12 in 2005.

Solid Track Record

Doubtless the punishing and protracted macroeconomic downturn has factored into Cisco’s slowing pace of M&A activity. I also think Cisco has lost some leadership and bench strength on its M&A team. And, yes, Cisco’s push to keep money offshore, away from US corporate taxes, is a factor, too.

Although Cisco is capable of innovating organically, it historically has produced many of its breakthrough products through inorganic means, namely acquisitions. Its first acquisition, of Crescendo Communications in 1993, ranks as its best. That deal brought it the family of Catalyst switches, a stellar group of executive talent, and eventual dominance of the burgeoning enterprise-networking market.

Not all Cisco acquisitions have gone well, but the company’s overall track record, as John Chambers will tell you, has been pretty good. Cisco has a devised cookbook for identifying acquisition candidates, qualifying them through rigorous due diligence, negotiating deals on terms that ensure key assets don’t walk out the door, and finally ensuring that integration and assimilation are consummated effectively and quickly.  Maybe Cisco has gotten a bit rusty, but one has to think the institutional memory of how to succeed at the M&A game still lives on Tasman Drive.

Acute Need for M&A

That brings us to Cisco’s overseas cash and the dilemma it represents. Although developing markets are growing, Cisco apparently has struggled to find offshore acquisition candidates. Put another way, it has not been able to match offshore cash with offshore assets. Revenue growth might increasingly occur in China, India, Brazil, Russia, and other developing markets, but Cisco and other technology leaders seem to believe that the entrepreneurial innovation engine that drives that growth will still have a home in the USA.

So, Cisco sits in a holding pattern, waiting for the US government to give it a repatriation tax holiday. Presuming that holiday is granted, Cisco will be back on the acquisition trail with a vengeance. Probably more than ever, Cisco needs to make key acquisitions to ensure its market dominance and perhaps even its long-term relevance.

Huawei Discouraged Repeatedly

Huawei has a different sort of problem, but it is similarly constrained from making acquisitions in the USA.  On national-security grounds, the US government has discouraged and prevented Huawei from selling its telecommunications gear to major US carriers and from buying US-based technology companies. Bain Capital and Huawei were dissuaded from pursuing an acquisition of networking-vendor 3Com by the Committee on Foreign Investment in the United States (CFIUS) in 2008. Earlier this year, Huawei backtracked from a proposed acquisition of assets belonging to 3Leaf, a bankrupt cloud-computer software company, when it became evident the US government would oppose the transaction.

Responding to the impasse, Huawei has set up its own R&D in Silicon Valley and has established a joint venture with Symantec, called Huawei Symantec, that structurally looks a lot like H3C, the joint venture that Huawei established with 3Com before the two companies were forced to go their separate ways. (H3C, like the rest of 3Com, is now subsumed within HP Networking. Giving HP’s apparent affinity for buying companies whose names start with the number 3 — 3Com and 3Par spring to mind — one wonders how HP failed to plunder what was left of 3Leaf.)

Still, even though Huawei has been forced to go “organic” with its strategy in North America, the company clearly wants the opportunity to make acquisitions in the USA. It’s taken to lobbying the US government, and it has unleashed a charm offensive on market influencers, trying to mitigate, if not eliminate, concerns that it is owned or controlled by China’s government or that it maintains close ties with the China’s defense and intelligence establishments.

Waiting for Government’s Green Light

Huawei wants to acquire companies in North America for a few reasons.  For starters, it could use the R&D expertise and intellectual property, though  it has been building up an impressive trove of its own patents and intellectual property. There are assets in the US that could expedite Huawei’s product-development efforts in areas such as cloud computing, data-center networking, and mobile technologies. Furthermore, there is management expertise in many US companies that Huawei might prefer to buy wholesale rather than piecemeal.

Finally, of course, there’s the question of brand acceptance and legitimacy. If the US government were to allow Huawei to make acquisitions in America, the company would be on the path to being able to sell its products to US-based carriers. Enterprise sales — bear in mind that enterprise networking is considered a key source of future growth by Huawei — would be easier in the US, too, as would be consumer sales of mobile devices such as Android-based smartphones and tablets.

For different reasons, then, Cisco and Huawei are hoping the US government cuts them some slack so that each can close some deals.

After F5 Backs Off, Whither Allot?

The strategic disposition of deep-packet inspection specialist Allot Communications has been open to interpretation lately.

In July, rumors and reports suggested that F5 Networks had been in months-long negotiations to acquire Allot. Those talks broke down, with F5 reportedly backing away from the table to reconsider its options. On that score, it’s worth noting that F5 struck a partnership early this year with Allot competitor Procera Networks.

No Deal with F5

Allot is a publicly listed company, traded on NASDAQ under the ALLT symbol. The company currently sports a market capitalization of about $275 million. In its aforementioned acquisition negotiations with F5, Allot apparently was asking for something in the salubrious neighborhood of half a billion dollars, a significant premium on its current valuation.

Since talks with F5 apparently collapsed, Allot chose to change course and announced plans to raise about $72 million through a secondary stock offering. The proceeds from that offering were to be used for “general corporate purposes, including acquisitions, investments in companies or products, or to buy use rights to complementary technologies.”

Course Correction

In what the company seems to perceive as a buy-or-be-bought world, it had reversed its role to the former from the latter. Then, early this month, Allot scrapped those its plans for a secondary offering, citing adverse market conditions.

All of which leaves Allot . . . where, exactly? The company obviously reserves the right to resuscitate its plans for a secondary offering, but it’s also possible that Allot will go in a different direction. Perhaps, in fact, Allot remains receptive to acquisition, by F5 Networks or by somebody else.

Allot has trod a tortuous strategic path this summer. It will be interesting to see where it goes from here.

For Microsoft, China Forecast is Cloudy

Trying to discern what’s happening in China — in technology, in politics, and where the two frequently converge — is a difficult endeavor.  Much of what occurs there is reported partially, inaccurately, or not at all.  You have to read the entrails and sift the tea leaves to follow the game, and there’s always a possibility you’ll misinterpret the signals.

That’s why, with China and technology, stories seem to emerge from nowhere. Developments percolate in unseen back rooms or in secret laboratories, then they spring into the public realm, catching some people (yes, I am raising my hand) by surprise.

NeoKylin?

This morning, for instance, I read that Microsoft has struck an agreement with a Linux operating system provider, China Standard Software Co. Ltd., to  jointly develop, market, and sell solutions for China’s cloud-computing market.  According to a Microsoft press release, the two companies will jointly develop solutions that will allow customers to adopt virtualization and cloud-based IT infrastructures.  The partners will focus on certification of China Standard’s NeoKylin Linux-based operating system on Windows Server 2008 R2 with Hyper-V, creating Microsoft Systems Center management packs for NeoKylin application workloads, and incorporating support for NeoKylin within the Hyper-V Cloud architecture.

The companies also have signed a “mutually beneficial customer legal covenant agreement.”

When I read the press release, I wanted to know more about NeoKylin. There’s not a lot of background material on the Internet, but I was able to learn that the operating system first received public mention toward the end of last year. At that time, China Standard Software and China’s National University of Defense Technology (NUDT) signed a strategic partnership to launch NeoKylin as an operating system that will be used for national defense and across key strategic sectors of China’s economy.

Ironic Turn

Before the advent of NeoKylin, China Standard developed the NeoShine Linux desktop distribution, whereas academics at NUDT produced Kylin, a secure FreeBSD-based alternative to Windows and other foreign operating systems.

There’s a certain irony in today’s announcement, because it’s clear that China wants to become less dependent on Western software purveyors by developing a domestic software industry capable of delivering home-grown operating systems.

China’s IT Aspirations and Concerns

China is pursuing this strategy for two reasons. First, it wants to develop a thriving software industry that refocuses its IT efforts upmarket, from lower-value manufacturing to higher-value research and innovation. But China also is pursuing its software strategy because of security concerns, including that software from Microsoft might be used against it — perhaps through backdoors and trojans — in the event of escalating tensions with the US and the West.

In that context, let’s cast our minds back to late 2008, when Microsoft’s anti-piracy strategy, undertaken as an outgrowth of its Windows Genuine Advantage initiative, included turning Windows desktop screens black when pirated copies of the operating system were detected.   This gambit not only resulted in howls of outrage and lawsuits from Chinese consumers, but it caused China’s authorities to wonder what else Microsoft might be able to do remotely to Windows-based computers.

Earlier in the last decade, Microsoft chose to espouse a tolerant approach to software piracy in China. Microsoft wasn’t happy about the practice, to be sure, but it felt it was better to build a user base that might be persuaded to pay for the software later than to clamp down hard on piracy and drive users to Linux or other open-source alternatives.  By 2008, though, Microsoft’s heart had hardened toward software piracy, and it took a more aggressive tack, resulting in the “black screen” and renewed fears in China about dependence on Windows.

Microsoft’s Mixed Results

It also has resulted in mixed results for Microsoft. Matt Rosoff reported at Business Insider earlier this year that Microsoft derives revenue of about $1.25 billion from China — one-fiftieth of the company’s total take. Microsoft does much better in India than in China, and it believes that its China revenue could grow to $7.5 billon if the authorities there would take a harder line against software piracy.

Apparently China has other plans.

So, now, in a bid to get a piece of what apparently is a burgeoning cloud-computing market in China, Microsoft will work with an operating-system developer whose government-mandated charter is to dislodge Windows from desktops and servers spanning the country’s key industries.

PC Market: Tired, Commoditized — But Not Dead

As Hewlett-Packard prepares to spinoff or sell its PC business within the next 12 to 18 months, many have spoken about the “death of the PC.”

Talk of “Death” and “Killing”

Talk of metaphorical “death” and “killing” has been rampant in technology’s new media for the past couple years . When observers aren’t noting that a product or technology is “dead,” they’re saying that an emergent product of one sort or another will “kill” a current market leader. It’s all exaggeration and melodrama, of course, but it’s not helpful. It lowers the discourse, and it makes the technology industry appear akin to professional wrestling with nerds. Nobody wants to see that.

Truth be told, the PC is not dead. It’s enervated, it’s best days are behind it, but it’s still here. It has, however, become a commodity with paper-thin margins, and that’s why HP — more than six years after IBM set the precedent — is bailing on the PC market.

Commoditized markets are no place for thrill seekers or for CEOs of companies that desperately seek bigger profit margins. HP CEO Leo Apotheker, as a longtime software executive, must have viewed HP’s PC business, which still accounts for about 30 percent of the company’s revenues, with utter disdain when he first joined the company.

No Room for Margin

As  I wrote in this forum a while back, PC vendors these days have little room to add value (and hence margin) to the boxes they sell. It was bad enough when they were trying to make a living atop the microprocessors and operating systems of Intel and Microsoft, respectively. Now they also have to factor original design manufacturers (ODMs)  into the shrinking-margin equation.

It’s almost a dirty little secret, but the ODMs do a lot more than just manufacture PCs for the big brands, including HP and Dell. Many ODMs effectively have taken over hardware design and R&D from cost-cutting PC brands. Beyond a name on a bezel, and whatever brand equity that name carries, PC vendor aren’t adding much value to the box that ships.

For further background on how it came to this — and why HP’s exit from the PC market was inevitable — I direct you to my previous post on the subject, written more than a year ago. In that post, I quoted and referenced Stan Shih, Acer’s founder, who said that “U.S. computer brands may disappear over the next 20 years, just like what happened to U.S. television brands.”

Given the news this week, and mounting questions about Dell’s commitment to the low-margin PC business, Shih might want to give that forecast a sharp forward revision.

Divining Google’s Intentions for Motorola Mobility

In commenting now on Google’s announcement that it will acquire Motorola Mobility Holdings for $12.5 billion, I feel like the guest who arrives at a party the morning after festivities have ended: There’s not much for me to add, there’s a mess everywhere, more than a few participants have hangovers, and some have gone well past their party-tolerance level.

Still, in the spirit of sober second thought, I will attempt to provide Yet Another Perspective (YAP).

Misdirection and Tumult

It was easy to get lost in all the misdirection and tumult that followed the Google-Motorola Mobility announcement. Questions abounded, Google’s intentions weren’t yet clear, its competitors were more than willing to add turbidity to already muddy waters, and opinions on what it all meant exploded like scattershot in all directions.

In such situations, I like to go back to fundamental facts and work outward from there. What is it we know for sure? Once we’re on a firm foundation, we can attempt to make relatively educated suppositions about why Google made this acquisition, where it will take it, and how the plot is likely to unspool.

Okay, the first thing we know is that Google makes the overwhelming majority (97%) of its revenue from advertising. That is unlikely to change. I don’t think Google is buying Motorola Mobility because it sees its future as a hardware manufacturer of smartphones and tablets. It wants to get its software platform on mobile devices, yes, because that’s the only way it can ensure that consumers will use its search and location services ubiquitously; but don’t confuse that strategic objective with Google wanting to be a hardware purveyor.

Patent Considerations 

So, working back from what we know about Google, we now can discount the theory that Google will be use Motorola Mobility as a means of competing aggressively against its other Android licensees, including Samsung, HTC, LG, and scores of others.  There has been some fragmentation of the Android platform, and it could be that Google intends to use Motorola Mobility’s hardware as a means of enforcing platform discipline and rigor on its Android licensees, but I don’t envision Google trying to put them out of business with Motorola. That would be an unwise move and a Sisyphean task.

Perhaps, then, it was all about the patents? Yes, I think patents and intellectual-property rights figured prominently into Google’s calculations. Google made no secret that it felt itself at a patent deficit in relation to its major technology rivals and primary intellectual-property litigants. For a variety of reasons — the morass that is patent law, the growing complexity of mobile devices such as smartphones, the burgeoning size and strategic importance of mobility as a market — all the big vendors are playing for keeps in mobile. Big money is on the table, and no holds are barred.

Patents are a means of constraining competition, conditioning and controlling market outcomes, and — it must be said — inhibiting innovation. But this situation wasn’t created by one vendor. It has been evolving (or devolving) for a great many years, and the vendors are only playing the cards they’ve been dealt by a patent system that is in need of serious reform. The only real winners in this ongoing mess are the lawyers . . . but I digress.

Defensive Move

Getting back on track, we can conclude that, considering its business orientation, Google doesn’t really want to compete with its Android licensees and that patent considerations figured highly in its motivation for acquiring Motorola Mobility.

Suggestions also surfaced that the deal was, at least in part, a defensive move. Apparently Microsoft had been kicking Motorola Mobility’s tires and wanted to buy it strictly for its patent portfolio. Motorola wanted to find a buyer willing to take, and pay for, the entire company. That apparently was Google’s opening to snatch the Motorola patents away from Microsoft’s outstretched hands — at a cost of $12.5 billion, of course. This has the ring of truth to it. I can imagine Microsoft wanting to administer something approaching a litigious coup de grace on Google, and I can just as easily imagine Google trying to preclude that from happening.

What about the theory that Google believes that it must have an “integrated stack” — that it must control, design, and deliver all the hardware and software that constitutes the mobile experience embodied in a smartphone or a tablet — to succeed against Apple?

No Need for a Bazooka

Here, I would use the market as a point of refutation. Until the patent imbroglio raised its ugly head, Google’s Android was ascendant in the mobile space. It had gone from nowhere to the leading mobile operating system worldwide, represented by a growing army of diverse device licensees targeting nearly every nook and cranny of the mobile market. There was some platform fragmentation, which introduced application-interoperability issues, but those problems were and are correctable without Google having recourse to direct competition with its partners.  That would be an extreme measure, akin to using a bazooka to herd sheep.

Google Android licensees were struggling in the court of law, but not so much in the court of public opinion as represented by the market. Why do you think Google’s competitors resorted to litigious measures in the first place?

So, no — at least based on the available evidence — I don’t think Google has concluded that it must try to remake itself into a mirror image of Apple for Android to have a fighting chance in the mobile marketplace. The data suggests otherwise. And let’s remember that Android, smartphones, and tablets are not ends in themselves but means to an end for Google.

Chinese Connection?

What’s next, then? Google can begin to wield the Motorola Mobility patent portfolio to defend and protect is Android licensees. It also will keep Motorola Mobility’s hardware unit as a standalone, separate entity for now. In time, though, I would be surprised if Google didn’t sell that business.

Interestingly, the Motorola hardware group could become a bargaining chip of sorts for Google. I’ve seen the names Huawei and ZTE mentioned as possible buyers of the hardware business. While Google’s travails in China are well known, I don’t think it’s given up entirely on its Chinese aspirations. A deal involving the sale of the Motorola hardware business to Huawei or ZTE that included the buyer’s long-term support for Android — with the Chinese government’s blessing, of course — could offer compelling value to both sides.

Will Cisco Leave VCE Marriage of Convenience?

Because I am in a generous mood, I will use this post to provide heaping helpings of rumor and speculation, a pairing that can lead to nowhere or to valuable insights. Unfortunately, the tandem usually takes us to the former more than the latter, but let’s see whether we can beat the odds.

The topic today is the Virtual Computing Environment (VCE) Company, a joint venture formed by Cisco and EMC, with investments from VMware and Intel.  VCE is intended to accelerate the adoption of converged infrastructure, reducing customer costs related to IT deployment and management while also expediting customers’ time to revenue.

VCE provides fully assembled and tested Vblocks, integrated platforms that include Cisco’s UCS servers and Nexus switches, EMC’s storage, and VMware’s virtualization. Integration services and management software are provided by VCE, which considers the orchestration layer as the piece de resistance.

VCE Layoffs?

As a company, VCE was formed at the beginning of this year. Before then, it existed as a “coalition” of vendors providing reference architectures in conjunction with a professional-services operation called Acadia. Wikibon’s Stuart Miniman provided a commendable summary of the evolution of VCE in January.

If you look at official pronouncements from EMC and — to a lesser extent — Cisco, you might think that all is well behind the corporate facade of VME. After all, sales are up, the business continues to ramp, the value proposition is cogent, and the dour macroeconomic picture would seem to argue for further adoption of solutions, such as VME, that have the potential to deliver reductions in capital and operating expenditures.

What, then, are we to make of rumored layoffs at VCE? Nobody from Cisco or EMC has confirmed the rumors, but the scuttlebutt has been coming steadily enough to suggest that there’s fire behind the smoke. If there’s substance to the rumors, what might have started the fire?

Second Thoughts for Cisco?

Well, now that I’ve given you the rumor, I’ll give you some speculation. It could be — and you’ll notice that I’ve already qualified my position — that Cisco is having second thoughts about VCE. EMC contributes more than Cisco does to VCE and its ownership stake is commensurately greater, as Miniman explains in a post today at Wikibon:

 “According to company 10Q forms, Cisco (May ’11) owns approximately 35% outstanding equity of VCE with $100M invested and EMC (Aug ’11) owns approximately 58% outstanding equity of VCE with $173.5M invested. The companies are not disclosing revenue of the venture, except that it passed $100M in revenue in about 6 months and as of December 2010 had 65 “major customers” and was growing that number rapidly. In July 2011, EMC reported that VCE YTD revenue had surpassed all of 2010 revenue and CEO Joe Tucci stated that the companies “expect Vblock sales to hit the $1 billion run rate mark in a next several quarters.” EMC sees the VCE investment as strategic to increasing its importance (and revenue) in a changing IT landscape.”

Indeed, I agree that EMC views its VCE acquisition through a strategic prism. What I wonder about is Cisco’s long-term commitment to VCE.

Marriage of Convenience

There already have been rumblings that Cisco isn’t pleased with its cut of VCE profits. In this context, it’s important to remember how VCE is structured. The revenue it generates flows directly to its parent companies; it doesn’t keep any of it.  Thus, VCE is built purely as a convenient integration and delivery vehicle, not as a standalone business that will pursue its own exit strategy.

Relationships of convenience, such as the one that spawned VCE, often do not prove particularly durable. As long as the interests of the constituent partners remain aligned, VCE will remain unchanged. If interests diverge, though, as they might be doing now, all bets are off. When the convenient becomes inconvenient for one or more of the partners, it’s over.

It’s salient to me that Cisco is playing second fiddle to EMC in VCE. In its glory days, Cisco didn’t play second fiddle to anybody.

In the not-too-distant past, Cisco CEO John Chambers had the run of the corporate house. Nobody questioned his strategic acuity, and he and his team were allowed to do as they pleased. Since then, the composition of his team has changed — many of Cisco’s top executives of just a few short years ago are no longer with the company — and several notable investors and analysts, and perhaps one or two board members, have begun to wonder whether Chambers can author the prescription that will cure Cisco’s ills. Doubts creep into the minds of investors after a decade of stock stagnancy, reduced growth horizons, a failed foray into consumer markets, and slow but steady market-share erosion.

Alternatives to Playing Second Fiddle

Meanwhile, Cisco has another storage partner, NetApp. The two companies also have combined to deliver converged infrastructure. Cisco says the relationships involving VCE’s Vblocks and NetApp’s FlexPods don’t see much channel conflict and that they both work to increase Cisco’s UCS  footprint.

That’s likely true. It’s also likely that Cisco will never control VCE. EMC holds the upper hand now, and that probably won’t change.

Once upon a time, Cisco might have been able to change that dynamic. Back then, it could have acquired EMC. Now, though? I wouldn’t bet on it . EMC’s market capitalization is up to nearly $48 billion and Cisco’s stands at less than $88 billion. Even if Cisco repatriated all of its offshore cash hoard, that money still wouldn’t be enough to buy EMC. In fact, when one considers the premium that would have to be paid in such a deal, Cisco would fall well short of the mark. It would have to do a cash-and-stock deal, and that would go over like the Hindenburg with EMC shareholders.

So, if Cisco is to get more profit from sales of converged infrastructure, it has to explore other options. NetApp is definitely one, and some logic behind a potential acquisition was explored earlier this year in a piece by Derrick Harris at GigaOm. In that post, Harris also posited that Cisco consider an acquisition of Citrix, primarily for its virtualization technologies. If Cisco acquired NetApp and Citrix, it would be able to offer a complete set of converged infrastructure, without the assistance of EMC or its majority-owned VMware. It’s just the sort of bold move that might put Chambers back in the good graces of investors and analysts.

Irreconcilable Differences 

Could it be done? The math seems plausible. Before it announced its latest quarterly results, Cisco had $43.4 billion in cash, 89 percent of which was overseas. Supposing that Cisco could repatriate its foreign cash hoard without taking too much of a tax hit — Cisco and others are campaigning hard for a repatriation tax holiday — Cisco would be in position to make all-cash acquisitions for Citrix (with a $11.5 billion market capitalization) and NetApp (with a $16.4 market capitalization). Even with premiums factored into the equation, the deals could be done overwhelmingly, if not exclusively, with cash.

I know the above scenario is not without risk to Cisco. But I also know that the status quo isn’t going to get Cisco to where it needs to be in converged infrastructure. Something has to give. The VCE open marriage of convenience could be destined to founder on the rocks of irreconcilable differences.