Category Archives: 3Com

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.

HP’s Extreme Rumor

There’s a rumor making the rounds that HP might be interested in acquiring Extreme Networks.

It’s easy to understand why Extreme would be willing to sell, but it’s less obvious as to why HP would want to buy. Still, this rumor has intensified recently, and one would be remiss not to at least deal with it.

Unless something is wrong at HP Networking, I don’t see HP making this deal. While there are differing interpretations as to why HP acquired 3Com (H3C) back in 2009, the fact remains that HP now offers a relatively extensive array of networking gear from its 3Com acquisition and from its preexisting HP ProCurve product portfolio. The combined offerings now run the gamut, from branch-office and campus offerings to data-center switches.

At least nominally, HP has the networking bases covered, though some could contend (and have done so) that HP Networking might want to consider unifying its product portfolio under a single network operating system, most likely Comware.

Considering that HP arguably hasn’t finished integrating its networking operations, and also taking into account that HP already has an extensive networking portfolio, what could be the motivation, if any, for a rumored acquisition of Extreme Networks?

Maybe there’s nothing to this rumor, and HP has no motivation to acquire Extreme. If so, that puts the story to bed. If HP does make an Extreme move, though, questions will be asked, and rightly so.

Wondering About HP Networking’s Dualism

At Network Computing, Greg Ferro writes an intriguing piece about HP Networking’s split personality.

After HP acquired 3Com (H3C), the conventional wisdom, with which I concurred, was that the ProCurve product line was living on borrowed time. I didn’t expect ProCurve to disappear overnight — there was an installed base of customers to take into account, after all — but I did think the development pendulum would swing overwhelmingly to China and the 3Com/H3C team.

To a large extent, that has happened, but the ProCurve product portfolio is proving surprisingly tenacious. As Ferro notes, HP’s E Series switches continue to sport ProCurve’s in-house ASICs and ProCurve software. Meanwhile, HP  Networking’s A Series switches feature merchant silicon and 3Com/H3C’s Comware network OS. Finally, HP has the S Series, which also sports merchant silicon.

HP’s Rationale

So, what’s with the continuing split in HP Networking’s product portfolio? In his article at Network Computing, Ferro quotes Dan Montesanto, an HP switch product manager, who asserts that custom ASICs “make a lot of sense in the ‘middle of the market,’” but apparently not as much sense at the low end or the high end of the market. You can read the rationalization over at Network Computing, and you can decide whether you buy it.

I must admit, I’m skeptical of the official reasoning. I don’t want to go all “conspiracy theory” on you — in fact, I don’t have a conspiracy theory to proffer on this matter — but I just question whether HP is giving us the whole truth and nothing but the truth.

Something just doesn’t ring true about it. Yes, I note HP’s claims that it can make cheaper and better chips than merchant-silicon purveyors for certain product price points in the market. Perhaps those claims are true. I can’t disprove them.

Still, why continue to offer the different network operating systems? Wouldn’t it make sense to run the same software across all HP’s switches? Silicon issues notwithstanding, why wouldn’t HP unify its networking portfolio under Comware?

Market Expects Comware Migration

The market thinks that will happen eventually. Ferro writes:

 “One thing seems clear: HP Networking hasn’t convinced the wider market that both Comware and ProCurve operating systems are necessary, and most network architects expect HP to migrate its product line to Comware.”

Again, I’m not trying to sell you an extraterrestrial in the desert or persuade you that I saw Elvis outside a Burger King, but I wonder what’s happening behind the scenes at HP. It’s almost as if HP Networking is keeping the ProCurve ASICs and software going as an insurance policy.

But, if that’s true, why?

Huawei Tries Not to Get Fooled Again

The evolution of the joint venture between Huawei and Symantec — called, perhaps not surprisingly, Huawei Symantec — has taken an interesting turn recently. Originally established in China with a remit covering storage and security products, Huawei Symantec has been expanding geographically, beyond China to other markets globally, and technologically, into networking infrastructure and servers from its original offerings of storage and security boxes.

As a joint venture, Huawei Symantec has some familiar elements. It’s based on a “China-out” strategy, which we’ve all seen before, and it’s only now hitting American shores after revving up its engines overseas. In some ways, it’s deja vu all over again for Huawei. We’ve seen this show before, though perhaps the ending will be different this time.

Trip Down Memory Lane

Before returning to the present, let’s take a quick excursion down Memory Lane, shall we?

In March 2003, when Huawei and 3Com Corporation formed a joint venture company, called Huawei-3Com (H3C), Huawei owned the majority stake, 51 percent, with 3Com holding the other 49 percent. The joint venture focused on research and development, production, and sales of data-networking products, with Huawei retaining territorial sales rights for “greater” China and Japan, and 3Com, through its own brand, having sales jurisdiction for the rest of the world. The JV agreement also accorded 3Com the right to buy two percent of the joint entity’s stock from Huawei during a two-year period, thus giving 3Com the option to take a controlling interest.

3Com provided financial support for the joint venture, whereas Huawei provided technology, products, and the H3C workforce in China.

Eventually, Huawei sold two percent of its take in the joint venture to 3Com, which then assumed a controlling interest of 51 percent. Subsequently, in 2006, Huawei divested its remaining 49 percent in H3C to 3Com for $880 million.

Thwarted Ambitions

China-based H3C came to represent the most valuable asset in 3Com’s possession. When Bain Capital and Huawei later tried to buy 3Com for approximately $2.2 billion — the acquisition ultimately was thwarted on national-security grounds by the US government — the H3C component was valued at about $1.8 billion, the legacy 3Com business at just $400 million.

If the Bain-Huawei acquisition of had been consummated, Bain would have owned 83.5 percent of 3Com, Huawei 16.5 percent. As we all know, 100 percent of 3Com is now owned by HP, where it forms a growing proportion of HP Networking.

Anyway, having taken that contextual excursion, let’s amble back to Huawei and Symantec and their joint venture. The point is, I’m sure Huawei learned some extremely valuable lessons from its entanglement with 3Com and from H3C, the JV love child they had together.

Origins of Huawei Symantec

In May 2007, as reported by ZDNet, Huawei Technologies and Symantec announced plans to establish a joint venture to develop and distribute security and storage appliances to telecommunications carriers and enterprises worldwide.

Headquartered in Chengdu, China, the joint venture was 51-percent owned by Huawei, with Symantec holding the remaining 49 percent stake.

Huawei contributed its telecommunications storage and security businesses, including its integrated supply chain and product-development practices. Symantec contribute $150 million toward the joint venture’s growth and expansion, as well as some of its enterprise storage and security software licenses, working capital and management resources. In addition, the joint venture had access to Huawei’s intellectual property (IP) licenses, research and development capabilities, manufacturing expertise and engineering resources, including more than 750 China-based employees.

A Symantec filing with the SEC indicated that the he joint venture lost $63 million on revenue of $224 million in 2009.

Reviewing Options

Recently, Symantec CEO Enrique Salem said that his company is reviewing its options regarding its joint venture with Huawei. Just as 3Com had before, Symantec has the right to buy an additional two percent of the joint venture for about $28 million. Salem said that Symantec and Huawei are discussing whether Symantec will exercise that right, or whether the two companies will sell a stake in the venture through an initial public offering. According to Salem, a decision, one way or the other, will be reached by the end of the year.

As I said earlier, in some respects, it’s like deja vu all over again, a reprise of the Huawei-3Com saga.

What’s different, though, is that, through Huawei Symantec, China’s $28-billion telecommunications-equipment titan already has gained entry to the US market. With its 3Com joint venture, 3Com retained sales rights outside greater China and Japan. This time, Huawei retains, as of today, 51-percent ownership in a joint venture that has a worldwide marketing and sales mandate. That’s an important distinction.

Bigger Canvas, Cloud Ambitions 

Now, let’s consider what this joint venture is selling. Whereas H3C was all about data-networking boxes, Huawei Symantec is painting on a much bigger canvas. It’s got the networking gear, check, but it also has storage, servers, security appliances, and it has plans to provide data-center management software, too. Like so many others — Cisco, HP, Dell, Oracle, IBM — it’s heading for the cloud.

And, as Ovum suggested in May, Huawei has major cloud ambitions:

“Huawei’s cloud strategy, comprising hardware (compute, storage), software (virtualization, distributed file system, database management), and services (“cloud in a box”), was a well-kept secret. Huawei’s overwhelming barrage of claimed cloud capabilities included a platform, “SingleCloud,” integrated content distribution networking and caching, and policy and charging control. Huawei highlighted the use of cloud-based storage and computing for its 10,000-person Shanghai R&D operation as early proof of its capabilities, noting energy savings, better data security, and faster inclusion of new employees as benefits it has accrued.”

Some, if not most, of that technology will find its way into the Huawei Symantec data-center offerings. If you look at the Huawei Symantec website, some of the hardware is there now — storage, servers, some networking gear, security appliances.

Cue The Who

At the very least, Huawei, on its own and through this joint venture with Symantec, can add to Cisco’s problems by further contributing to the commoditization of switches and routers and by putting a margin squeeze on converged data-center solutions. As if Cisco doesn’t have enough problems, now this threat looms on the horizon.

In the past, I had dismissed the possibility of a Cisco acquisition of Symantec, but — given the fear, loathing, and increasing desperation on Tasman Drive these days — I’m wondering whether Cisco is looking at Symantec in a different light now, especially within the context of Big Yellow’s expanding relationship with Huawei.

If Symantec could buy that controlling two-percent share from Huawei, well . . . .

Then again, Huawei must  have learned from its trials and tribulations with H3C. It’s surely looking for a different outcome this time.

Cue The Who’s “Won’t Get Fooled Again.”

Cisco: The Merchant-Silicon Question

As reported by MarketWatch yesterday, Lazard Capital analyst Daniel Amir has written a note suggesting that Cisco Systems, “long a proponent of in-house solutions, has begun the shift to off-the-shelf Broadcom parts.”

Amir added that he expects Broadcom and, to a lesser extent, Marvell to benefit from Cisco’s move to merchant silicon, as well as from an intensification of an industrywide trend toward off-the-shelf parts.

Staying the ASIC Course

Many of Cisco’s networking rivals already have made the switch to merchant silicon. Cisco, along with Brocade Communications, has stayed the course with custom ASICs, believing that the in-house chip designs confer meaningful proprietary differentiation and attendant competitive advantage.

It’s getting harder for Cisco to make that case, though, as the company suffers market-share losses and margin erosion at the low end of the switching market, which is being inexorably commoditized, and as it also meets increasingly strong competitive headwinds from vendors such as Juniper Networks and Arista Networks in the some of the largest and most demanding data-center environments.

As Cisco’s recently announced layoffs attest, the company is under unprecedented pressure from shareholders to reduce costs. It’s also under the gun to raise its top line, but that’s a tougher problem that could take a while to remedy.

Need to Cut Costs

On the cost front, though, Cisco clearly cannot jettison employees indefinitely. It needs to look at other ways to reduce capital and operating expenditures without compromising its ability to get back on a sustainable growth trajectory.

Given the success of its competitors with off-the-shelf networking chips, one would think Cisco would stop swimming against the merchant-silicon tide. It’s likely that merchant silicon would help reduce Cisco’s development costs, allowing it to at least mitigate the margin carnage it’s suffering at the hands of HP and others in an increasingly price-sensitive networking world.

But even though Amir suggests that Cisco’s apparent dalliance with merchant silicon might not be a “one-time experiment,” it’s not a given that Cisco will ardently transition from home-brewed ASICs to off-the-shelf chips.

Mixed Signals

Just last month, Rob Soderbery, senior vice president and general manager of Cisco’s Unified Access business unit, contended that Cisco’s profits and market share in switching revenue might be taking a hit, but that it was holding its own it port-based market share. What’s more, Soderbery made the following statement regarding whether Cisco was considering adoption of merchant silicon over its custom ASICs:

 “There’s tremendous scale in our portfolio. We have competitive ASIC development. We always evaluate a make/buy decision. ASIC development is a core part of our strategy.”

Maybe Cisco, upon further review, has decided to change course, or perhaps Amir has misread the situation.

Next Setting Sun?

Nonetheless, EtherealMind.com’s Greg Ferro argued persuasively earlier this year that merchant silicon will dominate the networking-hardware market. If you haven’t read it, I advise you to read the whole piece, but here’s a money-shot excerpt:

 “I have the view that Merchant Silicon will dominate eventually, and physical networking products will become commodities that differentiate by software features and accessories – not unlike the “Intel server” industry (you should get the irony in that statement). As a result, any argument between “which is better – merchant or custom” is just matter of when you ask the question.

One interesting feature is that John Chambers continue to publicly state that custom silicon is their future. The are parallels with Sun Microsystems who continued to make their own processors in the face of an entire market shift, and that doesn’t appear to have worked out very well. In this another wrong footed innovation from Cisco? Time will tell.”

Besieged now by its shareholders as well as by its competitors, Cisco CEO John Chambers and his executive team are finding that time does not appear to be on their side.

How Cisco Arrived at the Crossroads

As reports of Cisco’s impending layoffs intensify and spread, I started thinking about how the networking giant got into its current predicament and whether it can escape from it.

One major problem for the company is that the challenges it faces aren’t entirely attributable to its own mistakes. If Cisco’s own bumbling was wholly responsible for the company’s middle-life crisis, one might think it could stop engaging in self-harm, right the ship, and chart a course to renewed prosperity.

Internal Missteps Exacerbated by External Factors

But, even though Cisco has contributed significantly to its own decline — with a byzantine bureaucratic management structure replete with a multitude of executive councils, half-baked forays into consumer markets about which it knew next to nothing, imperial overstretch into too many markets with too many diluted products, and the loss of far too many talented leaders — external factors also played a meaningful role in bringing the company to this crossroads.

Those external factors comprise market dynamics and increasingly effective incursions by competitors into Cisco’s core business of switching and routing, not just in the telco space but increasingly — and more significantly — in enterprise markets, where Cisco heretofore has maintained hegemonic dominance.

If we look into the recent past, we can see that Cisco saw one threat coming well before it actually arrived. Before cloud computing crashed the networking party and threatened to rearrange data-center infrastructure worldwide, Cisco faced the threat of network-gear commoditization from a number of vendors, including the “China-out” 3Com, which had completely remade itself into a Chinese company with an American name through its now-defunct H3C joint venture with Huawei.

Now, of course, 3Com is part of HP Networking, and a big draw for HP when it acquired 3Com was represented by the cost-effective products and low-priced engineering talent that H3C offered. HP reasoned that if Cisco wanted to come after its server market with Unified Computing System (UCS), HP would fight back by attacking the relatively robust margins in Cisco’s bread-and-butter business with aggressively priced networking gear.

Cisco Prescience

HP’s strategy, especially in a baleful macroeconomic world where cost-cutting in enterprises and governments is now an imperative rather than a prerogative, is beginning to bear fruit, as recent market-share gains attest.

Meanwhile, Cisco knew that Huawei, gradually eating into its telecommunications market share in markets outside North America, would eventually seek future growth in the enterprise. It was inevitable, and Cisco had to prepare for the same low-priced, value-based onslaught that Huawei waged so successfully against it in overseas carrier accounts. In the enterprise, Huawei would follow the same telco script, focusing first on overseas markets — in its home market, China, as well as in Asia, the Middle East, Europe, and South America — before making its push into a less-receptive North American market.

That is happening now, as I write this post, but Cisco had the prescience to see it on the horizon years before it actually occurred.

Explaining Drive for Diversification

What do you think that hit-and-miss diversification strategy — into consumer markets, into home networking, into enterprise collaboration with WebEx, into telepresence, into smart grids, into so much else besides — was all about? Cisco was looking to escape getting hit by the bullet train of network commoditization, aimed straight at its core business.

That Cisco has not excelled in its diversification strategy into new markets and technologies shouldn’t come as a surprise. Well before it make those moves, it had failed in diversification efforts much closer to home, in areas such as WAN optimization, where it had been largely unsuccessful against Riverbed, and in load balancing/application traffic management, where F5 had throughly beaten back the giant. The truth is, Cisco has a spotty record in truly adjacent or contiguous markets, so it’s no wonder that it has struggled to dominate markets that are further afield.

Game Gets More Complicated

Still, the salient point is that Cisco went into all those markets because it felt it needed to do so, for revenue growth, for margin support, for account control, for stakeholder benefit.

Now, cloud computing, with all its many implications for networking, is roiling the telco, service provider, and enterprise markets. It’s not certain that Cisco can respond successfully to cloud-centric threats posed by data-center networking vendors such Juniper Networks as Arista Networks or by technologies such as software-defined networking (as represented by the OpenFlow protocol).

Cisco was already fighting one battle, against the commoditizing Huaweis and 3Coms of the world, and now another front has opened.

Sweet and High: The Bidding War for 3PAR

All signs suggest that Dell will fire a return volley in the bidding war between it and HP for ownership of 3PAR. Recent evidence can be found in a Bloomberg article that cites a person “familiar with the matter” who says Dell is preparing a sweetened offer for the apparently sough-after vendor of high-end storage.
A  sweetened offer? If the offers for 3PAR get any sweeter, investment bankers involved in the deal will suffer from diabetic shock.

$2 Billion?

Meanwhile, the market sends its own compelling signals that Dell isn’t done with 3PAR. On a down day, 3PAR shares are up, trading at a level that assigns the company a current market capitalization (as of 12:53 pm EDT) of $1.68 billion. HP’s proposal for 3PAR values the company at about $1.6 billion, so market sentiment suggests the tug of war will continue.

Could Dell go as high as $2 billion in its pursuit of 3PAR? It seems like madness, but that’s what some market watchers and Dell aficionados believe will happen.

Let’s say Dell does decide to trump HP’s counteroffer. What will HP do? Opinion on that question is split, with some saying HP will go even higher and others suggesting that HP would back away from the table, content to see Dell overpay spectacularly to win the duel.

Sincerity or Duplicity?

The thinking from one camp, in fact, is that HP is angling for that very outcome. If, after putting 3PAR on its corporate mantelpiece, Dell were to want to add, let’s say, network infrastructure to its data-center solution stack, its options would be restricted by what it spent to acquire and integrate 3PAR. Indeed, after closing a $2-billion deal for 3PAR,  Dell would be on notice to show investors that the gambit was more than a vanity purchase.

But I doubt that HP is playing a maniacally devious game of M&A brinkmanship. If one considers what HP spent to acquire 3Com and Palm, it’s a company that isn’t afraid of paying top dollar to obtain assets it wants to buy. My thinking is that HP is in the race for 3PAR because it wants to own the company, not because it’s trying to drain Dell’s piggy bank.

That said, would HP go above $2 billion to claim the prize from Dell? Don’t ask me. I thought we’d hit nosebleed altitude on this transaction long before now.