Category Archives: Silicon Valley

Cheriton Sees Opportunity in Infrastructure

When I wrote my first post on this blog, way back in 2006, I assumed that technology infrastructure largely was a spent force. I expected incremental enhancements, gradual advances, but I didn’t anticipate another major boom or a significant disruption of the established order in what once had been a vibrant technology space.

While the technology industry as a whole can suffer from blinkered, willful optimism, perhaps I was afflicted by a different condition entirely. I might have been too pessimistic, too gloomy, dispirited by the technology downturn of the early 2000s and the lack of a meaningful, sustained recovery in the years that immediately followed.

By the way, when I refer to technology, I’m not talking about social networking such as Facebook. I understand that there’s a lot of technology behind the scenes at Facebook, but the customer-facing “social” phenomenon leaves me cold. I never did see the point of Facebook from a user’s perspective, though I understood how it could serve as an unprecedented data-mining machine for advertisers.

Opportunity Renewed

Fortunately, though, I was wrong about the decline and fall of infrastructure. It took a while, but a new era of infrastructure has arisen, based on virtualization, orchestration, and automation. Technological possibilities that we could only dream about more than a decade ago are now possible. In the networking realm, software-defined networking (SDN) is enabling comparatively outmoded network infrastructure to catch up with compute and, to a lesser degree, storage infrastructure as the promise of an application-driven, programmable data center comes into clearer view.

Suddenly, at long last, there’s new opportunity in infrastructure.

You don’t have to take my word for it, either. There are people who’ve designed and developed industry-leading technologies who espouse the same opinion. Some of these people are billionaires, and they’re backed their convictions with substantial sums of money, investing in technologies and companies with clear mandates to remake IT infrastructure.

Outrageously Wealthy Canuck

One of those people is David Cheriton, a billionaire who wears many hats. He is Professor of Computer Science and Electrical Engineering at Stanford University, where he researches networking and distributed systems, and he also serves as a co-founder and chief scientist at Arista Networks. He’s also an investor in startup companies. Back in 1998, one early-stage company in which he invested, along with Arista co-founder Andy Bechtolsheim, was Google.  The duo made a similar early investment in VMware, so they’ve done okay.

Born in Vancouver, raised in Edmonton, Alberta, and ranked 37th on a Wikipedia list of “richest Canadians”** — Forbes ranks him 21st among outrageously wealthy Canucks  — Cheriton recently spoke about innovation and entrepreneurship at a Churchill Club event in Silicon Valley. The event was co-hosted and organized by the Hua Yuan Science and Technology Association and also featured Ken Xie, who founded NetScreen (acquired by Juniper Networks in 2004) and is now president and CEO of unified-threat-management/firewall vendor Fortinet, a company he also founded.

In addition to his apparent knack as an investor, Cheriton has considerable firsthand experience as an entrepreneur and an innovator. Before he and Bechtolsheim combined forces at Arista Networks,  they founded Granite Systems, a Gigabit-Ethernet switching concern that was acquired by Cisco in 1996 for about $220 million in stock, back when shares of Cisco were continuously on the rise.  Subsequently, after the Google investment, Bechtolsheim and Cheriton combined forces again to found Kealia, which specialized in server technology based on AMD’s Opteron microprocessor.  That company was acquired by Sun Microsystems in 2004, providing technology included in the Sun Fire X4500 storage product.

Room for Improvement

In 2005, Cheriton and Bechtolsheiim followed up with Arista, then called Arastra, and its 10-GbE switching technology, which brings us to the approximate present and back to something Cheriton said at the Churchill Club event late last month. Noting that people tend to become preoccupied with the latest developments in social networking and mobility, Cheriton expressed his enthusiasm for infrastructure, as an investment vehicle as well as an area in which he has an abiding technical interest. As quoted in a BusinessWeek article, Cheriton said: “I think there is an opportunity to go back and say, ‘Gee, I think there’s lot of room for improvement in the infrastructure.’ ”

Reinforcing that point, he noted that technology infrastructure today is predicated on ideas that are about 30 years old. The network was the place to start the infrastructure refurbishment, Cheriton believed, and Arista Networks grew from that conviction.

But Cheriton hasn’t stopped there. He also founded a company called Optumsoft, about which not much is known. On its website, Optumsoft is described as an early-stage startup company “taking distributed computing and distributed software development mainstream.” Quoting from the website:

Recent advancements in multi-core computing systems, coupled with the ever increasing functional and performance requirements of software has created an exciting market opportunity for addressing the programmatic and architectural issues involved in modern software development. Optumsoft is addressing this growing market with a novel technology approach that is transparent, scalable, and portable, resulting in significant improvement to the development and maintenance of distributed/parallel structured software systems. Early production usage by commercial clients has validated the technology and value proposition.

Last fall, an anonymous source suggested on Quora that what Optumsoft was building related to “how to structure object-oriented RPC in a way that makes it easy to build robust systems.  The technology behind Arista’s EOS is based on some of these ideas, as was software structure at a previous startup, Kealia.  The technology includes an IDL and a C++ runtime, similar to what you’d get using CORBA.”

Nebula and Tintri

On the investment side, Cheriton and Bechtolsheim have put money into Nebula, which has venture-capital backing from Kleiner Perkins Caulfield & Byers and Highland Capital Partners. Built on OpenStack, the Nebula Enterprise Cloud Appliance is designed to provision and configure flexible, scalable cloud-computing infrastructure. Although it doesn’t say so on the Nebula website, previous reports indicated that Arista’s networking technology is included in the Nebula appliance.

According to the BusinessWeek article,  Cheriton also has a stake in Tintri, co-founded by Kieran Harty and Mark Gritter. Harty was EVP of R&D at VMware for seven years, and Gritter was one of the first of Cheriton’s employees at Kealia. They’ve assembled a PhD-laden engineering team that has developed a virtual-machine-aware storage appliance designed for virtualized environments, which the company says have been underserved by older storage technology that apparently contributes to “VM stall.”

Another early-stage investment that Cheriton made was in Aster Data Systems, a purveyor of a massively parallel DBMS that runs on clustered commodity servers. Already a minority owner of Aster, Teradata bought the 89% of the company it didn’t own for $263 million last year.

Cheriton has made bets on infrastructure, and he’ll likely make others. It’s an encouraging sign for those of us who gravitate to that part of the industry.

(**No, I am not on the list, but thanks for asking.)

What Cisco’s SDN Spin-In Move Tells Us

Many of you have followed a series of posts I’ve written on rumblings that Cisco’s renowned engineering troika  of Mario Mazzola, Luca Cafiero, and Prem Jain would be reuniting to launch another venture.

Rumors last summer suggested that they might be incubating a networking company, perhaps in conjunction with a Valley venture capitalist. Subsequent rumors indicated that the Cisco engineering trio was building a switch as part of a startup company, maybe even as part of another Cisco spin-in company.

Spinning Back

During the last two weeks, rumors intensified and suggested that the threesome was building a data-center switch attuned to the requirements of cloud computing. It also became clear that this would indeed be another Cisco spin-in company. Now we learn, from a report in the New York Times, that the switch in question will feature software-defined networking (SDN), and that the principals behind the spin-in venture, called Insieme — it means “collection” or “assembly” in Italian — are involved in business negotiations with Cisco.

We don’t know much other than that, though. When asked by the New York Times about Insiemi, Cisco CEO John Chambers invoked a cone of silence, saying “we do not discuss our plans or internal investments.”

Well, hey, somebody’s been discussing this particular plan, if not the specific investment terms pertaining to it, because this has not been a particularly well-kept secret. Information has leaked out about it, some of it perhaps intentionally, for some time.

The negotiations relating to Insiemi will be about remuneration, deliverables, and timelines. Cisco will tie compensation to the realization of specific objectives. Now that it has come this far, getting reported in the New York Times, I doubt that it will go back into mothballs. It’s doubtless moving ahead.

Messages Imparted

So, what does that tell us?

Well, it tells us a few things. First, it indicates that Cisco felt it again needed the services of its spin-in wrecking crew, the team that came to Cisco initially in its first-ever acquisition, of Crescendo Communications back in 1993. That brought Cisco the Catalyst line of switches, which was no small prize, along with a talented roster of personnel that played a significant role in the company’s growth into an industry giant. After coming to Cisco, Crescendo’s engineering stars — they would be in Cisco’s Hall of Fame, if such a thing existed — then were involved in Cisco’s highest-profile spin-in efforts: Andiamo for storage networking, and Nuova, which developed data-center technology that found its way into Nexus switches and UCS blade servers.

That Cisco felt it needed the spin-in touch, especially involving this particular group of engineers, also tells us implicitly that Cisco didn’t feel the job could be done by the teams it already has working inside the company, including David Yen’s Server Access and Virtualization Technology Group (SAVTG). That’s interesting in and of itself, because Yen came over from Juniper Networks to effectively take the reins from Mazzola, Cafiero, and Jain, who then transitioned to “support Cisco in an advisory capacity.”  In that advisory capacity, which they assumed last spring, the trio reported to John Chambers directly, not to Yen’s bosses, senior vice presidents Padmasree Warrior and Pankaj Patel.

Potentials Risks As Well As Rewards

And now they’re back in the spin-in saddle, and you can make of that what you will. Rest assured, however, that much will be made of it on the Cisco campus . . . which brings us to the third thing that this move tells us.

These spin-in moves are not universally popular within Cisco Systems. While Cisco had entirely valid business and technology reasons for instituting its spin-in model, the practice has generated much internal discord and friction. Cisco employees not chosen to participate in the spin-in ventures have been known to become alienated and invidious. (I suppose “pissed off” might sum it up, but we usually aim for a higher order of decorum and eloquence around here.)

That was one of the reasons that I wondered, back in the spring of 2010, whether Cisco might have retired its spin-in move. While some external observers contend that Cisco overpays for its spin-in ventures, Cisco insiders who don’t get to travel on the spin-in express aren’t pleased about left behind on the station platform. In 2008, former Cisco executive Jayshree Ullal, who now serves as CEO of Arista Networks (more on which later), made the following comment to Forbes about the malignant consequences of spin-in ventures:

“Spin-ins are a creative model to accelerate innovation and bring in engineers you couldn’t normally recruit–and financial gains go to entrepreneurs, not venture capitalists,” says Jayshree Ullal, a 15-year Cisco veteran who built the 7000 then left last May as the Nuova people came back in. “But it’s a nightmare when the guy in the next cubicle is a multimillionaire and you aren’t, because you weren’t chosen.” She left Cisco for personal reasons, she says, adding that she had to deal with a lot of unhappy employees over the spin-in structure.

Cisco Takes SDN Threat Seriously

So, there will he happy employees and unhappy ones at Cisco, those who get tapped for the not-so-secret spin-in society and those who get left behind to maintain the workaday business. How troublesome that becomes, and whether it results a new stream of defections, remains to be seen.

One of those previous defections involved the aforementioned Jayshree Ullal, now CEO of Arista Networks. I intimated above that Arista figured into this story, and it does, as do Nicira Networks and the new breed of SDN purveyors.

If Cisco is betting big on a Mazzola-Cafiero-Jain spin-in venture related to SDN — and past performance tells us that these ventures are never small wagers — it tells that the Cisco takes very seriously the threat posed in the data center by Arista, which has staked its own SDN ground, and by SDN startups such as Nicira.

Cisco’s conception of SDN, as fashioned by its spin-in wrecking crew, might diverge in interesting ways from those others have put forward. Watch how terms are defined, and who does the defining, as the battle for hearts, minds, and wallets intensifies.

Update on Arista’s Road to IPO

From the search terms for this blog, I know many of you have a strong interest in learning about Arista Networks’ plans for an IPO.

I intended to touch on the company’s IPO plans within a larger post on its strategy for software-defined networking (SDN), but I’ve decided that the two threads should be addressed separately.

So, where does Arista Networks stand with its IPO plans? I believe the company is still very much on track for an IPO, though forecasting a specific date for such an event is not something I’ll do here. I would say that an IPO remains Arista’s preferred exit strategy. I don’t see the company selling to Cisco or to anybody else before a public offering. Sources say that Arista already has been approached by potential acquirers, but that it wasn’t interested in pursuing that option.

Looking for CFO

In that context, remember that Arista is not a VC-funded company. It has been financed by its principals, and it controls its own destiny. As such, Arista is not under external pressure to consider or reconsider buyout propositions.

At the moment, Arista does not have a chief financial officer (CFO). Last fall, at the same time the company announced the addition of two independent board members, Steffan Tomlinson joined Arista as its chief financial officer.  He left the company after just a few months, however, and is now CFO at network-security player Palo Alto Networks. Previously, Tomlinson served as CFO at Aruba Networks when it went public in 2007.

Nobody is saying much about the circumstances of Tomlinson’s departure from Arista. Sources say that the parting of the ways had nothing to do with Arista’s financial performance. As noted above, all reports suggest the company remains on track for an IPO. Before long, we should see an announcement regarding the hiring of a new CFO.

All of you who have been seeking an update on Arista’s IPO plans — and I know there are many of you — now have one.

Mazzola Switches Again?

Many of you were avid readers of a post I wrote on Mario Mazzola, Cisco’s former chief development officer (CDO), and his rumored next move. I don’t have much additional detail to report — certainly nothing definitive — but I have heard further rumblings that I will now share with you in an unalloyed spirit of speculative generosity and kindness.

What I hear now is that Mazzola is involved with a startup switch company. I don’t know whether said company has been devised as a Cisco “spin-in,” or whether it will be an independent venture funded by Mazzola and others.  The rumor suggests that at least some of Mazzola’s former collaborators will join him in the venture.

Unfortunately, that’s all I’ve heard. I don’t know what type of switch the alleged company will develop, when the company might emerge from the shadows and into the light, or when I might have further information to convey.  As I learn more,  I’ll let you know.

For you SDN aficionados, I should have a new post tonight or tomorrow morning.

Revisiting the Nicira Break-In

While doing research on my last post, I spent some time on Martin Casado’s thought-provoking blog, Network Heresy. He doesn’t generate posts prolifically — he’s preoccupied with other matters, including his job as chief technology officer at Nicira Networks — but his commentaries typically are detailed, illuminating, intelligent, and invariably honest.

One of his relatively recent posts, Origins and Evolution of OpenFlow/SDN, features a video of his keynote at the Open Networking Summit, where, as the title of the blog post advertises, he explained how SDNs and OpenFlow have advanced. His salient point is that it’s the community,  not the technology, that makes the SDN movement so meaningful.  The technology, he believes, will progress as it should, but the key to SDN’s success will be the capacity of the varied community of interests to cohere and thrive. It’s a valid point.

Serious Work

That said, that’s not the only thing that caught my interest in the keynote video. Early in that presentation, speaking about how he and others got involved with SDNs and OpenFlow, he talks about his professional past. I quote directly:

“Back in 2002-2003, post-9/11, I used to work for the feds. I worked in the intelligence sector. The team I worked with, we were responsible for auditing and securing some of the most sensitive networks in the United States. This is pretty serious stuff. Literally, if these guys got broken into, people died . . . We took our jobs pretty seriously.”

It doesn’t surprise me that OpenFlow-enabled SDNs might have had at least some of their roots in the intelligence world. Many technologies have been conceived and cultivated in the shadowy realms of defense and intelligence agencies. The Internet itself grew from the Advanced Research Projects Agency Network (ARPANET),  which was funded by the Defense Advanced Research Projects Agency (DARPA) of the United States Department of Defense.

Old-School Break-In

When I heard those words, however, I was reminded of the armed break-in that Nicira suffered last spring, first reported in a Newsweek cover story on the so-called “Code War” and cyber-espionage published in July.  What was striking about the breach at Nicira, both in and of itself and within the context of the Newsweek article, is that it was a physical, old-school break-in, not a cyber attack. An armed burglar wearing a ski mask broke into Nicira Networks and made his way purposefully to the desk of “one of the company’s top engineers.” The perpetrator then grabbed a computer, apparently containing source code, and took flight.

Palo Alto constabulary portrayed the crime as a bog-standard smash and grab, but “people close to the company” and national-intelligence investigators suspect it was a professional job executed by someone with ties to Russia or China. The objective, as one might guess, was to purloin intellectual property.

The involvement of national-intelligence investigators in the case served as a red flag signaling that the crime was not committed by a crank-addled junkie hoping to sell a stolen computer. There’s a bigger story, and Newsweek touched on it before heading off in a different direction to explore cyber espionage, hack attacks, and the code-warrior industry.

Nicira’s Stealth Mode

Last month, the New York Times mentioned the Nicira break-in during the course of an article titled “What Is Nicira Up To?”.

Indeed, that is a fair question to ask. There still isn’t much meat on the bones of Nicira’s website, though we know the company is developing a network-virtualization platform that decouples network services from the underlying hardware, “like a server hypervisor separates physical servers from virtual machines.”

It’s essentially software-defined networking (SDN), with OpenFlow in the mix, though Nicira refrained assiduously from using those words in its marketing messages. On the other hand, as we’ve already seen, CTO Martin Casado isn’t shy about invoking the SDN acronym, or providing learned expositions on its underlying technologies, when addressing technical audiences.

Mystery Remains 

Let’s return to the break-in, however, because the New York Times provided some additional information. We learn that a significant amount of Nicira’s intellectual property was on the purloined computer, though CEO Steven Mullaney said it was “very early stuff, nothing like what we’ve got now.”

Still, the supposition remained that the thief was an agent of a foreign government. We also learned more about Casado’s professional background and about the genesis of the technology that eventually would be developed further and commercialized at Nicira.  Casado’s government work took place at Lawrence Livermore National Laboratory, where he was asked by U.S. intelligence agencies to design a global network that would dynamically change its levels of security and authorization.

We might never discover who broke into Nicira last May. As the Newsweek story recounted, government investigators have advised those familiar with the incident not to discuss it. Questions remain, but the mystery is likely to remain unsolved, at least publicly.

Talk of CEO Succession at Cisco

As Cisco has struggled to adapt to the protracted global market downturn and the “recoveryless” recovery — it’s been going on so long, perhaps we should just call it the Information-Age Depression — the company’s CEO, John Chambers, has been subject to unfamiliar criticism from investors and industry observers alike.

Then again, Cisco’s shares have stagnated for much of the last decade, leading some to contend that Chambers and his thinning bench of executive talent were long overdue for reproach.  Indeed, it’s a measure of Cisco’s great success under Chambers, especially during the hypergrowth 90s, that he was spared the scrutiny that other executives would have received under similar circumstances. Cisco’s blazing growth and industry dominance in its earlier incarnation gave Chambers and crew protective cover from criticism — until now.

Glory Days Fade

One can only feast on the glory deals for so long. Cisco still dominates enterprise networking, but its market share is receding gradually. The company hasn’t been able to find the growth it expected from Chambers’ “market adjacencies,” and it was forced to abort an ill-considered foray into the consumer space, shutting down Pure Digital Technologies and its Flip video camcorders earlier this year.

What’s more, the company’s inorganic growth-by-acquisition model, which served it so well in the 1990s and into the last decade, seems to be sputtering, with Cisco making fewer acquisitions and not batting its formerly exalted average on the ones it does make. Cisco executives who directed and executed some of its most successful acquisitions — Charlie Giancarlo and Mike Volpe among them — no longer are with the company, which might partly explain Cisco’s faltering M&A pace.

Hoisted on Its Own Petard

However, Cisco also has put itself into a box of its own devising, having parked most of cash overseas to avoid US taxation. Until that money is repatriated, whether through a “tax holiday” or otherwise, Cisco will be forced to evaluate acquisitions partly on where its money resides rather than exclusively on the basis of strategic requirements. It’s a perverse dilemma, but ultimately Cisco was the author of its own misfortune.

That’s been doubly unfortunate because Cisco had become dependent on acquisitions to provide its innovation. Years ago, competitors alleged that Cisco couldn’t innovate organically, and I also felt that accusation was harsh and unfair. Now, though, it’s difficult to contend that Cisco is providing enough value-bestowing innovation to drive top-line growth or to support its traditionally robust profit margins.

Finally, Cisco has seen scores of talented executives, and their intellectual capital, leave the company in recent years. This summer thousands of employees were shown the door. Others, some with reserves of institutional memory and hard-won experience, took early retirement.

Chambers Reportedly Leaving

Cisco has seen better days, and it’s no wonder that shareholders are demanding a change of leadership. A Reuters news item reports that John Chambers might be about to relinquish the big chair, with discussion inside and outside the company intensifying about Cisco’s CEO succession plans.

Some sources say Chambers might announce his departure imminently while others say he’ll want to leave on a high note, perhaps after an expectation-smashing quarter. Timing aside, it seems all but certain that Chambers will be gone before long.

Reviewing the Field of Candidates

That has occasioned rampant speculation about who will succeed him. Candidates have been proposed from inside and outside Cisco, and some apparently are campaigning for the job, lobbying shareholders and board members for support.

The current consensus is that Cisco will look externally for its next CEO rather than promote from within.  That view implicitly questions the depth of the executive bench strength currently at Cisco.

Potential external candidates mentioned by Reuters include former Hewlett-Packard CEO Mark Hurd and former Cisco executives Charles Giancarlo, Mike Volpi, Gary Daichendt, and James Richardson. Other industry executives cited as possible contenders include Juniper Networks Inc CEO Kevin Johnson, former McAfee CEO Dave DeWalt, and HP executive David Donatelli.

Hurd Worst Fit

Some dark-horse candidates undoubtedly will surface, too, but of those mooted by Reuters, I think Mark Hurd perhaps is the worst fit. Hurd’s specialty is operational efficiency and relentless cost-cutting. As Cisco’s latest layoffs and austerity attest, operational discipline isn’t necessarily the company’s most urgent requirement.

What Cisco really needs is somebody who knows how to identify, nurture, and lead the next wave of growth. I respectfully submit that Mark Hurd is not that candidate. It’s probably a moot point, because Hurd has a pretty cushy sinecure as co-president at Oracle.

Of the others, one or more of the former Cisco executives might be good candidates, including Daichendt and Richardson. Presuming Cisco can repatriate its mountain of overseas cash, Volpi or Giancarlo might be able to resuscitate Cisco’s growth-by-acquisition model.

Casting an eye at those who’ve never been at Cisco,  I question whether Donatelli is the right fit, and I suspect that Kevin Johnson will remain at Juniper. Former McAfee CEO Dave DeWalt is an interesting possibility. He has a mix of operational, sales, and M&A aptitude that Cisco’s board might find compelling.

Perhaps the good folks at Betfair should establish a “market” on the next Cisco CEO.

Brief Note on Bartz’ Yahoo Ouster

I haven’t had much to say on Yahoo for a while, and I won’t be prolix in discussing the ouster of Carol Bartz as the company’s CEO yesterday. She apparently was relieved of her executive duties on a telephone call from the company’s chairman, Roy Bostock, and she promptly shared that fact with Yahoo staff in a brief, presumably valedictory email message.

As I noted nearly two years ago, Bartz seemed lost at Yahoo. She provided lots of sound and fury, not to mention abundant theatrics, but her reign was more sideshow than focused leadership. Yahoo didn’t need a sideshow. There’s not much money in that.

To be fair, though, Bartz was miscast in her role. Before she came to Yahoo, she made her name and reputation as the chief executive at Autodesk, a company that specializes in the development of 3D-design, engineering, and entertainment software.

As you might imagine, Autodesk’s software was (and still is) sold to and used by design professionals and engineers,  not consumers. On the other hand, Yahoo is a content, media, and communications company that serves a broad-based consumer market. They’re very different companies, and it’s not clear why the Yahoo board thought Bartz’ previous experience made her the ideal candidate to reverse the dimming fortunes of one of the Internet’s brightest lights during the wild 90s.

Anyway, the whole Yahoo saga of the last decade has been an unremittingly sad story.  Yahoo retains some valuable assets, but nobody there seems to know how to get the most from them.

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.

No Ruse: Hurd Joins Ellison at Oracle

A changing of the guard has occurred in the Oracle executive suite, with Charles Phillips on the way out and Mark Hurd, former chairman and CEO of Hewlett-Packard, taking his place as co-president alongside Safra Catz.

The move is both unsurprising and surprising at the same time. For example, it’s not surprising that Phillips is leaving Oracle. Reports had persisted for some time that he might depart. His departure needn’t have coincided with Hurd’s arrival, but that’s the way it worked out.

Comfortable Arrangement

Speaking of which, Hurd’s move to Oracle makes perfect sense considered within the context of his friendship with Larry Ellison. The two apparently are close, and they share considerable mutual admiration and respect. There’s every reason to think they’ll be able to co-exist at Oracle’s executive heights.

That said, I’m still not sure that Oracle needs Mark Hurd. It’s already a lean, mean ship, and Hurd’s modus operandi is to identify and rectify operational inefficiencies in pursuit of cost reductions. Oracle does that well today, and probably could have continued to do so without Hurd joining the company, no doubt at great expense to shareholders.

From Tennis Court to Boardroom

I have to wonder whether Ellison is making this move purely on the basis of business considerations or whether he made the decision more for personal reasons. It certainly feels like executive fiat. I don’t think Hurd will do any lasting damage at Oracle — he’ll be reporting to Ellison and will not be given the latitude he had, up until near the end, at HP — but nor am I convinced that he offers a lot of upside value.

I had thought Ellison and Oracle might have been engaging in a ploy in leaking discussions of Hurd taking a job there. I thought Ellison might have been trying to help his friend’s negotiating position in relation to a CEO position elsewhere. There had been talk to that effect in recent days.

In the end, though, the tennis tandem have become boardroom buddies. What will be interesting to watch now is not so much how Hurd coexists with Ellison, but how well he gets along with co-president Safra Catz. You know the old saying: Two’s company, three’s a crowd.

Pondering Hurd-to-Oracle Reports

Everybody knows by now that Oracle CEO Larry Ellison and former HP CEO Mark Hurd are good friends, on and off the tennis court.

Ellison, you might recall, sent the New York Times an impassioned email missive decrying the HP board’s decision to show Hurd the door, ostensibly over dubious expense reports. That futile intervention by the Oracle chieftain was testament to his loyalty to his friend and it might actually have reflected Ellison’s true estimation of Hurd as an executive.

We’ll know soon enough, because reports have surfaced in the Wall Street Journal and the aforementioned New York Times suggesting that Oracle might offer a top executive position to Hurd. Other reports also suggest that Hurd could snag a seat on Oracle’s board of directors.

These reports all are fueled by “a person briefed on the talks” between Hurd and Ellison. The person in question has chosen to remain anonymous, apparently due to the confidentiality of the matters under discussion. We don’t know whether the talks are being leaked by somebody inside Oracle, someone close to Hurd, or by other parties with knowledge of the situation.

Like Dropping Anvil on Subdued Prisoner

If Hurd were to join Oracle, it would be in a senior executive capacity, especially if he also were to claim a position on the board. This suggests that one of Oracle’s current co-presidents, Charles Phillips or Safra Catz, could be displaced as a result of Hurd’s ascension. Of the two, Phillips is thought by many to be more likely to suffer if Hurd were to join the Oracle executive team.

Still, if Hurd were to join Oracle, I’d attribute the move to Ellison’s friendship with Hurd rather than to any burning need for Hurd’s talents at Oracle. Hurd would not come cheaply, and — on the basis of a rigorous cost-benefit analysis, surely an approach Hurd would appreciate — it’s not obvious that he’d bring a return on the considerable investment he’d entail.

After all, Oracle doesn’t have difficulty running a tight ship. Why would it have need for the services of an executive who is the technology industry’s answer to Al Dunlap, a man variously honored with affectionate sobriquets such as “Chainsaw Al” and “Rambo in Pinstripes.” Adding Hurd to the mix would be overdoing it, like dropping an anvil on a prisoner who’s already been subdued.

Potential Negotiating Leverage

The fact is, Oracle doesn’t need Hurd’s operational help with the integration of Sun Microsystems, and Larry Ellison doesn’t require or want assistance plotting the strategic course and vision for his company. Besides, Hurd’s strength is not and never was vision. His calling card, his speciality, is finding and then mitigating or eliminating operational inefficiencies. Oracle doesn’t have many of those.

All of which causes me to wonder whether this story has been leaked for other reasons. We know Ellison and Hurd are friendly. We know Ellison is inclined to come to his friend’s assistance. Allow me to hypothesize for a moment. Let’s assume Hurd is in negotiations for a CEO job with another technology company in Silicon Valley, one whose operations might benefit from some vigorous austerity measures. Let’s further suppose that Hurd is trying to negotiate the sort of boffo compensation to which he has become accustomed. Finally, let’s assume that the company in question is reluctant to acquiesce to his demands. In those circumstances, a putative offer of a plum job at Oracle could provide Hurd with convenient negotiating leverage.

No matter what transpires, I would not be surprised to see Hurd take a board seat at Oracle, effectively substituting for the one he lost at News Corporation in the wake of the scandal (or whatever it was) at HP. Ellison and Hurd are friends, after all.

Dell’s 3PAR Buy Like a Blast from the Past

The storage space received a jolt today when Dell announced it would pay a whopping $1.15 billion in cash to acquire 3PAR, whose data-center storage technology competes against offerings from EMC, IBM, and HP.

There are several interesting aspects to this deal, and I’ll touch on a few of them briefly.

First off, Dell is paying dearly, quite literally, for 3PAR. The acquisition price represents an 87-percent premium on 3PAR’s closing stock price last Friday. That sort of acquisition premium is a blast from the past, taking us back to the days of wine and roses in Silicon Valley, when slick spivs cut wild M&A deals with blistering frequency and reckless abandon. It harkens back to a time when men such as Frank Quattrone bestrode the Valley like mythical colossi.

Party Like It’s 1999

Wait, what’s that? Frank Quattrone was on the sell-side of the Dell-3PAR deal, ensuring that his client got fair value for its technological wares? Then I suppose it’s deja vu all over again. For one day, at least, Quattrone and his merry band of investment bankers can pretend that we’ve gone back to a more salubrious time, when the next big transaction was, in more ways than one, right around the corner.

Let’s give Mr. Quattrone his due, though. If he got aboard the time-travel machine and went back to the late 90s, he got his Dell counterparts to make the journey with him. They certainly whipped out their rolls of cash like drunken brokers . . . well, never mind. Let’s not go there.

All things considered, however, I’m surprised Dell paid such a rich price for 3PAR. Dell must have thought it was a necessary measure, for whatever reason. Perhaps Dell was convinced that another company — HP, for instance — was competing for the deal. It would be good know what precipitated the preemptive strike. (Even though the deal seems rich by today’s standards, not everybody associated with 3PAR is pleased with it, much to the delight of litigious lawyers — are there any other kind? — everywhere.)

Dell and EMC Part Ways

My second observation is that the 3PAR deal, no matter what Dell says publicly, suggests that its reseller relationship with EMC is in serious trouble. It’s been a fraught relationship for a while now, and Dell  must have concluded that the prognosis wasn’t good. Rather than wait for the inevitable acrimonious divorce, Dell decided to throw down the gauntlet and start the recriminations early. If you’re going to go to war you might as well fire the first salvo.

In the end, I suspect Dell felt it could not compete with Cisco for EMC’s affections. That probably was an accurate assessment. With EMC about to be kicked into touch, Dell needed an alternative for its high-end storage customers — something it could control and own — and 3PAR was an obvious choice.

Dell’s Valley Presence

Finally, as 3PAR’s Marc Farley wrote on his StorageRap blog, Dell apparently will leverage 3PAR’s location as well as its technology. The thinking is that Dell will expand both the business and the engineering teams at 3PAR’s headquarters in Fremont, California. Many, including Farley, believe it’s long past time for Dell to raise its profile in Silicon Valley.

I understand the reasoning behind Dell’s 3PAR acquisition. I see how it fills a hole in Dell’s product portfolio while also providing an integral element in Dell’s vision for data-center storage and cloud computing. That said, I’m still feeling a bit of sticker shock looking at that price tag, and I’m not even a Dell shareholder.

A Hurd Conspiracy Theory

One of the conspiracy theories making the rounds about Mark Hurd’s forced departure from HP’s mahogany row is that at least some of the company’s board members set him up.

Yes, that seems outlandish, and I don’t put much stock in it. Still, let’s walk through the scenario, if only because it’s a Sunday morning and there’s not much else to do.

Exploring the Conspiracy Theory

According to the conspiracy theorists, a minority of HP board members had become convinced that Hurd had overstayed his welcome. They were concerned that Hurd had done all he could in implementing his unique brand of operational rigor, replete with “labor arbitrage” (that’s a bloodless description of shipping jobs overseas to low-cost jurisdictions), lean command-and-control hierarchies, relentless emphasis on efficiencies and cost cutting, and automation of any and all processes that could benefit from it.

Despite what the gullible business press tells you, Mark Hurd was no innovator. He wasn’t a strategic genius or a visionary. He didn’t really take HP into any new areas during his reign — they already had services before EDS, they already had networking before 3Com, they already had mobile devices before Palm. His proficiency was in making things run leaner and meaner, to the point where the company and its business units became carefully monitored, resource-maximized operations.

Not a Visionary

Hurd isn’t a creative man. He’s not Steve Jobs, looking to redefine product categories with striking new designs and far-reaching market vision. That’s not Hurd’s strength. Instead, his claim to fame was the ability to take charge of an organization and squeeze inefficiencies out of it. His preoccupation was the elimination of waste, which results in reduced operating expenditures, not the creation of new products and revenue streams.

The conspiratorial murmurs suggest that a minority of HP’s board members felt it was time for new leadership, that HP had executives in place who could carry on Hurd’s cost-control disciplines in his absence. What they felt they didn’t have, according to the theory, is a team of executives who could engender meaningful innovation at the company. Under Hurd, HP had become a company whose only innovations came in cost cutting.

Apparently the dissident shareholders didn’t have enough votes to oust Hurd, who was also the company chairman, without creating a catalyzing event, a pretext, for the change. Hence a setup and the scandal you’ve just read about in the news.


Other Factors

Now the conspiracy theory includes other background elements. As I mentioned yesterday, morale at HP, especially in the USA and Europe, is dangerously low. As you can see, Mark Hurd isn’t the most popular man in the world. At a certain point, especially if you have a company in which nobody below the executive level feels much like coming to work, you have a problem. There was also the matter of compensation. Hurd’s contract was coming to an end, and he apparently wanted to be paid like Alex Rodriguez.

Still, in my view, the conspiracy theory doesn’t hold. While I think we have yet to learn the truth about what really transpired between Mark Hurd and the mysterious marketing contractor, I don’t think a faction of HP’s board hatched a plot to fatally embarrass the company’s CEO. Anything could have happened, I suppose, but this scenario seems very unlikely.

The full story has yet to emerge, but I don’t think we’ll discover that a cabal of Hurd’s fellow board members engineered his downfall.