Daily Archives: June 30, 2006

SEC Investigating Redback’s Stock-Option Grants

Companies often try to sneak out bad news on a Friday night, hoping everybody has gone home, begun weekend partying, and generally stopped paying attention to the workaday technology world.

If you were scanning the news wires this evening, however, you would learn that Redback Networks has received a request from the Securities and Exchange Commission (SEC) for information relating to the company’s historical stock-option grant practices. What’s more, the company also has received a subpoena from the United States Attorney for the Northern District of California requesting documents relating to Redback’s stock-option practices, and the company’s board of directors has launched its own investigation into the matter.

Redback joins a growing number of Silicon Valley companies being investigated for so-called backdating of options, which involves retroactively setting option strike prices at the lowest-possible historical levels so that executives and other employees would reap the maximum rewards from their stock-option allocations.


Tucci Defends EMC’s Big Buy

EMC’s shares plunged sharply earlier today, but they regained most of their losses before the trading day came to a close.

The reason? To varying degrees, market analysts and major investors are ambivalent, skeptical, or downright hostile to EMC’s announced acquisition yesterday of RSA Security for $2.1 billion.

There are two basic concerns, both of which are entirely valid. The first concern is that EMC overpaid for RSA. EMC will pay $28 for each share of RSA, a 22-percent premium above the $22.88 price at which RSA’s shares closed Thursday, and 45 percent higher than RSA’s closing price Wednesday, the day before RSA confirmed its involvement in buyout talks. In the post-bubble era, that’s a big premium to pay for any acquisition. It is plausible that EMC CEO Joe Tucci and his executive coterie got caught up in the competitive excitement of back-and-forth auction bids. RSA had put itself up for sale, and Tucci says other bidders were aggressively pursuing his catch.

Given that he is compelled to justify the relatively high price he paid to claim RSA, Tucci rationalized that it was both strategically necessary — “RSA wasn’t going to be around” and would have gone to a rival if EMC hadn’t won the bidding, he said — and that the inherent value represented by RSA, which will allow EMC to sell security as well as storage solutions, will be more than worth the nominally extravagant investment.

The other concern is that EMC, which has bought 25 companies in three years as it expanded into information life-cycle management and related software markets, is losing its focus and might not have the wherewithal to digest RSA, which is the largest company EMC has acquired. Again, this concern is entirely valid.

EMC overpaid, no question. The numbers above tell the story. Even if one of EMC’s rivals was poised to take RSA off the table, EMC had other alternatives than to pay a steep premium to win the bidding war. For example, it could have considered buying one or more of RSA’s competitors at a considerably lower aggregate price; not only would that have been easier on the books, but such bite-size acquisitions would have been easier and faster to assimilate.

But Tucci has made his move. He has no choice but to defend and justify it. As for investors and observers, it’s their prerogative to wonder whether other alternatives might have been explored and pursued.

Zafirovski Plies Nortel Shareholders with Promises of Renewal

Most CEOs view shareholders meetings as necessary evils, onerous obligations that are part of the big-chair mandate.

As CEOs stand before the great unwashed to deliver a hackneyed homily, they invariably wish they were on the golf course, in a customer meeting, or nearly anywhere else than in front of people who think their shares entitle them to a say in how to run the business. The nerve of the common shareholders!

Such was the case yesterday in a suburban Toronto conference hall where Mike Zafirovski, former operational hatchet man at Motorola and now CEO of Nortel Networks, held court before an audience of approximately 350 shareholders, most of whom still haven’t come to emotional or financial terms with Nortel’s implosion from tech-boom darling to telecommunications-equipment has-been. Tremendous amounts of Nortel shareholder wealth have evaporated over the last six years, and the natives are restless. Yes, caveat emptor always applies, in the stock market as well as in any other market, but Nortel didn’t help matters with its seemingly endless accounting chicanery and financial restatements. It’s hard enough for shareholders to know what they’re buying when they plump down money for stock, but it’s next to impossible to make a rational purchase when you can’t even trust the putative fundamentals.

Anyway, Zafirovski struck the stoic pose yesterday, telling shareholders that Nortel “will be a great company again,” though it might take as many as five years to get there. He also said Nortel is committed to business transformation, integrity renewal, and “growth opportunities with moderate investment.” Integrity renewal, though, does not include reviewing a business decision to build out a wireless network along a controversial rail link between China and Tibet, which a dissident shareholder argued would dilute Tibetan culture, facilitate Chinese troop movement, and the resource-constrained Chinese government to plunder Tibet’s natural resources.

Zafirovski attempted to make a silk purse of a sow’s ear when he said Nortel is not for sale and doesn’t need to merge to survive. Although he intimated that companies have made takeover entreaties to Nortel, I seriously doubt that any of the major players in the telecommunications-equipment market has seriously considered buying the embattled former Canadian giant. The company remains a mess, its research development, by Zafirovski’s own account, has failed to meet expectations, and its employee morale has been severely cratered. The best employees have left, and the rest are suffering the death of a thousand cuts. What’s more, the telecommunications sector continues to undergo wrenching structural change, with fewer service providers and carriers translating into a need for fewer equipment suppliers. The circle of life has become the circle of death.

It’s a good thing Zafirovski doesn’t want to sell, because nobody wants to buy what Nortel is offering. Obviously, that wasn’t a message Zafirovski could deliver to shareholders yesterday.

Dvorak Explains Why Microsoft Won’t Acquire Yahoo

Some of his phrasing is glib and he applies broad brush strokes occasionally, but John Dvorak is essentially correct as to why Microsoft should not and will not acquire Yahoo.

I touched on similar points in an earlier post on this forum. The Merrill Lynch analyst’s musings on such a pairing were wet-dream reveries of an investment banker hoping for an early Christmas. It’s not going to happen, folks. If you’re investing in Yahoo, you should have better reasons than wishful thinking about a Microsoft acquisition.

EMC Overpays for RSA

It its continuing acquisition-fueled evolution from hardware purveyor to software and services juggernaut, storage-infrastructure giant EMC agreed to acquire RSA Security for slightly less than $2.1 billion on Thursday.

In announcing the acquisition, EMC’s CEO Joe Tucci said: “EMC is where information lives, and tomorrow EMC will be the company where information lives securely.”

Maybe Mr. Tucci is right, but he was peppered with questions from market analysts who felt the match between EMC and RSA was less than ideal and that EMC overpaid for the privilege of owning its latest corporate bauble. Tucci naturally defended the acquisition, arguing that it was essential for EMC to own RSA rather than allowing it to fall into the hands of dastardly competitors.

EMC has made some clever acquisitions in the past, but I don’t think this one was pursued for the right reasons. As such, I believe it will not produce the ROI Tucci envisions. The fact is, RSA had put itself up for auction a few months ago, hiring investment bankers to solicit bids from the known universe of candidate buyers. Doubtless other vendors were pursuing the company, and EMC got caught up in the competitive excitement of the auction proceedings.

Yes, storage networks should be secure, and EMC is right bolster its security credentials. Was RSA the best acquisition target EMC should have pursued from a value standpoint? Well, I don’t think so, but Tucci is paid the big bucks, and it’s his bet that will count and be scrutinized by EMC shareholders in the months to follow.