Daily Archives: July 20, 2006

Former Brocade Executives Indicted in Stock-Options Probe

As reported by the Associated Press, the former chief executive of storage-switch vendor Brocade Communications Systems Inc. was formally charged this afternoon with fraud, the first indictment in stock-options probes involving allegations of option backdating at more than 55 U.S. companies.

Gregory L. Reyes, who resigned in 2005 after an internal company audit uncovered improper accounting of stock options, now owns the ignominious distinction of being the first past or present chief executive to be charged criminally as a result of investigations. Stephanie Jensen, Brocade’s former vice president of human resources, was also charged. Brocade has attempted to dissociate itself from Reyes since his alleged malfeasance came to light, and these new charges will open old wounds all over again.

In addition to facing criminal charges, Reyes and Jensen also will be slapped with civil charges by the Securities and Exchange Commission (SEC). This news will send a jolt of fear and trepidation throughout Silicon Valley, as many companies await news on ongoing investigations into their own alleged backdating practices.

Apparently, the SEC tipped its hand regarding its intentions, inviting journalists to its press conference by sending them a file named “brocademedia.com.”


Groundhog Day for Symantec’s CEO: Justifying Veritas Deal Yet Again

I’m not convinced Symantec’s acquisition of Veritas last summer was the best investment the former could have made.

Symantec made a huge bet, at great expense, and it incurred a substantial opportunity cost as a result. There were all sorts of other companies Symantec could have acquired, some with more obvious connections to Symantec’s core business and with products that could have been adopted and sold more easily by Symantec’s field sales force and channel partners.

Nonetheless, Symantec made the right move in seeking to grow by acquisition. It’s traditional competitors from the antivirus realm, McAfee and Trend Micro, were being joined by larger competitors that were new to the space, including Microsoft and Cisco Systems (among others), pushed into the security business by customers as they were being drawn to it as a source of growth during the long darkness that followed the Internet bust in 2001. So, it isn’t a question of whether Symantec should have gone about growing through acquisition, but whether it made the right choices in the acquisitions it made, especially the $10.2 billion purchase of Veritas Software in July 2005.

In an article that appears in today’s edition of the Wall Street Journal (subscription required), Thompson explains his rationale for the acquisition by expressing the view that Symantec’s security software and Veritas’s storage software serve a similar purpose: protecting digital data.

Is that really true? Security software, when there is truth in advertising, protects computers, networks, and their users from malware. Storage software ensures that data is retained permanently and safely, preferably in a structured manner that makes valuable information instantly retrievable when required. Yes, storage software, and the archival systems it supports, should be secure, but that’s a different assertion from the one Thompson made.

Put another way, Symantec’s software and Veritas’ software are complementary, you can see how one could be used alongside or with the other, but they aren’t exactly mirror images of one another. They have different purposes, and they often have different buyers within the enterprise, something that Symantec discovered when it attempted to push Veritas product through its own sales channels. Thompson and his lieutenants saw the similarities between the two companies’ products but they didn’t appreciate the differences, and that made for a period of assimilation and integration that lasted longer than many expected.

Has Symantec got it sorted out now with its Veritas group? Do they know whether what’s complementary and what’s orthogonal? It’s getting better, I think, but there’s still some question as to whether the synergies are as compelling or a valuable as Symantec assumed prior to the acquisition.

A statement Thompson makes in the Wall Street Journal article concerns me. Says he:

"People say, ‘We don’t think you guys know what the hell you’re doing.’ Well, we’ll prove that wrong….Nothing gets me more jazzed up than proving my thinking about the company is right."

Okay, I understand the need for assertiveness, confidence, and steely resolve in a CEO. I understand why they’re important character traits for a CEO to possess. But what Thompson is saying is that he is "jazzed up" by proving himself right instead of by being right. There are important differences between the two concepts. The first suggests stubbornness and an inability to mistakes or errors in judgment, whereas the second connotes a willingness to continually adapt one’s thinking to the intrinsic dynamism of factual data and reality. As Don Ameche said in the David Mamet film of the same name, "Things change." People need to be able to change with them. 

It’s not a sign of weakness to admit past mistakes and to learn from them. In fact, it’s essential for our personal and professional development, and for the robust evolution of corporations and other organizations. We’ve all made mistakes, and we’ll make more of them, presuming we live long enough.

For the sake of Symantec’s shareholders, let’s hope Thompson and his team choose to be right rather than to prove themselves right at all costs.

Intel’s Otellini Shuffles Executive Cabinet

The past two quarters have not been easy for Intel. Its stock has languished, hovering near its 52-week nadir, and it has been getting the competitive stuffing beaten out of it by AMD in almost every meaningful market segment for microprocessors.

CEO Paul Otellini surveyed his kingdom and recognized that it might be entering a period of decline. He concluded that change was necessary if Intel was to avoid losing more competitive ground and to save its stock from permanently residing in the doldrums.

So, in April of this year, Otellini threw down the gauntlet, vowing to restructure the company by overhauling operations wherever complacency and redundancy could be found. The goal was greater efficiency, faster decision making, and some semblance of strategic coherence. The company recently confirmed it was eliminating 1,000 management positions, and all indications point to further personnel cuts.

Still, those were top-down changes, leaving the executive elite along Intel’s mahogany row untouched. So, we learn today that Otellini issued an edict yesterday, the same day Intel released disappointing second-quarter earnings, regarding an extensive reshuffling of his executive cabinet members. The net result is that Otellini now has four fewer executives reporting to him, enabling the company to "speed up our decision-making in these critical areas, while allowing me to spend more time on our key strategic issues," according to an Otellini-penned memo circulated to Intel employees.

The big winners in the shuffle are Sean Maloney and David "Dadi" Perlmutter. Maloney assumes exclusively purview over Intel’s sales and marketing while Perlmutter takes sole control of Intel’s mobility group, which designs and makes microprocessors for laptop and notebook PCs. It’s interesting to note that Maloney and Perlmutter ran the mobility group together, just as Anand Chandrasekher and Eric Kim ran Intel’s sales and marketing activities before the changes announced yesterday. Chandrasekher and Kim have been reassigned to other executive responsibilities.

These changes suggest that Intel might do away with the "two men in a box" concept of management, which involved having two senior executives divide responsibility for certain jobs. It would seem the two-man model definitely has been scrapped in relation to sales and marketing, where Otellini apparently wants one throat to joke and one back to pat.

Two executives — Bill Siu, general manager of the channel platforms group, and Richard Wirt, co-general manager of the software solutions group — are retiring from the company.

Another change involves Don MacDonald, who will be replaced as general manager of the Digital Home Group by Kim. McDonald will become vice president of corporate brands and marketing, reporting to Maloney. Let’s hope Maloney can prevent MacDonald from spreading fear and loathing throughout the ranks with public musings about a continual purging of staff.

Even though his mandate includes getting MacDonald under control, Maloney benefits enormously from these changes. Many observers believe he is being groomed to take over from Otellini at some point. This latest reordering of the executive ranks at Intel seems to confirm his unofficial status as the heir apparent.

Apple Looking Solid Across the Board

The market seems pleased with the quarterly results released by Apple Computer last night.

Apple, whose shares had been declining during much of the past quarter on the concerns and fears of investment analysts, regained some of its luster on Wall Street by recording booming sales of notebook computers and relatively steady shipments of iPods, albeit with a slight sequential dip in volume.

Revenue for Apple’s third quarter was $4.37 billion, up 24 percent from last year’s quarterly revenue of $3.52 billion. Net income was $472 million, or 54 cents per share, an improvement of 48 percent compared with last year’s results of $320 million in net income and 37 cents per share. Analysts surveyed by Thomson First Call expected Apple to report $4.4 billion in revenue and earn 44 cents per share. That’s called blowing away expectations, and that’s part of the reason why the stock is up sharply today during a session that is decidedly mixed for technology stocks.

Mac sales were up 12 percent compared with last year, with Intel chips powering 75 percent of the units sold, and notebook computers led the charge. Apple shipped 798,000 notebooks in the period — a 61-percent improvement in unit shipments as well as in product revenue. Desktop Macintoshes sold only 529,000 units, a 23 percent year-over-year decline. Desktop and notebook shipments overall increased 12 percent worldwide, outpacing the growth of the overall personal-computer market during the quarter. As a result, Apple gained market share, globally and in the US domestic market.

Usually, a stock doesn’t advance immediately after a company guides market expectations lower, but Apple has provided an exception to the rule. The company predicted fourth-quarter revenue would be about $4.5 billion to $4.6 billion, less than the $4.9 billion analysts had been anticipating.

Notwithstanding the reduced guidance, the immediate future looks bright for Apple. Notebook sales are surging, a refresh of the iPod product line appears imminent — perhaps including a larger-screen video model — Intel-based versions of Apple’s desktop computers and servers for the professional market are on deck, and the company has plans to counter whatever incursions cell-phone-based music players might hope to make against the iPod. Market-research also suggests that Apple is converting a greater number of PC users into its camp, perhaps encouraged to make the switch by Boot Camp, software that allows Intel-based Mac to run Windows applications as well as native OS X programs.

All in all, Apple is looking solid, and its latest quarterly results have assuaged most of the concerns market analysts had harbored regarding the company’s ability to perform consistently and find a way forward that would provide a suitable encore to the “halo effect” bestowed by the success of the iPod.

Whither IronPort?

For those of you not familiar with IronPort Systems, it is a messaging-security vendor based in the Bay Area that has attracted approximately $105 million in venture-capital financing since June, 2002.

That’s a lot of money, and with it came great expectations. The VCs that poured money into IronPort looked forward to big things from their investment vehicle. The company was targeting a hot market, initially spam prevention but now extending to the whole array of malware that can infect computer networks and afflict the performance and productivity of enterprises and service providers.

Starting out with network appliances that addressed email security, IronPort since has expanded its product portfolio to include appliances that protect the integrity of web communications. It also has reputation-based networks that provide continual updates to its systems at customer installations, providing ongoing data regarding the trustworthiness of messages from specific blocks of IP addresses.

IronPort emerged as a market leader in email-security appliances, battling fiercely with CipherTrust and other startup companies attempting to lay claim to the space. Unfortunately, though, the big boys began taking notice of the problem of email security. That could have been a positive development, at least for the investors in IronPort, if the big players had determined that they had to own a market-leading email-security vendor and they were willing to part with big bucks for the privilege.

But that’s not what they decided to do. Symantec, Microsoft, McAfee, Cisco Systems, and Juniper Networks all looked carefully at the market and came to different conclusions, but none of them thought that acquiring IronPort, which would make itself available only at an exorbitant price, was an option worth pursuing.

In a couple instances — Cisco and Systems and Juniper Networks — decisions were made not to acquire anybody in the messaging-security space; the business models just weren’t thought to be right, the revenues not large enough, and the margins unsustainable. Symantec pursued other acquisitions in adjacent areas, buying private anti-spam software company Brightmail, run by a former Symantec alumnus, and spam-router startup TurnTide. Microsoft did likewise, buying up several security companies, including email-security services firm FrontBridge Technologies, content-filtering specialist Sybari Software, and Romanian anti-virus company GeCAD Software.

McAfee focused its acquisitions on other areas, choosing to address the messaging-security market with homegrown offerings.

Then, earlier this month, Secure Computing acquired CipherTrust, IronPort’s longtime nemesis in email security. The nominal acquisition price was just under $274 million, but the closing price might be considerably less than that because it was a cash-and-stock deal, and Secure Computing’s stock has taken a hammering, for a variety of reasons, since the deal was announced.

Secure Computing is not exactly a top-tier security vendor, and it’s telling that CipherTrust couldn’t attract a buyer with a bigger name at a higher price. Regardless, you can be sure that CipherTrust’s acquisition didn’t set off rejoicing in the IronPort executive suites, though the company’s marketing department put the best possible spin on developments.

The fact is, IronPort is stuck between a rock and a hard place. It would like to have an IPO, but the CipherTrust deal has forced it to retreat, at least temporarily, from that plan. Meanwhile, it’s extremely unlikely that IronPort will be acquired, certainly not for the sort of price — $800 million or more — that its executives and backers are said to think the company is worth. The price at which CipherTrust sold to Secure Computing set a benchmark, and it’s one that doesn’t provide IronPort with anything like the valuation it thinks is warranted.

Either IronPort goes public now, accepting a lower valuation in the bargain, or it finds a buyer — though it isn’t obvious who that might be — and sells itself off at a sharply discounted price.

 There is a third option, though, one that, under the unfavorable circumstances, might more acceptable to IronPort’s executive team and to its investors. The company could accept another round of financing to fill out its product portfolio and modify its strategic mandate — to reinvent itself as something other than the company that competed against CipherTrust. My guess is that this process already is underway.