Daily Archives: August 11, 2006

Tech IPO Prospects Remain Grim

A Reuters story uses the Go Daddy Group’s aborted IPO as an example of the struggles technology companies are having in going public.

As noted on this blog, Go Daddy’s planned $200-million IPO was withdrawn on Tuesday. The company blamed market conditions for its decision not to move ahead, though others factors seemed to be involved, too.

Reuters notes that ten technology IPOs, worth about $900 million collectively, have been withdrawn in 2006. Of the companies who retreated, only Activant Solutions Holdings Inc., acquired by a private-equity firm, did not cite market conditions as its reason for failing to forge ahead.

What’s more, of 17 technology IPOs that reached market this year, only seven ended their first day above their offer price. The most disastrous of IPOs this year involved VoIP service provider Vonage Holdings Corp., who shares fell 13 percent on their first day and ended trading today at $6.50 per share, approximately 62 percent below its $17-per-share offer price. To make matters worse, Vonage shows no signs of staging a recovery.

The Reuters reporter, Yung Kim, summarizes the technology sector’s public-market malaise in this paragraph:

The technology sector has struggled to recover from the dot-com bust. In 1999 alone, 258 tech companies registered for IPOs. Since 2001, a total of 140 companies have registered.

I realize that the public markets in 1999 were suffering from an infatuation with technology stocks that crossed over into the fevered realm of delusional mania, but has the market overcompensated by practically shutting off the IPO tap completely in recent years? Are technology startups as mediocre and undeserved of representation on the public markets as some observers would have us believe?

Make no mistake, that’s what some observers believe. Said Ben Holmes, publisher of Morningnotes.com, an independent research firm based in Boulder, Colorado:

The deals getting done are barely getting done and there are not a whole lot of things on the horizon in terms of quality to lift us up out of this market.

He’s not even damning private technology companies with faint praise. He’s saying there’s not much quality on the horizon.

Others think we’re going through a period of slow, painful market adjustment, shaking off a monstrous hangover from the dot-com bust. These commentators believe technology IPOs will again find favor with investors; they believe that new day will dawn soon enough.

But I’m not so sure. A maturing, consolidating technology market and inhibitive regulatory requirements might mean that the trickle of IPOs we’ve seen in recent years will be the norm rather than the exception.

Concurrent Computer Shares Plunge; Any Acquirers in the Wings?

After announcing a fourth-quarter loss earlier today that was significantly greater than the one it posted during the corresponding period last year, and also was higher than the loss that market analysts had anticipated for the quarter, Concurrent Computer saw its shares plunge more than 15 percent.

Concurrent, a vendor of video-on-demand (VOD) systems, blamed the earnings shortfall on stiffening competition in the VOD market. Translation: Concurrent is cutting prices, seeing reduced margins, and is losing market share to its rivals.

As consolidation hits the VoD server market, questions persist about whether Concurrent will find refuge in the arms of a white-knight acquirer. Motorola recently acquired VOD-server vendor Broadbus Technologies Inc. for an undisclosed sum, alleged to be $186 million in cash. Meanwhile, Cisco is said to be negotiating the acquisition of Pleasanton, Calif.-based Arroyo Video Solutions, a Broadbus competitor.

Where does that leave Concurrent? Well, the company is not averse to be acquired. In July, during a conference call with analysts and trade journalists, Concurrent CEO Gary Trimm indicated that a sale of all or part of the company was possible, but he denied that it was a strategy the company was actively pursuing. He made those comments just after the company had shed about seven percent of a staff that then numbered about 400 employees.

One company said to be interested in Concurrent is Arris Group Inc. The company has the means to acquire Concurrent, whose VOD-system capabilities would fill a hole in Arris’ product roster for MSO’s and other broadband service providers. Arris, though, is perceived to be an acquisition target as well as a potential acquirer, with Alcatel and others said to be looking closely at the company.

Will Concurrent find a buyer? It’s a good possibility, but it might not find one right away.

Rumors of Apple iPhone Surface Once More

Rumors are making the rounds, yet again, that Apple is planning to spring an iPod-based mobile phone on the unsuspecting masses.

According to an article on Apple-rumor site AppleInsider, Steve Jobs has been uncharacteristically open in talking with acquaintances about an iPod-derivative, Apple-branded cellphone. Jobs’ garrulousness would be a surprise, since he is notorious for his stringent secrecy in relation to unannounced products.

Although AppleInsider.com claims that one of the sources for its report has been credible in the past, I am deeply skeptical as to the veracity of the rumor.

Too many things don’t make sense: Jobs’ excited blabbing, even among friends; Apple wanting to get into the cell-phone handset market with its own brand, which would put it into competition with companies (Nokia, Motorola, Sony-Ericsson, Samsung) who understand the nuances of cellular-networking technologies and the telco-world idiosyncrasies of the wireless operators far more than Apple ever could (or would want to); and the degree of control Apple would have to sacrifice to wireless operators (even under an MVNO arrangement) to get a foothold in the market.

There’s a possibility Apple might eventually consider the development and commercial launch of a mobile phone that could work across WiFi and WiMax networks, perhaps in conjunction with its microprocessor partner Intel, but that’s probably not a product that would be released imminently, for a variety of reasons.

Count me among those who doubt Apple’s interest in wading into the cellphone market. I just don’t think that’s a fight Apple wants or needs.

For now, Apple is right in its assertion that cellphones that play media content are no match for the features, benefits, and functionality of specialized media-player devices such as the IPod. That situation might change, of course, but I think the entire business model of the cellular-phone industry would have to change first.

Cisco Brings Back Mazzola and Friends for Data-Center Push

It’s not a spin-in transaction, because it wasn’t contrived and premeditated as such, but Cisco Systems announced yesterday that it will acquire an 80-percent stake, through a $50-milion initial investment, in data-center technology company Nuova Systems.

The driving forces behind Nuova — Mario Mazzola, Luca Cafiero, Prem Jain, and Soni Jiandani — are the same principals who launched Andiamo Systems as a Cisco spin-in company.

Andiamo, which specialized in storage-area networking (SAN) switching products and technology, eventually was folded back into Cisco for $750 million in 2004. Adiamo’s advanced SAN-switching technology became the basis for Cisco’s MDS 9000, which has done extremely well for Cisco against SAN-switching competitors, some of whom are seeking mergers and acquisitions in a bid to compete more effectively against the networking giant.

Before Andiamo, the team behind Nuova was a longtime force within Cisco, playing high-profile roles in building Cisco’s enormously successful and industry-dominating enterprise-networking business unit.

Cisco brought Mazzola into the company originally in 1993, via the acquisition of Cresendo Communications. Crescendo’s technology constituted the basis for the Catalyst family of switches, a multibillion-dollar franchise for Cisco.

Obviously, the crew at Nuova has a stellar track record, and Cisco is figuring another investment in the group might provide them with a hat-trick of sorts. That, in itself, would be no mean feat.

It appears the structure of this transaction is much like the deal structure for spin-in Andiamo. In addition to Cisco’s initial 80-percent majority position in the company, procured with $50 million in cash and other considerations, Cisco retains the option of investing a further $42 million. Cisco also has the option to purchase the remaining 20 percent of Nuova, which now belongs to company’s founders and 76 employees.

It’s an interesting aside that Nuova didn’t want, and actively resisted, venture-capital investment.

If all goes according to plan, Cisco will buy the remainder of the company in late in fiscal 2008 or early in 2009. Cisco’s potential payout under a full-scale acquisition scenario would range from a minimum of $10 million to a maximum of $578 million, depending on how well Cisco does at selling Nuova products. As noted, it’s a deal structure not unlike the one Cisco used for Andiamo, and it’s also similar to the concept of performance bonuses for professional athletes.

As for what Cisco’s is getting from Nuova, aside from an illustrious roster of exceptionally accomplished and talented executives, there remain more questions than answers. Nuova closely guarded its plans and its technology, so not much known publicly about what the company hopes to achieve. Locking out VCs probably helped keep a lid on the the company’s secrets.

In the press release announcing the deal, Cisco said the following:

Nuova Systems’ product development efforts will complement Cisco’s current data center product portfolio, which includes the Catalyst 6500, Cisco’s core enterprise networking platform, the MDS line of storage switches, SFS server networking switches and application networking solutions for accelerating applications within the data center and to the rest of the enterprise.

I can’t find much detail there, but it’s apparent that the Nuova contribution will be additive and complementary to Cisco’s existing data-center product portfolio. Whatever results from this arrangement doesn’t appear to be replacing or superseding existing product mainstays in Cisco’s data-enter solution set.

Now we’ll have to see whether we can learn more about exactly what Nuova is doing within Cisco and about the ambitiousness of the revenue targets that could trigger the higher acqusition-related payouts from Cisco.

There was considerable consternation when Mazzola and his team left Cisco in 2005. Many observers wondered how the departures would affect the company’s data-center strategy and execution. Well, the Andiamo gang is back at Cisco, and it appears to have been given a significant strategic mandate to take the company forward in the data center.