Daily Archives: August 16, 2006

Leaving Private Comments

It has come to my notice that some of you would like to leave private comments instead of comments that are published on the blog.

That’s okay with me.

If you want to provide a private comment on any of the blog items relating to acquisition rumors, stock-option backdating scandals, or any other subject, please feel free to do so. Just let me know, in the body of the comment, that you don’t want it to be made public. I will respectfully honor your wishes.

You can trust me to maintain the strictest confidentiality and privacy. That’s what I’ve done throughout my career, and I’m not about to stop now.

We will now return to regularly scheduled blogging.

McAfee Stock-Option Backdating Fallout Could Be Serious

Casualties mount as the wave of stock-option backdating scandals washes over the technology industry.

McAfee became the latest company to sound an ominous note. In a form amendment filed with the Securities and Exchange Commission (SEC) today, the company reported that its special committee reviewing past stock-option granting practices has yet to complete its work, but that it already had come to the conclusion that “actual accounting measurement dates for certain historical stock options differ from the measurement dates previously used for such awards.”

As a result, new accounting measurement dates will apply to the affected option grants. in that context, McAfee provides the following information to the SEC:

McAfee believes that it is more likely than not that the amount of such additional adjustments relating to prior periods will be material and that McAfee will restate its financial statements in at least one, and potentially several, prior periods.

The prior periods that could be affected are extensive. They include McAfee’s fiscal years 2005, 2004 and 2003, including 2002 and 2001 data, and also include the company’s financial results for its first fiscal quarter of 2006. McAfee advises that its past financial statements spanning those periods “should no longer be relied upon.”

McAfee then has this to say:

Because the Special Committee’s review is ongoing, McAfee has not determined the aggregate amount of additional non-cash stock-based compensation expense, nor has it determined the amount of such expense to be recorded in any specific prior period or in any future period, nor has it determined the tax consequences that may result from these adjustments.

McAfee also expects that expenses arising from the Special Committee’s review, any potential restatement of financial statements and related activities, which will be recorded in the periods incurred, will be significant.

I realize McAfee must exercise fiduciary due diligence and provide early warning to shareholders about any material impact that could result from its independent internal review of past stock-option granting practices. Understood in that context, this SEC amendment is a regulatory necessity, a precautionary measure that the company is obligated to take. It is not a statement of fact, just an update on what is transpiring and what might happen.

Nonetheless, there’s something about the tone and language of this document that suggests McAfee will not escape unscathed. How bad might it be? It could be pretty bad. McAfee has given us fair warning.

F5 Gets NASDAQ Warning, Shares Surge

F5 Networks’ shares surged more than six percent today after NASDAQ warned the company that it faces delisting. Clearly, the delisting notification could not have been the reason for the spike in F5’s share price, so other factors must be at work.

As reported yesterday, NASDAQ regulators warned F5 that it was out of compliance with a rule that requires timely filings with the Securities and Exchange Commission (SEC). Seattle-based F5, a market leader in networking gear that facilitates the delivery and optimization of application traffic, said it would challenge the warning by asking for a hearing before a NASDAQ listing-qualification panel. Until that hearing occurs and a judgment is rendered, F5’s stock will continue to trade on the exchange.

In July, F5 said it would restate earnings for the past five years and delay its latest quarterly filing due to issues with past stock options grants.

The company has reported that an internal review of past stock-option granting practices identified at least one instance where there was a discrepancy between the date on which option grants should have been recorded and the grant date on which the options were improperly filed. To resolve that discrepancy and any others that might emerge, F5 must incur commensurate charges and restate its earnings for the affected periods.

As in the case of Juniper Networks, rumors are buzzing that F5’s option-backdating problems could result in a serious reconfiguration of the personnel in the company’s executive suites. F5 CEO John McAdam is alleged by some to be under careful regulatory scrutiny because of similar issues that arose at Sequent Computer Systems back in the 1990s, when he served as that company’s president and chief operating officer.

While F5 consistently has determinedly steered its own course as an independent player and market leader in application traffic management, a growing drumbeat suggests that the company, under duress from the distraction and uncertainty associated with the stock-option backdating controversy and from renewed competition from Cisco and Citrix (among others), might be receptive to a reasonably priced takeover proposal.

Microsoft had been mentioned as one candidate that might choose to acquire the company, but a more likely candidate might be EMC Corporation, the market-leading storage vendor that has added security technologies to its portfolio and might be interested in the secure data-center and WAN-optimization capabilities that F5 could add to its roster.

One thing is certain: Investors and market makers did not bid up the value of F5’s shares today because they are overjoyed at the company’s receipt of a delisting notification from NASDAQ.

Juniper CEO on Unsteady Ground?

Speculation has intensified in recent days as to whether Juniper Networks’ CEO Scott Kriens, and perhaps other senior executives at the company, will survive the company’s alleged involvement in stock-option backdating infractions.

Analysts at Credit Suisse and American Technology Research are among those who have expressed concerns about whether Kriens will keep his job.

Said Credit Suisse analyst Paul Silverstein:

There may be some risk to the tenure of certain of Juniper’s senior executives — most notably to Juniper’s chief executive and founder (Scott Kriens). . . . “His departure would be a significant negative to the stock.”

Meanwhile, American Technology Research analyst Albert Lin said he stopped coverage of Juniper last week because of a number of uncertainties relating to the company. Lin has said . . .

. . . the stock could move radically on speculation about the ongoing leadership of the company and the ability of the stock to remain listed.

Yesterday Juniper revealed that it had received a delisting notification from NASDAQ. The company had expected to receive the notice because of its inability to file its latest quarterly financial report in a timely manner with the Securities and Exchange Commission (SEC). The number-two router vendor said it will appeal NASDAQ’s move to delist the company; pending that decision, the company’s shares will remain listed on the exchange.

In July, Juniper said it discovered discrepancies in its past stock-option granting practices. Earlier this month, the company announced that, as result of the irregular stock-option grants it found, it will need to restate financial results extending back as far as Jan. 1, 2003.

Meanwhile, Cisco Systems, the number-one vendor in the router market and Juniper’s chief competitor, apprised market analysts and investors that, after a thorough review, it did not identify any problems with the way it accounted for stock-option grants to its executives and employees.

Given Cisco’s improving execution in the router market, and its ability to bundle its routers into extensive video and broadband solutions for service providers and carriers, Juniper cannot afford a major distraction. Even with an undivided focus, it had been losing ground to Cisco.