Daily Archives: August 19, 2009

Former Brocade CEO Greg Reyes Exonerated of Options Backdating

Since few others are inclined to provide the service for me, I sometimes feel compelled to pat myself on the back for having managed to get something right every now and again.

Admittedly, as I get older, I’ll probably conduct those self-congratulatory exercises more figuratively than physically, if only to avoid arthritic discomfort. Nonetheless, the practice gives me a fleeting sense of accomplishment and a reassuring confirmation that my powers of observation haven’t gone entirely to seed just yet.

So it was with a measure of satisfaction that I read Peter Burrows’ BusinessWeek piece on the exoneration of Greg Reyes, the former Brocade Communications CEO prosecuted for allegedly defrauding shareholders between 2000 and 2004 by regularly altering the grant dates (otherwise known as backdating) of stock options awarded to employees. He also had been accused of falsifying documents to cover up the scheme.

Here’s an excerpt of what I wrote about that particular backdating saga way back on July 9, 2007:

I am no legal expert, not even close, but I toiled professionally in the information-technology industry during the period in question. As such, I can tell you that what the defense is saying has more than a ring of truth to it. There was intense competition to sign and retain executive, managerial, and engineering talent during the frothiest years of the boom, and it was not unusual for the egos and remuneration packages of existing and prospective employees to expand dizzily during the height of the frenzy. For the best and the brightest talent on the market, it was as close to being a cosseted professional athlete as geeks would get. Ahh, those were the halcyon days.

Of course, for the vendors, such as Brocade in the storage-networking market, that meant having to make increasingly aggressive compensation offers to keep and attract top personnel. At the time, vendors really did believe that making such aggressive offers, which might include the practice now commonly understood as stock-option backdating, was in the competitive interest of the company and in the long-term interest of shareholders. It was endemic behavior. There was madness in the air, and nearly everybody contracted the contagion.

Yes, I would not be surprised in the least to see the case dismissed and Mr. Reyes go free.

Well, the case wasn’t dismissed, but Reyes eventually was exonerated, which belatedly clears his name. It turns out that Reyes might have been thrown under the bus by his own colleagues and company. I wish him luck as he leaves it all behind.

And, yes, it does feel strange quoting my own commentary. I feel like a professional athlete or an entertainer who habitually, and rather disturbingly, refers to himself in the third person. I promise not to do it too often.

More Layoffs at HP ProCurve?

I have received unconfirmed reports of layoffs at HP’s ProCurve Networking business.

I don’t know whether these layoffs are related to those reported earlier this year or represent an entirely new development. Clarification from HP or from those affected would be appreciated.

What Happens to Tech if Consumer Spending Doesn’t Rebound?

What happens to Silicon Valley, and to the technology world in general, if consumer spending doesn’t bounce back?

Despite hopeful pronouncements from economists and business media about a nascent economic recovery, American retailers still confront tapped-out consumers reluctant to spend the meager discretionary income they have at their disposal.

When they’re not being optimistic, economists will inform you that consumers account for 70 percent of expenditures in the US economy. In other western economies, the percentage of consumer spending is closer to 65%, which is still a lot.

Think intently about that reduced retail spending and consider that it might persist for a long, long time.

I hate to be the bearer of bad news — in certain societies, that distinction can occasion nothing but grief — but we’re not in a standard, factory-issue recession.

There’s something bigger happening here, and not everybody has recognized it, though consumers, to their credit, haven’t bought the blandishments from on high that it’s okay to go back to the free-spending habits that contributed to (but did not create) the bubbles of yore.

For years, the world worked on the basis of US consumption of Chinese-manufactured goods. The Chinese would underwrite that consumption by buying US treasuries. Banks kept the party going by extending cheap credit to everybody that needed it and many that didn’t. The party seemed as though it would go on forever.

But nothing lasts forever, as Roxy Music told us in “The Same Old Scene.” Even credit-fueled bubbles end, it turns out. And, as at the conclusion of many parties, nearly everybody wakes up the next day with a severe hangover.

American consumers cannot keep the party going. They are financially strapped, with less income than they had before, less job security, reduced-value assets in the form of securities and real estate (including their depreciated homes).

Credit doesn’t come easily anymore, either. Banks have become more stringent in lending policies. Even if many consumers wanted to spend, they wouldn’t be able to get the money to do so.

As noted above, this situation will be with us for a long time.

Here’s a question to ponder: With the US consumer no longer able to fuel economic growth with his spending — and with European consumers unlikely to pick up the slack — who’s going to buy all the goods that manufacturers will churn out to restock depleted inventories?

For the time being, it won’t be Chinese consumers. They’re not ready to take the baton. Even as they gradually assume that mantle, they’ll be inclined to buy Chinese-made goods rather than those made in America or Europe.

So, we find ourselves in an uncomfortable global economic transition, not a typical recession. We live in interesting times, and, as the Chinese proverb suggests, that’s not always a good thing.

What does it mean for the Valley and for information technology? It probably means all bets are off regarding a revival of IPOs on a grand scale. It probably means venture-capital spending will remain depressed and highly selective. It also means exits, even by acquisition, will be few and far between.

What’s more, many Web 2.0 companies predicated on robust spending by the American consumer will become lost causes. Paid content directed at consumers also will fail. (Hear that, Rupert Murdoch?) Consumers will be able to pay for their Internet connections, but they won’t have enough spare change to spend on for-pay online news content.

As unfulfilling as they have been for countless content purveyors, advertising-based business models will be the only game in Web 2.0 town. Consumers won’t have the discretionary income to spend on content. Regrettably, advertising spending will be constrained by the diminished pay off from enervated consumer spending.

It’s a world of diminished expectations.

There’s always opportunity, though, and one that I definitely see ahead is for anything that helps businesses and consumers cut costs, become more efficient, and do more with less. Just as so many technology companies have been slashing costs, often by jettisoning employees, consumers will be looking to reduce their overheads, too.

For the time being, as top-line fortunes recede from immediate view, the world will become all about reduction of operating expenditures.

Cost-Cutting Sonus Ponders Bid for Nortel VoIP

Even as it dumps employees in the USA and ramps up its lower-cost operations in India, Sonus reportedly is interested in pursuing Nortel’s carrier VoIP assets.

It makes sense, if only from a market-consolidation angle. Sonus could benefit from buying the accounts and pushing its own products into them. It would also benefit from gaining Nortel’s VoIP technologies, but not as much as some observers suppose.

Not surprisingly, price will be a critical determinant in whether Sonus’ ardor for Nortel’s VoIP assets will remain passionately hot or will go as cold as an investment banker’s heart.

I have read reports and heard scuttlebutt that Nortel’s VoIP assets might go at court-ordered auction for as much as $1 billion. Perhaps that’s just tremendously wishful thinking from Nortel’s stakeholders. Regardless of provenance, that sort of speculation should give Sonus pause. The company should not, and probably will not, pay such a prohibitive price.

If you read the transcript of Sonus’ recent conference call with investment analysts, you’ll see more ambiguity, evasion, and misdirection than you’d find in good murder-mystery novel. The company is struggling to remain foremost of mind with many of its carrier customers, and many of those customers aren’t as financially healthy as they’ve been in years past.

Those circumstances explain why Sonus is cutting staff and transferring engineering work to India, where it can benefit from lower costs.

With that in mind, can Sonus really afford to splash out relatively big money for a piece of Nortel that won’t give it a lasting game-changing advantage?

Dell’s Listless Smartphone Debut

I can see why Dell wants to enter the smartphone market. The reasons are obvious: The market segment, unlike so many others in information technology, is growing robustly, and it offers relatively big margins to vendors that can differentiate their products from the pack.

What I don’t understand is why Dell’s initial foray into the market, as represented by the Dell mini3i for China Mobile, is so diffident and tentative. Dell isn’t entering the market with confidence and determination. Instead, it appears to be cautiously dipping its toes into the market waters, as inclined to return to its PC shed on the shores as to jump in and commit to the new venture.

Nothing about this first handset will create expectant buzz among consumers in China or elsewhere. It’s an undistinguished entrant, and it is easy to understand now why wireless operators in North America and Europe reportedly were indifferent to a smartphone Dell was said to have demonstrated for them a few months ago.

Maybe it’s unfair to expect design sparkle and aesthetic elegance from a Dell product. The company made its bones on bringing standardized products, such as PCs and file servers, to market cheaply and efficiently, not on redefining market segments or defining new ones with innovative features and unique product design.

Still, Dell must know that if it desires the market share and margins that the smartphone realm offers, it must do more than follow its standard formula of churning out me-too products at lower costs.

Or is that Dell’s game here? Does it think that the market will cleave into a high-end elite represented by Apple, RIM, and perhaps Palm (though I’m not convinced Palm is a confirmed long-term stayer) at the top and a welter of bargain-priced, lower-end vendors — employing commoditized operating systems such as Google’s Android and Microsoft Windows Mobile — competing for the affections of those who can’t afford or are disinclined to pay for higher-end alternatives?

If that’s Dell’s plan, how it defines itself as a player in the smartphone market, it can perhaps hope to ride some of the market’s growth, but it won’t be feasting on attractive margins. It will just be boxing itself into the same role it has played in the PC market, but with dimmer prospects for meaningful success.