Daily Archives: October 6, 2009

Ciena Reportedly Offers $550 Million for Nortel MEN Business

Ciena shares were down nearly eight percent today after “a person familiar with the matter” informed Bloomberg that Ciena had offered $550 million for most of Nortel’s Metro Ethernet Networks (MEN) assets.

As Ciena said in a press release yesterday, any agreement would be subject to a competitive bidding process under the United States Bankruptcy Code and the Canadian Companies’ Creditors Arrangement Act.

Today’s information leak, via that “person familiar with the matter,” immediately follows Ciena’s proclamation of interest in Nortel’s MEN assets. The two events seem choreographed to bring competing bidders into the open.

Ciena’s shares fell today because analysts and investors have expressed concern about the company’s capacity to finance and integrate an acquisition of this size.

If Ciena meets competition for Nortel’s MEN assets at auction, it can expect to pay a lot more than $550 million. Most Ciena investors probably would prefer that the company walk away from the table if the sale price escalates much beyond the stated bid. In fact, many Ciena shareholders would prefer that the company extricate itself from the process now, before forking over more than a half-billion dollars.

For now, though, Ciena appears determined to see whether its initial offer, or something similar to it, is enough to close the deal.

Cisco’s Post-Tandberg Acquisitions to Maintain International Flavor

Having just announced its pending $3-billion purchase of Tandberg, the Norway-based videoconferencing specialist, Cisco CEO John Chambers indicated yesterday that additional acquisitions with an international flavor are in his company’s near-term future, according to a Light Reading report.

Given that Cisco has $29 billion in cash overseas, as opposed to $6 billion in the USA, the company’s plans for global expansionism don’t come as a suprise.

As for acquisition targets, Chambers said Cisco wants to become the go-to company in two areas: collaboration and video. If collaboration and video occur together, as with telepresence and videoconferencing, so much the better.

In buying Tandberg and in continuing to look for deals outside Silicon Valley (and outside the USA), Chambers and company are flouting their traditional rule of making acquisitions within close geographic proximity to Cisco’s headquarters in San Jose. It’s a rule they’ve broken before, but not often. Never before, for example, has Cisco made an overseas acquisition the size of the Tandberg deal.

Chambers says the Tandberg deal was a worthy exception, that the cultures of the two companies are compatible and that integration won’t prove problematic. We’ll see. There’s already been talk about which Cisco executives might be sent to Norway to assist Tandberg CEO Fredrik Halvorsen.

Notwithstanding the Tandberg buy, Chambers says he still adheres to his credo of partnering with big companies and buying small ones.

Said the Cisco boss:

“I like the size of the acquisition we just announced, or small startups that have just 100 engineers. In our alliances, you will see us getting tighter with [partners such as] Accenture , EMC Corp., Wipro Ltd…. Large acquisitions just don’t work.”

All the qualitative and quantitative studies on the subject say he’s right. It’s far more difficult to successfully execute and integrate a large acquisition than a small one. The odds of failure rise exponentially with the size of any acquisition.

To recap, then, Cisco’s next acquisition targets are likely to be collaboration or video companies based overseas, most likely in Europe, with 100 or fewer engineers. I’m sure a few VC firms have candidates they would be more than willing to bring to Cisco’s attention.

It’s a good thing Cisco has chosen to look overseas for those buys. As one wag commented at Light Reading, severely constrained VC funding and economic hardship have combined to practically wipe out American startups with that profile.

Missing Gates, Ballmer Plans for Leaner Times

On something of a promotional and publicity tour, Microsoft CEO Steve Ballmer has been giving a lot of interviews recently.

In an interview published online yesterday by the Telegraph, Ballmer said he missed Bill Gates. He’s also nostalgic for better economic times.

Ballmer said current market conditions are”by far” the worst period Microsoft has experienced during his 30 years at the company. He said spending on information technology by businesses has dropped between 15 and 20 percent, with consumer spending also taking a dive.

Ballmer isn’t sanguine about the prospects for a fabled V-shaped recovery, though he admits he’s not an economist. (In my book, that doesn’t disqualify him from rendering an opinion on the downturn. The economists have not exactly proved themselves infallible in their powers of prognostication.)

Said Ballmer of the economy:

“It doesn’t look like things are going to change any time soon, and we’re planning our cost structure on that basis . . . . My theory is that things have come down and I see them staying down and then slowly growing.”

It’s one of the few times Ballmer could be said to agree with Oracle’s Larry Ellison, who also foresees an L-shaped pseudo recovery.

Ballmer says the severity and persistence of the downturn have occasioned “cultural reformation” at Microsoft. What that means, he explained, is that the company is reducing costs about 10 percent, slashing 5,000 jobs this year and next — the first significant layoffs in Microsoft’s history — and is being more selective regarding the investments it makes in markets and products.

He said the search and database businesses will be important to Microsoft’s future success, but he appeared to treat Windows Mobile almost as an afterthought, which might be wise given the critical drubbing Windows Mobile 6.5 has received.

Citing Apple’s iPhone as a successful example of how a pleasing user experience can be created by balancing device intelligence and local storage with cloud-based services, Ballmer estimated that cloud computing will account for about 70 percent of future processing.

Conveniently for Microsoft, that sort of computing model would leave plenty of room in the marketplace for local operating systems, such as Windows, and for hybrid approaches to application delivery, including Microsoft’s Office.

Bad Reviews for Windows Mobile 6.5 Put More Pressure on 7.0

If the latest reviews of Microsoft’s Windows Mobile 6.5 and grumblings about the dark fate of Project Pink are any indication, Microsoft needs Windows Mobile 7.0 to be an out-of-the-park home run when it debuts next year. Even then, Microsoft might have left itself with too much catching up to do, a textbook instance of too little, too late.

It’s a shame, though. While I doubt Microsoft ever could have achieved the consumer-pleasing style and grace of Apple’s iPhone, it seemed well placed for a meaningful mobile challenge to RIM for the favor of enterprise-messaging junkies. Unfortunately, it always missed the mark, with Windows Mobile 6.5 serving as the latest example of how Microsoft has lost ground against its major mobile-platform competitors.

Windows Mobile 7 will be a belated last chance to get back on track. The stakes riding on that version of Microsoft’s mobile operating system will be enormous.

According to market-research firm Gartner, Microsoft’s share of the mobile operating-system market dropped to nine percent in the second quarter. Google’s Android is set to compete more aggressively against the maligned Windows Mobile 6.5 for adoption of handset manufacturers, which means Microsoft figures to lose even more ground before Windows 7 finally makes its commercial debut.

With Windows Mobile 6.5 shaping up as an inadequate stopgap release, one can easily see why Microsoft CEO Steve Ballmer was so frustrated about Windows 7’s late arrival.

Ciena Tries to Flush Nortel MEN Bidders Into the Open

Yesterday Ciena finally tipped its hand, confirming that it is in “advanced discussions to acquire substantially all of the optical networking and carrier Ethernet assets of Nortel’s Metro Ethernet Networks (MEN) business.”

Said Ciena in a press release:

The outcome of these discussions is uncertain and subject to negotiation of definitive agreements. Any agreements would be subject to a competitive bidding process under the United States Bankruptcy Code and the Canadian Companies’ Creditors Arrangement Act.

In formally and publicly declaring its interest, Ciena is attempting to flush any competing bidders into the open.

Although insolvent Nortel already has sold its wireless and enterprise assets at auction, having no more than minor difficulty attracting bidders for those properties, the company has met unanticipated challenges in flogging its MEN business.

Andy Woyzbun, a lead analyst at Info-Tech Research Group, points out that Nortel had been attempting to sell its MEN assets before it sought refuge in bankruptcy protection. Many observers anticipated that the MEN assets would go to auction before Nortel’s other businesses, but that wasn’t the case.

Said Woyzbun:

“The fact that it was the first that they wanted to sell, but the last to generate some interest indicates what the market felt the opportunity was for a third party to take over.”

Indeed, analyst estimates diverge sharply regarding the ultimate value of Nortel’s MEN business. Estimates on what Nortel is likely to get for the unit range from $450 million to as much as $1.5 billion. As reported by the Ottawa Citizen, the Nortel division had sales of US$1.8 billion last year and employs about 1,500 people. Revenue in the second quarter fell 27 percent to $333 million.

At one time, Nortel’s MEN assets were regarded as the company’s crown jewels, but market dynamics and technological advances by competitors have taken some shine off the jewelry.

DSAM Consulting Duncan Stewart thinks Nortel could get as much as $1 billion for the MEN assets. Of the Ciena announcement, Stewart said the following:

“Twice now we’ve seen a stalking-horse bid where somebody essentially, like at an auction, puts in a reserve or a minimum bid . . . . The issue here is we have no idea what the floor is and I don’t actually know if that means this is going to be a less competitive bidding process than the other two were or perhaps a more competitive one.

“Perhaps the reason Ciena has not announced a dollar amount . . . is that they don’t want to tip their hand.”

That could be true. However, in announcing its interest, Ciena is publicly challenging other bidders to come forward. The company’s braintrust probably believes that it doesn’t face much competition, in which case it should be able to get the assets at a bargain price.

Some analysts think Ciena needs to be disciplined about what it is willing to spend for Nortel’s MEN business. They can see how potential synergies can justify an acquisition price of $450 million to $650 million, but they would be highly critical of Ciena paying $1 billion or more.

Mark Sue, managing director of RBC Capital Markets, thinks the price of Nortel’s MEN business “peaked at $650M and may have now settled near $450M.” He believes Ciena can justify paying a price at the lower end of that range — and can structure a deal to support it — but he admonishes the company to avoid the “winner’s curse” of overpaying for the privilege of owning the asset.

With annual revenue of about $650 million, Ciena operates at a net loss. It had had 2,203 employees at the end of 2008, though it has shed some since then. Interestingly, as a result of previous acquisitions, Ciena already has engineering operations in the Ottawa area where a large percentage of Nortel’s MEN personnel is based.

Origins and Implications of Cisco’s Overseas Cash Hoard

When Cisco announced its acquisition of Tandberg, it indicated that it had nearly $29 billion of its cash overseas and only about $6 billion in the USA. In light of that ongoing discrepancy between Cisco’s foreign and domestic cash positions, we should expect Cisco to make a greater proportion of its subsequent acquisitions abroad as opposed to in America.

Still, how did Cisco, a company that creates so much of its valuable intellectual property in the USA, end up with so much of its cash overseas? Taxation and the lack thereof are the answers.

Corporate taxes are higher in the USA than in other parts of the world. Cisco sets up subsidiaries all around the world, taking care to structure these subsidiaries so that corporate-wide earnings can be ascribed to subsidiaries in low-tax havens. Cisco can then attempt to repatriate funds to its US-based headquarters.

The problem is, the government looks askance at this practice. The government taxes these repatriated funds, including Cisco’s. In this particular instance, John Chambers and Cisco’s bean-counters have refused to repatriate overseas cash holdings as long as they’ll be taxed on them. The government has held firm, so Cisco looks for acquisitions abroad rather than repatriating its money.

I was resisting the urge to wade into this particular ethical morass, but I’m already hip deep, so let’s take the plunge. Is what Cisco is doing right? Is the government right?

Cisco is blaming the government for refusing to allow it repatriate its overseas cash, but Cisco deserves most of the blame for this predicament. Just because something is legal doesn’t mean it is ethical. In our society, we increasingly lose sight of that important distinction, with increasingly disastrous socio-economic results. Noblesse oblige and enlightened self-interest have become archaic concepts.

Even now, as Cisco shifts jobs from the USA to India and China, most of its value-giving intellectual property is created in the USA. That’s also where Cisco’s headquarters, and the heart of its operational base, is located. Is it right for Cisco to play a shell game with subsidiaries in low-tax havens so that it can avoid paying its “fair share” of US taxes?

Furthermore, is it ethically right for Cisco to then claim that the US government should accord it a tax holiday so that it can repatriate funds that were, in reality, generated primarily from the USA anyway? Cisco wants it both ways, coming and going, all the while transferring jobs to foreign countries.

Meanwhile, John Chambers — whose fiduciary responsibility is to Cisco’s shareholders, not to the US government or to its citizens — blames punitive US tax policies for preventing him from repatriating Cisco’s cash. (Business-minded readers will cavil that I am stating the obvious in pointing out that Chambers answers to Cisco shareholders, not to the US government or its citizens. I agree. My point is that Chambers cannot play uber patriot while acting as shareholder champion. The two roles are not necessarily compatible. Sometimes, in acting in the shareholders’ interest, Chambers’ policies and objectives will run counter to broadly considered American interests.)

The government isn’t perfect, folks, but Cisco has some questions to answer here. Cisco isn’t guilty of any crimes, but we don’t need lawyers to render verdicts in the court of ethical conduct.

Cisco might say: “Well, everybody does it.” As barristers in the UK like to say, that argument might serve to explain questionable conduct, but it does not serve to excuse it.

There are real consequences to this situation, and not only for Cisco. At a time when exit opportunities are few and far between for technology startup companies that can no longer depend on IPOs, Cisco effectively has signaled that it will be looking outside the USA for acquisitions in the foreseeable future. At least in the near term, VCs will know that US-based startup companies are less likely to attract Cisco’s acquisitive gaze. That’s one more reason to shift investments abroad.

Since Cisco traditionally has been a huge force on the buy side of the M&A equation in Silicon Valley and beyond, the implications could be quite significant.

Cisco would like to buy American companies, of course. It doesn’t want to be restricted in how and where it can spend its cash hoard. Then again, Cisco isn’t really the victim here, and it isn’t truly restricted from repatriating its overseas cash. It just doesn’t like the terms the government is offering.

Look, Cisco knew it what it was doing, and it knew all the corresponding tax laws when it set up its overseas subsidiaries. This is a problem that Cisco created for itself. It’s more than a little disingenuous for Cisco to be pointing the finger of blame elsewhere.