Technology Hedge-Fund Billionaire Charged with Insider Trading

Raj Rajaratnam, billionaire founder of technology-focused hedge fund Galleon Group, was among six people charged today in a $20-million insider-trading scheme, according to a Bloomberg report.

Among the others arrested were Rajiv Goel, a director of strategic investments at Intel Capital; Anil Kumar, a director at McKinsey & Co.; and IBM Corp. executive Robert Moffat.

Many of the illicit trades were said to involve information-technology companies, including Akamai Technologies Inc., Advanced Micro Devices (AMD) , Polycom, Clearwire, Google, IBM, Sun Microsystems.

Prosecutors called it the largest-ever insider-trading case involving a hedge fund. U.S. Attorney Preet Bharara told a Manhattan press conference it was the first time wiretaps have been used to target insider trading, signaling the government will now use the same tools against Wall Street that it employs in organized crime and drug cases.

It’s long overdue, as far as I’m concerned. Incidents such as this one confirm that public markets have become rigged games where those with advance inside knowledge of material corporate events conspire to enrich themselves at the expense of those who lack access to such information. As trades involve buyers and sellers, those buying or selling with inside information are perpetrating grand larceny.

For a long time now, I have said that the racetracks of Santa Anita and Goodwood offer a better chance of an honest outcome than the public markets of New York and London. Greed is rampant on Wall Street, and it too often runs riot in the boardrooms of the information-technology industry.

Ask yourself: How often have you observed a technology stock whose shares have moved up or down sharply and unaccountably, well in advance of meaningful news? Sadly, it happens all the bloody time.

These individuals deserve their day in court, and it isn’t my place to pass judgment on them. That said, the wiretap evidence cited today appears damning. If they are guilty, I hope they are sent up the river for a good long time.

The integrity of the public markets depends upon the markets being honest and transparent. Justice must be done, and it must be seen to be done.

Advertisement

New Financing Secured, Sony Ericsson Faces Platform Choice

Handset joint-venture Sony Ericsson Mobile Communications Ltd. lost a whopping $245 million in its fiscal third quarter, but the news wasn’t all bad.

Despite registering its fifth consecutive quarterly loss, Sony Ericsson managed to surpass analysts’ expectations for the quarter. What’s more, the company announced that it will receive a financing lifeline of 455 million euros ($678 million), 350 million euros ($521 million) of which will be guaranteed by its parent companies.

With global market share of 5 percent in the just-concluded quarter, the joint venture is betting heavily on the success of new camera-equipped handsets and gaming phones. Sony Ericsson thinks the new mobile phones, which are skewed to Sony’s consumer demographics, will give it a better product mix and higher profit margins.

The company needs a turnaround. In the third quarter, it shipped 14.1 million handsets, a decline of 45 percent compared to unit shipments in the same period last year. Sony Ericsson reiterated its outlook for a 10-percent contraction of the global handset market in 2009, but said the decline in global handset markets is slowing.

As it looks to the year ahead, Sony Ericssson will have some difficult decisions to make about the mobile platforms it supports. New CEO Bert Nordberg said the company is preparing a new strategy. Sony Ericcson currently ships smartphones that run Windows Mobile and Symbian, but it has stated that it will also deliver phones based on Google’s Android.

The thinking, within Sony Ericsson and among the analyst community, is that the company will not continue to support three mobile operating systems on its handsets. Android looks set to become a major platform for the company, which means Symbian or Windows Mobile will be shown the door.

Analysts are divided on which one will get voted off Sony Ericsson’s handset island. I could make a strong case for jettisoning either or both. If I had to make a call, I’d say the company will ditch Symbian, but it could just as easily dump Windows Mobile.

Restructured Dell Needs Improved Focus

I suffered from cognitive dissonance while reading a BusinessWeek feature article on strategic and operational overhauls that are said to have occurred at Dell.

In the article, Michael Dell and a few of his executives stress that the company has gone from being structured around its products to being structured around customers: consumers, corporations, small and midsize businesses, and governments and educational buyers.

That’s commendable. At the end of the day, it’s all about having customers buy products, thereby generating revenue and earnings.

My problem with Dell, though, is that restructuring around customers doesn’t do nearly enough. At one point in the article, David Eiswert, manager of T. Rowe Price’s Global Technology Fund, nails the issue when he explains that he dumped all his Dell shares because the company is overmatched by resource-rich competitors.

Actually, the problem is worse than Eiswert thinks. While he focuses on the PC business, where he says Dell doesn’t spend enough on research and development to create exceptional technology, Dell’s problem extends across all the customer-centric markets in which it hopes to succeed.

Put bluntly, the problem is focus.

Can Dell compete against Apple, Acer, HP, Sony, and scores of others for the allegiance of consumers? I would say no — not to the degree that it can become a top-two player.

That opinion notwithstanding, if Dell is to succeed in the consumer market, it will have to commit far more resources to that effort than it allocates today. It is going up against well-fortified competitors, and, if Dell wants to play to win, it will have to pay to win.

At this point, Dell’s consumer efforts are half-hearted, which is why it is losing PC market share to Acer and HP, and also why it’s Android-based smartphone — a commodity that several handset OEMs will offer — appears dead on arrival.

What about the other customers Dell endeavors to serve?

Let’s start with corporations, also known as enterprises. Again, because it lacks the resources of an IBM, HP, Cisco, or Oracle, it will have to focus keenly on doing a lot more with a lot less.

Where’s the strategy, though? With data-center convergence all the rage, how will Dell fill gaps in its product portfolio that HP, Cisco, IBM, and perhaps even Oracle already have considered and addressed. It’s possible that Dell has something up its sleeve, but how can it fight effectively in this high-maintenance market while simultaneously waging a costly war on the consumer front?

Next up are small and midsize businesses (SMBs) and government and education customers. These are battles Dell can win. The Perot acquisition, if harnessed properly, can give Dell a strong profile in healthcare and government markets. Dell has been doing relatively well in the SMB space, too.

To boost the returns it gets from those customers, however, Dell must hone its focus and make follow-on investments in those market segments. That means following the Perot purchase with technology-related acquisitions that strengthen Dell’s value propositions to healthcare and government customers. It also means that Dell should look at acquiring or developing technologies that reinforce the value it brings to SMBs. These are markets where Dell can lead rather than follow.

That’s not true of the consumer space. I was disappointed to read that Ronald Garriques, head of Dell’s consumer division, seems to be getting so much of Michael Dell’s time and resources. Dell is regressing in the consumer market, losing share to competitors overseas and in North America.

It’s not all Garriques’ fault, obviously. Dell just doesn’t have the DNA to win the consumer fight. The numbers bear that out. I’m not saying Dell should exit that market tomorrow, but I am arguing that Dell ought to consider playing to its strengths rather than to its weaknesses.

As for the enterprise, Dell needs to think long and hard about what’s trying to accomplish. If it’s going to go up against the big boys in the enterprise, it must give customers a compelling reason to choose it over incumbents that have more data-center credibility and a stronger overall product portfolio. It lacks a lot of data-center pieces, and I know it was caught off guard when CIsco got into the server business with its Unified Computing System (UCS).

Dell is a big company, but it’s not as big as many of its competitors in the consumer and enterprise markets. Having restructured itself around customers, Dell must now determine which customers it can serve best.

3Com Not Affiliated with U.S. Ethernet Innovations

(The post below, written on October 16, 2009, has been superseded by a subsequent post that more accurately reflects the existing relationship between 3Com and U.S. Ethernet Innovations — Editor.)

_______________________________________________________________

For the record, following up on previous posts, 3Com is not affiliated with U.S. Ethernet Innovations.

In email correspondence, Gene Skayne, a vice president of finance at 3Com, wrote the following:

US Ethernet is not affiliated with 3Com. We sold them some patents earlier this year.

From the ambiguous statements U.S. Ethernet Innovations has made on its website and in its press releases, one could be forgiven for thinking that the two companies are affiliated.

In a recent Network World news item regarding patent litigation filed against several computer vendors, U.S. Ethernet Innovations is said to own “the patents spun off from 3Com for the sole purpose of launching these sorts of lawsuits. ”

In its press release announcing the lawsuits, U.S. Ethernet Innovations provides the following boilerplate text:

U.S. Ethernet Innovations was formed to continue 3Com Corporation’s successful licensing program on behalf of its portfolio of foundational patents in Ethernet technology.

David A. Kennedy, CEO of U.S. Ethernet Innovations, said:

“We strongly believe that 3Com’s Ethernet technologies are being regularly infringed by foreign and some US companies. We believe that the continued aggressive enforcement of the fundamental ethernet technologies developed by 3Com against the waves of cheap, knock-off, foreign manufactured equipment is a necessary step in protecting the competitiveness of this American technology and American companies in general.”

This flag-waving, ostensibly patriotic approach to patent enforcement and litigation seemed at odds with the constitution and orientation of the 3Com we see today, which is why I am pleased to learn that the enterprise-networking company has nothing to do with U.S. Ethernet Innovations.

3Com, after all, has proudly assumed the mantle of a global company.

According to a feature article published this week on the Forbes website, Robert Mao, 3Com’s CEO, is said to live and work in Beijing. The article also discloses that 52 percent of 3Com’s revenue is derived from sales in China. Further, we learn that nearly all of 3Com’s research and development staff are based in China. With just a 3-percent share of the worldwide enterprise-networking market, 3Com has about a third of the Chinese market, putting it just behind Cisco Systems in that part of the world.

Says 3Com CEO Mao:

“Are we Chinese? Are we American? No. We’re a global company. Ideas, know-how, value can flow every which way.”

Titled “Cisco’s Threat From China,” the Forbes article explains that 3Com is pursuing a “China Out” strategy, using its base in China to expand its sales channels and product portfolio to target markets in the West.

As explained in previous posts I made in this forum, 3Com’s former joint venture with Huawei has been dissolved, and channel revenue in China attributable to Huawei is diminishing rapidly. To make up for lost Huawei business in China, 3Com must grow revenues in North America, Europe, and in developing markets outside China.

The China Out strategy was born of necessity, but that doesn’t make it any less logical. 3Com needs to expand into markets outside China. It must reassert a meaningful market presence in the U.S. and Europe.

Given that many of 3Com’s innovations and technologies today come from its employees in China, I was incredulous at the vague intimations of U.S. Ethernet Innovations regarding a residual relationship between the companies.

In my view, U.S. Ethernet Innovations is suggesting an affiliation with 3Com that does exist. Accordingly, 3Com should insist that U.S. Ethernet Innovations, on its website and in future interactions with trade press and business media, make explicit that it is not, in any way, connected to 3Com.