Daily Archives: November 3, 2009

Reported Skype Settlement Sees Founders Taking Ownership Stake; Index Ventures Out

The battle between the founders of Skype, its current owners (eBay), and others who wish to own it will reportedly reach its end in a negotiated agreement.

So says the New York Times. Before the Times published its report, Om Malik also reported that a settlement might be in the works.

Several people briefed on the situation told the Times that the proposed settlement will be struck between a consortium of investors, who successfully bid for Skype in September, and the original founders of Skype — Niklas Zennstrom and Janus Friis — who filed a fusillade of lawsuits in an effort to derail the consortium’s $1.9-billion deal to buy 65 percent of Skype from eBay.

The settlement mooted by the Times’ sources would restructure the consortium buying Skype, with Zennstrom and Friis, who created Skype and sold it to eBay in 2005, taking a significant interest in the p2p communication company they founded. (Back in September, I wrote about a potential settlement along these very lines.)

Apparently withdrawing from the deal — doubtless at the strong insistence of Zennstrom and Friis — will be Index Ventures, a London-based venture capital firm whose partner, Mike Volpi, formerly served as CEO and chairman of Joost, a video-sharing firm also founded by Zennstrom and Friis.

This is where the tale gets tangled and sordid, and where it requires some expository backtracking.

A phalanx of intellectual-property disputes and lawsuits relating to software technology licensed to Skype by Joltid — a company controlled, again, by Zennstrom and Friis — was designed to prevent eBay from completing the $1.9-billion sale of a 65-percent interest in Skype to a group of investors that includes Index Ventures, private-equity firm Silver Lake, venture-capital firm Andreessen Horowitz, and the Canada Pension Plan Investment Board.

But there’s an additional subtext to this byzantine story. It involves Volpi, a former Cisco executive who was involved in a great many of the networking giant’s acquisitions through the late 90s and into the current decade. In 2007, Volpi left Cisco to take the helm at Joost, a video-sharing business built atop some of the same software technology that provided the p2p architectural foundations for Skype and Zennstrom and Friis’ earlier companies, including file-sharing trailblazer Kazaa.

What transpired at Joost is key to understanding the intense antagonism between the principals involved in the fight for Skype.

At some point, as Joost struggled to gain ground against established video-distribution websites, Volpi turned his attention to Skype. In February of this year, while he was serving as CEO and chairman of Joost, Volpi began email correspondence with Danny Rimer of Index Ventures — the VC firm Volpi would later join — regarding a scheme to take control of Skype in conjunction with private-equity firm SIlver Lake and others. To make matters worse, Volpi wrote the correspondence using his email account at Joost.

In a motion for a preliminary injunction as well as in a preceding lawsuit, Jotid and Joost accused Volpi of a veritable panoply of chicanery and outright malfeasance. Regarding the investment-consortium’s bid to take majority control of Skype, the plaintiffs charged that “the entire transaction is . . . . infected with Volpi’s misconduct.”

With Volpi having used his Joost account for email correspondence regarding Skype, the Joost and Joltid plaintiffs produced Volpi’s email messages and other documentation to support their injunction demands.

Not only did Volpi discuss a Skype takeover with his future colleague at Index Ventures while he was still at Joost, but Volpi also made critical, even disparaging, comments about prospective deal partners (including former Cisco colleague Charlie Giancarlo) and about his employers, Zennstrom and Friis.

Regarding Giancarlo, Volpi wrote:

“Charlie is a good guy, but not a superstar . . . . His core asset at Cisco is (sic) that he was much more inclined to say “yes” to John (Chambers, Cisco’s CEO) than I was.”

In those email messages, Volpi also discussed how Skype could change its underlying software architecture to obviate the intellectual-property claims related to Joltid and its p2p software.

The entire saga may have done irreparable damage to Volpi’s previously stellar professional reputation. In a column published originally on October 31, the San Jose Mercury News’ Chris O’Brien wrote:

Even if we give Volpi the benefit of the doubt and assume he prevails on the legal issues, his actions and behavior are likely to put a considerable dent in his reputation. It may be hard to predict who will be the winner in these legal cases, but it’s clear that Volpi is the early loser.

If the New York Times report proves accurate, the epilogue of this story will be worth following.

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Cisco Acquisition Targets China’s Set-Top Box Market

Cisco’s acquisition of the set-top box business belonging to Hong Kong-based DVN (Holdings) Limited drew considerable media coverage earlier today.

The deal will see Cisco part with $44.5 million of its cash hoard, with $17.5 million to be paid up front and a maximum of $27 million to be paid in the ensuing four years. Cisco expects the transaction to close in the first half of the 2010 calendar year.

As part of the deal, Cisco will strike a go-to-market partnership with what remains of DVN. The latter company will provide Cisco and its Chinese set-top box customers with middleware, advanced applications, and integration and support services.

It’s a relatively small financial transaction for Cisco, but the Chinese set-top market is large and growing. China has the largest cable market in the world, with 160 million subscribers today and projections of more than 200 million in the next three to five years.

Sales of set-top boxes are growing fast in the country. Research firm In-Stat expects a record 20 million cable set-top boxes to ship in China this year. China’s government has mandated that all subscribers adopt digital set-top boxes by 2015. While Cisco and Motorola are the world’s top two makers of the devices, another six of the top ten companies are Chinese (including Huawei Technologies), according to In-Stat.

Upon completion of the transaction, the DVN set-top box business will become a part of the International Cable Business Unit within the Service Provider Video Technology Group (SPVTG) at Cisco. That group is led by Ken Klaer.

In an email message to InternetNews.com, Klaer made the following comments regarding the acquisition:

“The set-top box business of DVN provides a strong product offering, market-leading R&D organization, and established sales force serving over 70 cable operators across China, which positions Cisco to capture a share of the expected transition of over 80 million households to digital cable over the next four years. DVN’s set-top box business will give Cisco a platform to introduce advanced set-top and other cable- and media-enabled home solutions into the China market as it matures.”

Cisco bought a set-top box market leader, Scientific Atlanta, for $6.9 billion in 2005, and it’s likely a lot of Scientific Atlanta’s technology will be incorporated into future products Cisco takes into the Chinese market.

Although localization isn’t the only value the set-top box business of DVN will deliver for Cisco, it will be among its deliverables.

Hilton Romanski, vice president of corporate development for Cisco, says Cisco will continue to be active in China:

“We’re going to continue to invest both equity as well as venture capital funding into the Chinese market … and we’ll continue to look for interesting acquisition opportunities as well.”

Cisco Takes Harder LIne with Dissident Tandberg Shareholders

At this point, only those within Cisco’s inner sanctum know whether the company will stick to its guns and refuse to negotiate with dissident Tandberg shareholders who stand in the way of the networking giant’s $3-billion acquisition of the Norway-based videoconferencing-systems vendor.

The latest salvo in the gamesmanship standoff was fired in a blog post from Ned Hooper, chief strategy officer and senior vice president of the consumer business at Cisco. Seeming a bit peeved at “significant speculation and rumor in the media” regarding Cisco’s pending offer to acquire Tandberg, Hooper seized the moment to stress that there are risks, as well as rewards, associated with a Cisco acquisition of Tandberg.

Hooper makes his case by first asserting that Cisco made a fair offer for Tandberg. Then, he cites the risks associated with the deal, including integration of a large European public company — unprecedented for Cisco — as well as the “overall integration complexity associated with engineering and sales spread across both Norway and the UK.” Another risk he mentions are onerous currency-exchange rates.

He then puts these cards on the table:

The bottom line is that Cisco will always act with fiscal prudence. The collaboration market is a $34 billion dollar opportunity where voice is currently the largest application. We believe that video will become the core of the collaboration market, but, it will require substantial innovation and investment to drive this market transition. We’ve already seen increased competition for the traditional video players in the market, as broad based collaboration vendors increasingly focus on video. For all these reasons we believe the time is right for Cisco and Tandberg to come together to help accelerate global adoption of collaboration technology through interoperable, standards-based products. However, no acquisition should be pursued or completed if it runs counter to the broader principles of prudence and financial fairness.

Given all the speculative “noise” last week, I wanted to take the time to reiterate these points because it is important to me, and to Cisco, that all of our stakeholders understand our position as we near the end of the offer period.

Did you notice the none-too-subtle intimation Hooper dropped into his statement? It’s contained in one word: voice. Although he includes the word within the context of pointing out Cisco believes video will become the core of a collaboration market that represents a $34-billion opportunity, he says “voice is currently the largest application.”

Well — hey, now! — which vendor does video- and voice-based collaboration and is one of the leaders in the videoconferencing-systems market? Hint: It isn’t Tandberg. It’s Polycom.

Is Cisco willing to drop Tandberg like a bag of rotting spuds and run toward Polycom? Probably not, but one never knows — which is why Hooper interjected the voice dimension into his online epistle to Tandberg’s holdout shareholders. Whether one wants to deem it a veiled threat or a blunt statement of fact, Hooper has implicitly suggested a new alternative for Cisco to pursue if Tandberg’s refusenik shareholders continue to block the deal.

Just to recap, the rebellious shareholders own about 24 percent of Tandberg’s stock. To close the deal, Cisco requires that 90 percent of Tandberg’s shares be tendered at the proposed per-share offer price on our before November 9.

To put this in perspective, some of the disgruntled Tandberg shareholders have said a slightly higher Cisco bid — perhaps adding $300 million or $400 million to the current offer — will be enough to win their support.

Many wonder why Cisco doesn’t just quietly sweeten the offer a bit to get the deal done. It now seems to be about precedent, specifically the precedent of Cisco getting squeezed by recalcitrant shareholders in a company it seeks to acquire. Cisco is probably saying to itself: “If we do this for Tandberg, we’ll have to do it for everybody.” It is a dangerous precedent, and one can understand why CIsco would play hardball.

What happens now? Well, Cisco’s stance is clear. It has taken a hardline negotiating position — which is to say it isn’t negotiating at all — and it’s up to Tandberg’s dissident shareholders to respond.

Cisco could simply boost its offer modestly to close this deal, and that still might be what happens before this saga is done, but it apparently has taken stock of the situation and determined that it can do without that sort of precedent. Cisco also seems to be confident that it can intimidate the Tandberg mutineers into submission.

Cisco has signaled that it has options, whereas Tandberg’s options are less obvious. Cisco, at least theoretically, could drop its Tandberg offer and make a pitch for Polycom, while Tandberg doesn’t have a white-knight acquirer waiting in the wings. If Cisco’s drops its bid, Tandberg’s only recourse would be to continue as the independent company it is today.

Will Tandberg’s dissident shareholders stand firm in their demand for a sweetened deal? If they do, they had better be sure Cisco is bluffing.

Nokia Siemens to Slash Payroll, Restructure

After pondering what to do with their wayward joint-venture stepchild, Nokia and Siemens apparently have chosen to retrench and then move forward rather than to abandon the project entirely through divestiture.

As reported this morning by several newswires and others, Nokia-Siemens Networks will lay off up to 5,700 workers globally as part of a move to cut annual costs by euro500 million ($740 million) by 2011.

The provider of wireless-network infrastructure also will realign its operations into three business units from five, effective Jan. 1, and will seek to strengthen its business through partnerships and acquisitions.

Nokia Siemens Networks also will target annual cost reductions in product and service procurement costs.

Regarding the changes, the company said the following in a statement:

“Despite having fully achieved the original merger integration savings objectives of Nokia Siemens Networks, changes in the global economy and competitive environment make further cost reductions necessary.”

Challenging market conditions and intensifying competition from Chinese vendors Huawei and ZTE have been a difficult combination for all the major European telecommunications-equipment players, including Ericsson, Alcatel-Lucent, and Nokia Siemens Networks.