Daily Archives: November 10, 2009

Ciena Acquisition Bid Approved, but Nortel Postpones MEN Auction

Even though Ciena has received regulatory clearance to proceed with its proposed acquisition of insolvent Nortel Networks’ Metro Ethernet Networks (MEN) business assets for approximately $515 million in cash and stock, Nortel has deferred the bankruptcy-auction process in the hope that another bidder will emerge.

Bids were due yesterday for Nortel’s MEN assets, but Bloomberg reports that Nortel has extended the deadline by as many as five business days.

Clearly Nortel’s creditors believe, or hope, another bidder can be coaxed from the wings.

Murmurs surfaced last week that Nokia Siemens Networks (NSN) might take a run at Nortel’s MEN assets, but, as far as we know, the Finnish-German joint venture hasn’t thrown its binational hat into the auction ring. At one point, before NSN was said to be prepared to bid for Nortel’s MEN assets, reports circulated that Siemens, and perhaps even Nokia, wanted out of the joint venture entirely, discouraged by abstemious telecommunications spending and intensifying competition from rising Chinese vendors Huawei and ZTE.

Ciena’s stalking-horse bid, submitted last month, included $390 million in cash and 10 million shares of common stock. When Ciena first tendered its bid, its offer was worth approximately $521 million, but the value has declined slightly in the interim due to the fluctuating value of the company’s shares.

Until now, Nortel has sought cold hard cash for its business assets auctioned off under bankruptcy protection. It got $1.13 billion from Ericsson for its wireless assets and $915 million from Avaya for its enterprise business, though the latter transaction must pass an ongoing review by the Canadian government.

When CIena’s stalking-horse bid included stock, many observers felt it was a sign that Nortel didn’t expect heated competition for its MEN assets, which at one time were viewed as the company’s “crown jewels.”

Those jewels apparently are tarnished, because it’s becoming clear that Nortel is having to pull out all the stops — and then some — to persuade another party to join Ciena at the auction table.

The lack of competing bids has been good news for CIena, which was warned by analysts, including Mark Sue of RBC Markets, not to fall victim to the “winner’s curse” of overbidding to claim ownership of an asset.

Perhaps Nortel’s creditors have reason to believe another bidder is almost ready to declare interest, or maybe they’re just hoping one materializes. Whatever the case, the situation will be resolved soon enough.

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Cisco’s Pointless Procrastination in Tandberg Deal

Cisco continues to behave curiously in its ambivalent takeover bid for videoconferencing-systems vendor Tandberg.

Cisco announced yesterday that it would extend its current $3-billion offer, valued at 153.50 Norwegian kroner per Tandberg share, until 5:30 pm CET (1630 GMT) on November 18. If, by that time, Cisco has not received tenders for 90 percent of Tandberg’s shares, the deal cannot proceed and Cisco will have to make its next move. Cisco has said repeatedly that it might just step away from the table and abandon the deal.

As of today, Tandberg stockholders have tendered only about 9.3 percent of the Norwegian company’s shares to Cisco at terms pursuant to the existing offer. That means more than 90 percent of Tandberg shareholders are holding back. A bloc in possession of about 30 percent of Tandberg’s shares is steadfastly opposed to the deal. That group has asked Cisco to produce a sweetened bid of at least 170 kroner per share.

Considering the arithmetic and the entrenched group dynamics, Cisco must know that the existing proposal will not win the necessary approval in the next eight days. A monkey with an abacus could figure that out.

All of which leads to an obvious question: Why has Cisco chosen to wait another eight days before it takes action? I’m not seeing method in the madness. What I am seeing is muddle.

Dissident Tandberg shareholders will hold their ground, demanding a higher bid from Cisco. There are enough of those naysayers to torpedo the acquisition at the proposed price. Cisco can either raise the bid enough to get the deal done, even though the precedent of doing so is unappealing, or it can walk away and forget about it.

Extending the current offer seems pointless. It gives the appearance that Cisco isn’t sure what to do, that it got caught off guard by everything that has happened since it announced the proposed acquisition early last month. If that’s true, Cisco has nobody but itself to blame.

Before it made this offer, it should have known whether it had the necessary support among Tandberg shareholders to close the deal. It’s baffling that Cisco staggered down this cul de sac, and it is even more astounding that it can’t find its way out.

Nothing is likely to change in the next week, and letting this stalled deal twist in the wind indefinitely will help neither Cisco nor Tandberg.

Cisco should realize that Tandberg is based in Norway, nor Denmark. Hamlet might have procrastinated in these circumstances, but Cisco should know whether it wishes to buy or not to buy.

Oracle and EC Positions Harden in Wake of Statement of Objections

Now that the European Commission (EC) has issued a formal statement of objections to Oracle’s proposed acquisition of Sun Microsystems for $7.4 billion, misdirected debates will ensue on multiple fronts.

We could argue all day about what ought to happen, what should happen, but it doesn’t matter. What we think is irrelevant to this process and to the ultimate disposition of Oracle’s bid for Sun.

What matters now are two things: the adamancy of the EC’s opposition to Oracle’s Sun acquisition, which turns on competitive concerns about the former’s ownership of MySQL in the database market; and how Oracle responds to that opposition.

Given the unusually prompt and surprisingly vituperative counterattack that an EC official delivered in the wake of Oracle’s disdainful reply to the European regulatory body’s statement of objections, I don’t think we should count on the EC to suddenly back down after seeing the sweet light of reason in Oracle’s argumentation.

So far, we are not seeing the two sides angle toward a compromise or reconciliation. If anything, they’re heading in the other direction, hardening their respective positions and digging in for a protracted battle.

Initially, when Oracle first announced its bid for Sun, we didn’t see much discussion of MySQL as a deal consideration. Some analysts had estimated that MySQL accounted for about $300 million in revenue in its last fiscal year. That might not seem like a huge amount, but remember that MySQL is doing well in database-management markets that are growing fast – those in developing countries such as China, India, Southeast Asia, Eastern Europe, and Latin America.

Bear in mind, too, that Oracle isn’t a major player in those markets. Its flagship database software is too expensive to compete in cost-sensitive markets where many businesses are at earlier stages of development than their counterparts in mature economies. In that context, one can see that Oracle views MySQL as a ticket to growth in a world where growth has become harder to attain. What’s more, MySQL gives Oracle a competitive entry in those high-growth markets against its longtime nemesis Microsoft and that vendor’s Microsoft SQL Server.

Does Oracle want to give up MySQL and leave behind an opportunity to gain share, revenue, and profitability in growth markets where it currently isn’t prospering against its longtime adversary? In a word, no.

Oracle wants MySQL. It doesn’t view the open-source database as incidental to its acquisition of Sun. Instead, Oracle sees MySQL as an essential asset, one it very much wants to own.

Look at it this way: Anything Oracle would cobble together with Sun’s hardware and other software for a data-center convergence battle against IBM, HP, and Cisco would confront prolonged, stiff competition in a war of attrition for consolidation spoils in mature data centers. That’s a war with waging, yes, but it’s one Oracle isn’t certain to win, and Larry Ellison and his team know it.

Meanwhile, MySQL represents an attractive, high-probability hedge against the more speculative data-center initiative. Unlike Sun in the data center, MySQL is on the ascent in the developing world’s database-management markets. It’s number one or two already in some key high-growth jurisdictions, and Oracle – with its ample resources and prodigious sales machine – could drive even greater returns. MySQL’s market opportunity isn’t as big as the one associated with the data-center push, but it’s probability of return is higher. Oracle knows it, too.

So, Oracle won’t let go, and the European Commission is spoiling for a fight. I’m not sure why Oracle went into street-fighting mode, but its truculent stance seems unlikely to persuade the EC to reconsider its position. Increasingly, it seems the EC will only be appeased if Sun consents to divest MySQL before or concurrent with the Sun acquisition.

What’s likely to happen now is that Oracle basically will object to the statement of objections. With no softening or surrender likely in the positions or the EC and Oracle, the current impasse is likely to lead to a formal rejection of the deal by the EC. According to a piece in the Wall Street Journal, here’s how that process would look:

The European Commission is due to make a final ruling on the deal by Jan. 19. Oracle could appeal if the EU ends up blocking the acquisition. In that event, the case would head to trial, and the process could drag on for months or even years, said Bert Foer, president of the American Antitrust Institute, a nonprofit group that isn’t affiliated with the case.

All the while, Sun’s asset value will depreciate. Oracle already says Sun is losing approximately $100 million per month as this acquisition’s approval is delayed.

Would Oracle just pull the plug and walk away, invoking a $260-million breakup fee? The consensus is that Oracle isn’t leaning in that direction. That, in and of itself, tells you how much Oracle wants this deal to go through, and it also tells you that MySQL is a significant element in Oracle’s grand design.