Daily Archives: November 12, 2009

Avaya’s Nortel Deal Clears Most Regulatory Hurdles

Avaya’s acquisition of Nortel’s enterprise business assets, won at auction in exchange for $915 million in cash, moved nearer to fruition this week by clearing some regulatory hurdles.

The one remaining major regulatory hurdle is a foreign-investment review that was initiated under the Investment Canada Act in late September by Tony Clement, Canada’s industry minister.

The review was automatically triggered because of the size of the deal. Under Canadian law, the government can review a sale to a foreign company if it considers the deal a threat to national security or if the transaction value exceeds C$312 million.

In the case of Avaya’s proposed acquisition of Nortel’s enterprise business, the deal is being reviewed strictly on a valuation basis. Although no status update has been provided regarding the review, many observers believe the likelihood of the sale being denied is low.

Avaya expects the transaction to close in December.

Nokia Siemens Networks Without COO As It Ponders Bid for Nortel MEN Assets

There’s a great headline and an interesting story over at Light Reading regarding an executive departure at Nokia Siemens Networks (NSN), which has experienced more than its share of drama in recent weeks.

Mika Vehviläinen, chief operating officer at NSN, is leaving the company to become the president and CEO of airline operator Finnair.

Said Vehviläinen:

” . . . . it was clear to me that the right change for the company and our customers would reduce the role of a dedicated chief operating officer. When Finnair approached me, it seemed like the right opportunity at the right time.”

Apparently NSN will not have a COO under its new executive structure. The joint venture’s CEO is Rajeev Suri, who came from the Nokia side of the house and led the services business at NSN before his promotion.

Now without a COO, Nokia Siemens Networks is said to be considering an auction bid for Nortel’s Metro Ethernet Networks (MEN) business assets. The deadline for bids originally was November 9, but Nortel has extended it for as many as five days.

Implications of HP’s 3Com Buy for Other Networking Players

As I mentioned yesterday, HP didn’t get revolutionary, game-changing products and technologies from its $2.7-billion acquisition of 3Com, a company that has gone through more reinventions and market repositionings than Madonna.

In 3Com’s long and eventful history, it has gone from providing the original Ethernet adapters and hubs for enterprises and small businesses, to an acquisition of Chipcom for its chassis-based hubs and switches, to deserting the enterprise market entirely — even directing its jilted corporate customers into the outstretched arms of Extreme Networks.

Subsequently, after a dalliance with consumer markets, 3Com focused on the SMB space before coming back to enterprise markets in its H3C joint venture with Huawei.

That joint venture is now deceased, with 3Com having bought out Huawei’s interest. It now competes against its former partner for the patronage of customers in China and elsewhere. (This is an important point that some people have gotten entirely wrong. 3Com and Huawei no longer are partners in H3C. The loss of Huawei-related business in China represented a serious drag on H3C revenue and necessitated the “China Out” strategy that 3Com pursued.)

Nevertheless, 3Com was reborn on the foundation of cost-effective Chinese engineering, which I believe was a big draw for HP.

Putting all that aside, what does HP’s buy of 3Com mean for smaller vendors in the marketplace, those left out of this latest installment of industry consolidation?

Let’s start with Juniper, one of the bigger independent networking vendors still on the board. As long as it continues to build on its data-center strategy, and to strengthen its partnerships with IBM and Dell, it should survive HP’s onslaught.

Recently, Juniper underwent a rebranding and repositioning of its own, albeit not as dramatic or radical as some of 3Com’s transformations. Juniper overriding message is that it presents a flexible, intelligent, and open alternative to the closed, proprietary systems offered by data-center behemoths Cisco and HP.

To get that message across, Juniper has introduced open, programmable capabilities in its flagship JUNOS software. It also announced new JUNOS chips and systems, including the JUNOS One line of processors and JUNOS Trio chipset with “3D Scaling,” a technology that provides dynamic support for additional subscribers, services, and bandwidth.

Juniper also unveiled new JUNOS-based cloud-networking and security products, including enhancements to Juniper’s SRX Services Gateway as well as modules, implementation guides, and best practices for building a “Cloud Ready Data Center.”

You can see what Juniper is attempting to do.

As much as its server-vendor partners, especially IBM, would like networking hardware to be interchangeable, standards-based commodities managed by an intelligent layer of data-center orchestration software, Juniper is seeking to make itself indispensable by providing its own layer of software intelligence riding atop the network fabric. If it can sell IBM and Dell on the necessity and value of that software, and it can develop and expose interfaces to complementary software its partners are promoting, all should be well and no nasty divorces will ensue.

To survive and perhaps to prosper, Juniper has to execute on its plan and maintain its partnerships.

Now let’s consider Brocade. Reports indicated that HP considered Brocade as an alternative to 3Com. Obviously, HP chose the latter, and I think the decision turned on the lower cost of goods and margin flexibility that 3Com’s enterprise-switching products offered relative to Brocade’s Foundry enterprise-networking gear.

There have been rumors that Dell might buy Brocade, but I think you can discount, if not dismiss, such speculation. Dell is content, for now, to stay with its partnering approach in filling out its data-center strategy. It seems to be mimicking IBM, following a similar plan and establishing similar technology alliances and partnerships. Dell has priorities other than big-ticket computer-networking acquisitions, and I can see it buying storage- and virtualization-software companies well before it gives consideration to a networking buy.

So, despite its best efforts to flog itself, Brocade appears orphaned.

The same story applies to Extreme Networks, which is left without a bigger corporate home to move into. Like Juniper, Extreme seems to have had a good indication where the industry — and perhaps HP — was heading, because it recently restructured and retrenched to significantly reduce its operating expenditures.

Extreme will suffer from the broader consolidation in the industry. Its first priority is to defend its installed base from competitive incursions.

What about WAN-optimization vendor Riverbed and application-delivery-networking (ADN) leader F5 Networks?

F5 probably isn’t for sale — it has been dogged by takeover rumors for years — but neither 3Com nor HP competes meaningfully on F5’s specialized turf. This deal means nothing to F5, which probably will maintain its long-running partnership with HP. If you liked F5 before this deal was announced, you have no reason to dislike the company today.

The story is similar, though not identical, for Riverbed, whose WAN-optimization products also have no direct competitor in the ProCurve or 3Com product portfolio.

So, there you have it.

HP’s acquisition of 3Com is only slightly damaging to Juniper, whose fate will turn on the success of its strategic direction with JUNOS and its partnerships with IBM and Dell.

For different reasons, the deal will have significant negative implications for Brocade and Extreme Networks. Finally, the deal is neutral for, and really doesn’t affect, F5 and Riverbed.

Some of you might be wondering about how this deal affects Cisco. I don’t think it really adds anything lethal to HP’s product portfolio, especially in relation to data-center convergence, but the lower-cost networking products likely to flow from 3Com’s Chinese engineering operations will put price pressure on Cisco’s margins.

At the end of the day, though, Cisco — which is pursuing a large number of “market adjacencies” and is suffering from attenuated focus in its legacy markets — might well become its own worst enemy over the long haul.

Fortinet IPO Next Week

Fortinet will have its IPO next week, with its shares trading under the symbol “FTNT.”

IPO Interactive is rating the Fortinet initial offering as “hot.”

I have had the Fortinet prospectus in hand for a while now, and I’ll be providing my assessment of the company and its stock shortly.

Questions Surface About Irregular 3Com Options Trading Before HP Acquisition Announced

Questions are surfacing regarding unusual trading patterns in 3Com options ahead of yesterday’s announcement of its $2.7-billion acquisition by HP.

Dow Jones Newswires reports that, under normal circumstances, 3Com’s options are rarely traded, with just a few hundred contracts changing hands daily. On Wednesday, however, 3Com options activity spiked to 13 times the normal volume.

Coincidence? Jon Najarian, co-founder of OptionMonster, said he doesn’t think so:

“Since I do not believe in coincidences on Wall Street, I would bet that these unusual call option trades will spark an investigation.”

As reported by Bloomberg:

Volume in contracts to buy shares of the Marlborough, Massachusetts-based company surged to the highest level since September 2007 before Hewlett-Packard Co. said it would buy the maker of computer-networking equipment for $2.7 billion.

“I don’t believe in that much luck,” said Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago- based online brokerage unit of options trading firm PEAK6 Investments LP, and a former market maker at the Chicago Board Options Exchange. “If you’re on the other side of someone buying calls and a takeover is announced, it’s like someone held you up at gunpoint. It’s like you’ve been robbed and you feel violated.”

Call options, conveying the right to acquire stock for a given price by a certain date, usually offer higher returns to traders speculating on takeovers. The Securities and Exchange Commission (SEC) is responsible for policing the options market to discourage and identify insider trading, which — if you think about it, and as Mr. Claussen contends — is a form of larceny.

Regrettably, the SEC apparently wasn’t policing anything yesterday, having been closed for Veteran’s Day.

More from Bloomberg:

More than 8,000 3Com calls changed hands yesterday, 17 times the four-week average. The most active were contracts conveying the right to purchase 3Com for $5 through Nov. 20, followed by December $5 calls. The shares rose 5.2 percent, the most since Sept. 28, to $5.68 in Nasdaq Stock Market composite trading prior to the announcement.

Almost 4,000 of the November $5 calls and 3,300 December $5 calls traded, with almost all of the transactions occurring at noon. That compares with a total of six puts giving the right to sell 3Com shares. Hewlett-Packard, the world’s largest personal- computer maker, agreed to pay $7.90 a share in cash for 3Com, a 39 percent premium to yesterday’s closing price.

More than 22 million shares of 3Com changed hands in the stock market yesterday, compared with this year’s daily average of 4.85 million and the most since March 2008. Trading was heaviest in the hour after 11 a.m. in New York, data compiled by Bloomberg show.

Some have suggested that the call trades might have resulted from “calendar spreads,” in which an investor sells contracts expiring in one month and buys options with the same strike price for a future date. However, that seems unlikely considering that November contracts would not have expired for another nine days.

According to Bloomberg, Goldman Sachs Group Inc. advised 3Com on the transaction and Morgan Stanley served as HP’s agent.

As reported by the New York Times, 3Com is one of several companies that featured in the insider-trading case involving Raj Rajaratnam and the Galleon Group. Traders from Incremental Capital allegedly gained information on 3Com’s previous attempt to sell itself from a lawyer working on the aborted deal with Bain Capital and Huawei, formerly 3Com’s business partner in the China-based H3C joint venture.

The SEC needs to seriously and thoroughly investigate this matter.