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—— Forwarded Message From: Udhay Shankar N Date: Wed, 20 Feb 2002 10:55:51 +0530 To: fork [at] xent [dot] com Subject: Cisco’s dealings

FoRKing this as I haven’t seen similar stuff about Cicsco being discussed here.


February 18, 2002 –IF you ask me, the Enron thing isn’t really complicated at all. The big guns at the com- pany just set up a bunch of private, off-the-books partnerships in which they held personal stakes. Then they used those partnerships to conduct business transactions with their own employer in a way that, at the very best, seems to suggest arguing with oneself in the mirror.

But we’re supposed to be shocked by this? Oh, come on. The Enron situation may be extreme, but lesser versions of the same sort of thing have been going on quite legally in the U.S. for years. During the bull market 1990s, thousands upon thousands of these private partnerships barnacled themselves onto the American corporate ship of state.

Just the other day I came across a fine example of some of these perfectly legal – but totally conflicted – partnerships, on the books of Cisco Systems, Inc., the San Jose, Calif., networking company that soared to astronomical levels during the boom.

Between 1997 and 2000, Cisco’s executives put together more than 60 major mergers and acquisitions, many of which appear to have been funneled through various partnership funds set up by a West Coast venture capital fund named Sequoia Capital.

As it happened, one of Sequoia Capital’s long-time wheels was, and is, a chap named Donald Valentine, who also just happened to be vice chairman of Cisco Systems’ board of directors. As such, he immediately wound up wearing two hats in every deal involving Cisco and any Sequoia Capital partnership fund: as a stand-in for the general partner (Sequoia Capital) in the fund, and as the vice chairman of the board of Cisco Systems that was conducting business with it.

ONE such fund – dubbed Sequoia Capital VII – is notable for our purposes here. The fund was set up in late 1995, with initial capital of $150 million, and it wasn’t long before Valentine got to have an argument with himself in the mirror as a result. That’s because, in July of 1996 – or roughly five months after Sequoia Capital VII was set up – Cisco Systems issued 76.4 million shares of Cisco stock, valued at around $4 billion, to acquire the ownership of a networking company down the street in San Jose, named Stratacom, Inc. And guess what: One of Stratacom’s owners was none other than Sequoia Capital – the general partner in the Sequoia Capital VII partnership.

A Cisco proxy report filed with the SEC in 1999 shows that Cisco’s president and chief executive officer, John Chambers, had as well by then become an investor in the Sequoia Capital VII partnership. Yet more financial filings show that Sequoia Capital VII had by then paid $10 million to acquire a 15 percent investment stake in a Richardson, Texas, networking startup called Monterey Networks, Inc.

In September of 1999, Cisco Systems acquired Monterey Networks in its entirety for $517 million in Cisco stock. Some 1 million of those Cisco shares were exchanged in the deal for the 15 percent stake in Monterey that was held by the Sequoia partnership.

Two months later, Cisco Systems filed papers with the SEC allowing the Sequoia partnership to sell the Cisco shares from the Monterey deal on the open market. With Cisco by then trading for roughly $70 per share and heading higher, the whole rigamarole enabled the Sequoia partnership to reap what would appear to translate into a more than 600 percent profit on Sequoia’s original $10 million investment in Monterey.

And Sequoia Capital VII looks to have been only one of many, many such partnerships through which the Sequoia Capital people did deals with Cisco. Cisco’s latest proxy statement (Oct. 1, 2001) contains footnotes showing stakes of unspecified size in eleven different Sequoia partnerships in which Cisco Vice Chairman Donald Valentine served as the general partner.

CISCO officials say there was nothing wrong or improper about any of this because Valentine never participated in any of Cisco discussions or votes involving assets held by the Sequoia partnerships. But who needs a vice chairman who is apparently so conflicted that he has to get up and leave the room regarding discussions about how to deploy what may have totaled, by one reckoning, $7 billion worth of the company’s M&A outlays during the 1990s?

The involvement of Chambers also seems indefensible. Did Chambers, as well, have to get up and leave the room every time the subject of the Monterey deal came up? Company officials say he didn’t have to because his stake in the partnership was so small that he wound up with only a few hundred shares from the transaction. But if the stake was that small, why bother investing in the first place?

In fact, no one at Cisco seemed terribly clear as to much of anything about Chambers and his partnerships. Indeed, after a day of searching around for answers, company officials reported back that Cisco’s SEC filings on the whole thing were actually full of errors.

Contrary to the company’s statements in its proxy filings since 1999, the officials now asserted that Chambers didn’t actually have an interest in Sequoia Capital VII, after all. Instead, said an official, Chambers had held – and continues to hold – a stake in a different partnership: Sequioa Technology Partners VII.

MORE confusing still, they now claimed it was this fund – and not Sequoia Capital VII – that had held the shares in Monterey Networks – a fact that would make the registration statement that Cisco filed on the transaction in November of 1999 in error also. Even more unsettling, the officials said that, upon checking, they had also discovered errors as to how many beneficial shares Chambers actually held in the Sequoia Technology Partners VII fund – meaning yet another set of errors in the filings.

Unfortunately for Cisco’s shareholders, while Valentine and Chambers were apparently either busying themselves with leaving the room (or not needing to) regarding the Monterey deal – or maybe simply being confounded by the complexity of their spaghetti plate of partnerships – the Monterey acquisition went completely into the dumper. Widely viewed as an overpriced dog from day one, the operation was soon shut down by Cisco and written off as a $517 million wipeout.

And the Monterey disaster was only one of many.

In the two years that have followed the tech wreck of March 2000, Cisco’s stock has plunged 78 percent in value and the company has written off more than $4 billion in impaired investments, worthless inventory, and restructuring charges.

Sadly, financial engineering arrangements like Cisco’s partnership deals are typical of what too many men at the top of American business spent their time putting together in the Great Stock Market Bubble of the 1990s. It would take 10 lifetimes to unravel the conflicts imbedded in such arrangements, and in the end there’d probably be no point. Business in America is what it has become, and in the end the lesson of Enron may be no more complicated than this: If you don’t try to hide your hustles in some offshore tax haven like the Cayman Islands, you can get away – apparently quite legally – with almost anything. Call it hiding in plain sight. Ain’t Wall Street grand like that?

* Please send e-mail to:

cbyron [at] nypost [dot] com

— ((Udhay Shankar N)) ((udhay @ (( God is silent. Now if we can only get Man to shut up.

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