Note the position Landing Gear Lever in one of the photos.  Hopefully that was just the ground crew exhibiting their sense of humour … though just because the lever was up doesn’t mean the aircrew forgot to cover that small detail on their checklist.  There’s still some hope that this was a mechanical failure of some sort.

As one armchair pundit put it here:

My understanding is that the first realization of a problem was when it took a very high power setting to try to taxi off the runway.

Heh.  My theory of a mechanical failure may be contested by the fact that in recovering the plane the ground crew were able to lift the plane, deploy the landing gear and actually tow the C-17 off of the runway.  Things are not looking good for the aircrew.

Crashed C-17: that'll buff right out, sir!

This isn’t the first time this kind of incident has happened at Bagram.  In October a P-3 Orion crashed after overshooting the runway, and the Navy quickly relieved the Commander (who was piloting the plane) of his post.  Only a week or so before this latest incident, the overshoot of a C-17 at Bagram resulted in minor damage and caused only limited disruption — but in 2005, another C-17 (tail #01-0196) was very nearly written-off after overshooting the runway, causing extensive damage (see below).

C-17 at Bagram in 2005: another fixer-upper

The 2005 crash resulted in a fairly remarkable recovery and restoration.  The plane was very nearly considered for a writeoff, however it was made (barely) airworthy by Boeing technicians on the airfield and then hopscotched back to Long Beach for an extensive reconditioning.  It has been flying again since the summer of 2006.

Bagram, an ex-soviet base built during that country’s (understatement) expedition in Afghanistan, is a forward operating airfield run by the US Army in a rather hotly-contested area of the country.  This means that it primarily supports A-10 attack aicraft as well as the Army’s usual complement of AH-64, UH-60, and CH-47 helicopters.  In 2007 an ambitious suicide bombing attack against the Bagram airfield claimed 23 dead and might have killed Dick Cheney while he was on a special morale-depleting visit.  That said, a town has now built up around the airfield and the base itself is considered relatively secure.

A number of other pilots have criticized aircrews of the C-17 and other non-attack aircraft of “flying hard” and using “combat zone” landing techniques when coming into Bagram.  This means landing hard, low, and fast and would certainly explain many of the overshoots.  Whatever the cause, in order to mitigate the overshoots and to make the field more usable by larger aircraft, the runway was extended in 2006 after the 2005 C-17 overshoot (C-17s can land in as little as 3,500 feet, and after the 2006 lengthening Bagram’s main (and only usable) runway is 11,000 feet long).  However, the overshoots have persisted.

The cautionary note on Bagram’s pilot’s briefing is pretty benign (for a combat airfield):

Ctl explosions and de-mining ops in vcnty of arpt, ATC will advise. Acft opr blw FL210 may experience a loss of rdo and/or radar ctc with Bagram ATC at dist greater than 30 NM. MPN-25 (ASR/PAR) PMI Mon-Fri 1930-2130Z. Hi potential for hydroplanning when rwy sfc is wet. Rwy in advanced state of decay, increased possibility of FOD. Avoid ovft 1/2 mile NE dep end Rwy 03, burn pit will cause inadvertent flare dispersal. tkof obstacle rwy 03 4900′ MSL ant , 599′ fr DER, 510′ leftof cntrln. Lit twr, 120′ AGL, Rwy 03 apch end 1,250 ft E of cntrln. Lit twr, 120′ AGL, 1,250 ‘ E of cntrln midfield Rwy 03/21. Poss 1/2 rwy width clsd for const, ctc App for status. Twy H btn twys B and E is 44 ft wide. Acft use inboard eng only to reduce FOD.

It goes on to warn that if the airfield is under attack, you should stay above 25,000 feet; and avoid flying below 1000 feet West of the airfield or you could get shot down by US air defenses.  :)   That said, though, for a C-17 to come in to Bagram these days doesn’t seem to be particularly challenging, unless you fly over the burn pit and your anti-SAM flares go off from the heat.  Baghdad’s briefing is a little more frightening.

Concerningly, the peanut gallery seems to think that this particular air crew failed to follow their checklist in the heat of .. erm .. battle and essentially forgot to deploy the landing gear.  It will take some time in order to figure that out of course, but C-17s are outfitted with cockpit voice recorders and if the pilots have anything to hide, news will come out soon enough.  Others have pointed out that hot-dogging it into Bagram is becoming a bit too commonplace.

The briefing above does contain a bit of a nugget, though:  “use inboard eng only to reduce FOD”.  In other words, pilots are instructed to run outboard engines at idle in order to prevent them from sucking in debris from the outer edges of the runway and adjacent desert (thought this might apply only to taxiing).  As Global Security points out, the thrust reversers are an integral part of the C-17’s ability to land in short distances –and if pilots are coming in hot but only using inboard thrust reversers to slow down upon landing, they’ve got 50% less thrust to use in braking.  That’s a problem.  Maybe our most recent celebrity C-17 crew just figured the easiest way to slow down in a short distance was to retract the landing gear.

In the meantime, Canada now has 4 C-17s, designated the CC-177.  If one of ours were to crash at Kandahar while the pilots were playing “Top Gun” the consequences would be disastrous to the Canadian military’s mobility, and to its budget.  Both of the badly damaged C-17s hail from Charleston, South Carolina.  Let’s hope that if the “hot-dogging” allegations have any merit, that our guys are a little more Formula One, and a little less NASCAR.

UPDATE: Welcome trolls from Charleston!  Your comments will be approved (see below)…

UPDATE 2/22: New photos popped up last week from the night of the crash… some interesting details were revealed.

FIRST: MILITARY SUPPLIES Who Sold What to Iraq? The U.S. aims to hunt down companies that supplied Saddam. FORTUNE Sunday, March 30, 2003 By Nelson D. Schwartz

When the first wave of American soldiers swept out of the desert and headed north toward Baghdad, the Iraqis weren’t the only ones who experienced shock and awe. In the thick of battle, U.S. commanders discovered that the Iraqi army was able to jam the global-positioning systems the military uses to pinpoint everything from cruise missile attacks to the location of troops on the ground. “It was a technological preemptive strike,” says a senior military source.

It was also a prime example of how private companies violated the embargo that the U.S. and the United Nations imposed on Iraq more than a decade ago. Russian firms supplied the jammers to Iraq in the past few years–they didn’t exist during the first Gulf war–prompting a personal protest from President Bush to Russian leader Vladimir Putin.

The news about the GPS-blocking devices is just the beginning of what’s likely to be a series of revelations detailing how companies–including American ones–helped supply Saddam Hussein’s war machine during the past decade. That’s because in addition to searching for weapons of mass destruction, U.S. forces are scouring Iraq for evidence of who sold what to Saddam. Military sources have told FORTUNE that special teams are already on the ground, sifting through files to determine where Iraq got everything from rocket parts to fiber-optic technology.

Despite both U.S. laws and UN sanctions that prohibited all but a handful of commercial dealings with Baghdad, there have been persistent reports that companies from Russia, France, and China, among others, were breaking the embargo. And when the evidence in Iraq is analyzed, says a top Washington official who deals with trade policy, it’s likely that at least a few U.S. companies will face fines or perhaps even criminal prosecution. “The fact that American companies have broken the embargo with Iran suggests that there will be some leads in Iraq,” adds the government official, who spoke with FORTUNE on condition of anonymity. “Those of us in law enforcement certainly contemplate that things will be found in Iraq.”

Probing the byzantine web of deals that kept technology flowing to Iraq is a complex job. It’s likely to involve teams from the Treasury, State, and Commerce departments, as well as the Pentagon and the CIA. For now the main task is locating the forbidden goods–and their paper trail. Sources say units made up of both military personnel and representatives of the CIA and other agencies have been trained to operate in volatile areas inside Iraq, taking inventory of contraband items and poring over records.

Similar task forces operated after the U.S. invasion of Panama in 1989 and NATO’s intervention in the Balkans in the mid-1990s, but this time the job is much bigger. Because of Iraq’s oil riches, Saddam had a far easier time of evading the embargo than did former dictators like Manuel Noriega and Slobodan Milosevic. Fixing blame can be tough, however. Business transactions with embargoed nations are usually conducted through intermediaries, with China and the United Arab Emirates as common transshipment points.

To further complicate matters, U.S. companies might innocently sell something to a Chinese buyer, only to learn later that it ended up in Iraq. For example, says Kelly Motz of the Wisconsin Project on Nuclear Arms Control, China’s giant Huawei Technologies is believed to have supplied Saddam’s army with sophisticated communications hardware even as it was doing business with the likes of IBM, Motorola, Hewlett Packard, and Qualcomm. “These companies might have thought they were just selling telecom equipment into an emerging Asian market,” says Motz. “However, it’s been known since early 2001 that Huawei has had dealings with Iraq. So any deals that might have been done since then are questionable.”

If it turns out that companies intentionally evaded the ban, government officials say they are loaded for bear. “We won’t tolerate the breaking of the embargo,” says Richard Newcomb, director of the Treasury’s Office of Foreign Assets Control. “If there’s a knowing violation, we would prosecute to the full extent of the law.” In 2001, the Commerce Department hit McDonnell Douglas, a unit of Boeing, with a $2.12 million fine for improperly selling machine tools to China. Fines for dealing with Iraq are likely to be larger. And if evidence turns up that a particular firm knowingly sold items like night-vision goggles or gas masks to Iraq, federal agencies might impose what they call the “death penalty”–a total ban on all exports by the guilty firm. Criminal charges for executives are also a distinct possibility.

It’s going to take time to determine just who did business with Iraq. But the military, for one, seems eager to shine a light in some otherwise dark corners. “We will have everything at our disposal,” says Maj. Max Blumenfeld, an officer with Army’s V Corps in Kuwait. Documenting Iraq’s deals, he says, “will justify this operation and show the world what we’ve been saying all along about Saddam Hussein and his efforts to acquire weapons of mass destruction.” It could also cause a lot of companies to wish they’d never done business with Baghdad.

-Ian.

—- http://edwardjayepstein.com/nether_fictoid9.htm

Fictoid #9: Plastic Knives and Box Cutters

Following the September 11th attack, government authorities declared that the weapons used to hijack the planes that crashed into World Trade Center were plastic knives and box cutters. The story about plastic knives and box cutters, implements which passengers then were not legally restricted from bring through security checkpoints at airports, was relentlessly drummed into the public’s mind by two of the highest officials in the government. John Ashcroft, the attorney general, Donald Rumsfeld, the Secretary of Defense.

Ashcroft told ABC News on September 15th that “investigators believed that each of the commandeered planes had been hijacked by groups of three to six men armed with box cutters and plastic knives.” Donald Rumsfeld told Fox News on September 16th, that the hijackers used weapons that are distinctively different – – plastic knives.” On October 9th, he suggested to Dan Rather on CBS News “plastic knives and the use of a U.S. airliner filled with American people as a missile [were used] to destroy a World Trade Center.” On November 7th, he described to Jim Lehrer on PBS ” One of our planes is used as a missile to fly into our building and into the World Trade Center. It was beyond one’s imagination that plastic knives and our own commercial aircraft filled with our own people would be used as the implement of war.”

Actually, it was their imagination, not established facts, that informed the world that the hijackers had used plastic knives and box cutters to commandeer the two airliners that had destroyed the twin towers of the World Trade Center. Not a scintilla of evidence had been found then— or to date— that either plastic knives or box cutters were used by any of the ten hijackers who crashed United Airlines flight 175 and American Airlines Flight 11 into the World Trade Center. No box cutters or plastic knives were found in the debris. Nor were the cockpit voice recorders ever found from Flight 11 and Flight 175. No witnesses, either passengers or crew members, on either flight 11 or flight 175 ever reported any hijacker having a box cutter or a plastic knife. Both United Airlines flight 175 and American Airlines Flight 11 had departed from Boston. Once both Boeing 767s had reached their cruising altitudes, the hijackers took control of them by unknown means without any of the four pilots warning the ground controllers, even though they had open radios. Both airliners then turned off their transponders and disappeared from the computerized radar screens.

No message was ever received from flight 175 that mentioned any weapons. So, for all anyone knows, the hijackers may have used guns, grenades, poison gas or any other weapon

An executive summary of an unpublished FAA memo stated:

“At approximately 9:18 am, it was reported that two crew members in the cockpit were stabbed. The flight then descended with no communications from the flight crew members. The American Airlines FAA Principal Security Inspector (PFI) was notified by Suzanne Clark of American airlines Corporate Headquarters that an on board flight attendant contacted American Airlines Operation Center and informed that a passenger located in seat 10B shot and killed a passenger in 9B at 9:20 am. The passenger killed was Daniel Lewin shot by Satam al-Suqama. One bullet was reported to have been fired.”

The information came from two cell phone calls made by flight attendants, Betty Ong and Madeline Amy Sweeney, to Americal Airlines ground controllers. Ong, who was in the first class compartment— and the only witness to the assault on the cockpit. She reported that she had seen four hijackers come from first-class seats, kill a passenger seated behind them, and use a chemical weapon which she described as “some sort of spray” that made her eyes burn and made it difficult for her to breathe.” Madeline Amy Sweeney, the flight attendant in the rear compartment, call was not recorded. According to the ground controller, she said that the pilots, another flight attendant and a passenger had been stabbed or killed.

The FAA subsequently said that the report of a gun shot was an error proceeding from a “miscommunication”. The ground controller did not recall a gun shot or a bullet being mentioned.

In any case, there were no box cutters or plastics knives on flight 11 were used.

Two other flights were hijacked that morning, American Airlines flight 77, a Boeing 757 departing from Virginia, and United Airlines Flight 93, a Boeing 757 departing from Newark. On flight 77, which crashed into the Pentagon, one single passenger, Barbara Olsen, reported on weapons that some of the five hijackers had in the back of the plane. She told her husband, Theodore Olsen, on a cell phone that the hijackers who herded her and other the passengers into the back of the plane had two kind of weapons: knives and cardboard cutters (presumably box cutters). She did not say anything about the other hijackers in the cockpit and she apparently did not even know that they were piloting the plane. Nor did any other passenger or crew member on Flight 77 describe the hijackers’ weapons. It cannot be assumed that all the hijackers on the plane had similar weapons. The hijackers assaulting the cockpit might have needed more sophisticated weaponry to rapidly stun or kill the pilots.

On flight 93, the Boeing 757 which crashed near Pittsburgh, the flight attendant reported over a cell phone that a hijacker in her plane had a “bomb strapped on.” Some unidentified person also said over the loud speaker that there was a “bomb” aboard the plane. A passenger, Todd Beamer, talked over a cell phone about the “terrorist with a bomb.” Another passenger, Tom Burnett, told his wife over a cell phone that he had heard that a pilot had been “knifed.” No passenger or crew member described either box cutters or plastic knives as weapons and, as far as is known, no box cutters of plastic knives been recovered from the wreckage.

Similar weapons thus were not reported in the different flights. A paralytic chemical spray was described in the front compartment of flight 11, knives and card cutters was described in the rear compartment of Flight 77 and a bomb was described on flight 93. Nor is there any reason to assume that different hijackers on different planes leaving from different airports would use the same weaponry. Atta and Alomari, for example, having made a detour to Portland, might have obtained weapons unavailable to the hijackers in Virginia and New Jersey.)

In any case, the Ashcroft’s story that the hijackers used box-cutters and plastic knives in the attack on the World Trade Center is a functional fictoid. In this case, the function was diversion. This fictoid serves to divert public attentions from the responsibility, and legal liability, of the government and airlines to prevent major weapons— such as guns, bombs, chemical sprays and hunting knives from being carried aboard airplanes. If such illegal devices had been smuggled aboard the planes, the liability could amount to billions of dollars. If, , on the other hand, it could be disseminated that the hijackers had only used plastic knives, such as those provided by the airlines for meals, or box cutters, which were allowed on planes, neither the airlines, the screeners at the airport, or the FAA, which regulates the safety of airports, could be held legally responsible. Paul Pillar, who had headed the CIA’s counter-terrorism, could thus explain that”the attack that killed almost 4,000 people used box cutters.” This press accepted it as established fact. The New York Times, for example, reported “the hijackers did not use firearms, which would probably have been detected, but apparently wielded box-cutter knives of the type that were then allowed on board but are now banned.”

What made the box cutter and and plastic knives fictoid particularly welcome was that the FAA had found massive failures of airport screeners to find weapons prior to the attacks. Such tests were conducted by FAA undercover “Red Teams.” In 1998, for example, one FAA Read team leader told the New York Times, “we were successful in getting major weapons— guns and bombs–aboard planes at least 85 percent the time.” The failure rate was as high as 97 percent at some airports. Nor was this vulnerability corrected before September 11th. FAA Special Agent Bogdan Dzakovic, according to USA TODAY, said that FAA officials had ignored security problems before the terrorist attacks.

The fictoid successfully deflected from this gaping hole in security.

———–

Some French guys find it hard to believe that a 100-ton 757 slamming into the Pentagon caused as little damage as it did on September 11th.

http://www.asile.org/citoyens/numero13/pentagone/erreurs_en.htm

…use Google to translate it if you need to: http://translate.google.com

So how exactly does one hide a 757, and 64 passengers?

-Ian.

Sunday September 9 5:04 PM ET

Away on Business: You’ve Got Mail

By Michael Conlon

CHICAGO (Reuters) – Some lucky passengers on three airlines, Singapore, Air Canada and Cathay Pacific, are already encountering the future — sending and receiving e-mail from the sky as they cruise to distant destinations.

Best of all, for the immediate future during the system’s test phase, there’s no charge, though that will change by year’s end.

Air Canada offers the service on five Boeing 767s; Singapore began with e-mail on its Los Angeles-Tokyo-Singapore route and expects to have six or seven Boeing 777s and 747s equipped with it by November; and Cathay Pacific currently has one e-mail ready Airbus A330-300 in its fleet.

There are slight differences in the hardware being used by those airlines but the software for all three was developed by Seattle-based Tenzing Communications Inc. That company says it expects to see 50 to 75 commercial airliners from various carriers using its system by the end of 2001.

The e-mail involved here travels to and from the passenger’s laptop via a phone connection at the seat. A server on board sends the data to its destination and receives returning data in periodic bursts.

As a result the passenger is not truly “on line” but the turn-around time for sending a message and getting a reply is not much different than on land, the company says, about 15 minutes at most.

AIR CANADA FIRST

Air Canada was the first in the air with the concept. The system it initially tested is tied to a land-based telephone network, meaning that it can be used only over land. But it will expand that reach to over water, having signed an agreement in June to put the Tenzing system in its entire fleet of 239 planes.

Singapore and Cathay Pacific already have employed satellites for relay, meaning they now have global coverage.

All three carriers are still in the test phase of this concept and have not been charging customers. James Boyd, a spokesman for Singapore, said that airline will start a “modest pricing plan” on October 1, but does not regard the system as a profit center. The other two airlines are also offering the service for free pending pricing decisions later this year.

Tenzing says it believes the charge will wind up being from $4.95 to $9.95 for 24 hours of use.

“It’s a means for passengers to stay connected,” Boyd said. ”Passengers are happiest if we can create an environment where they can experience life on the aircraft the same way they do on the ground,” he added, whether it’s a business traveler or a tech-savvy senior keeping up with the grandchildren.

USERS MUST REGISTER

To use the system passengers must register and download appropriate software. Information on that can be found at http://www.tenzing.com. The company says more than 10,000 passengers have signed up so far to use e-mail on the three airlines that offer it.

Boyd says that passengers on Singapore, which operates a 71-city route covering 38 countries, can also sign up at boarding lounges in Los Angeles and Singapore or on board where attendants can provide a CD-ROM. The service is available on the carrier in tourist as well as business and first class.

Tenzing says Varig, Virgin Atlantic and Finnair will be offering e-mail with its system by the end of 2001 and SAS plans to try out a wireless in-cabin system that will not require individual telephone connections.

These developments are only the tip of a rapidly advancing information and entertainment revolution that will eventually wire all airline passengers.

American, Delta and United earlier this year formed a partnership with Boeing on a new broad band service that company is developing. It will eventually offer not only e-mail but Internet access, live TV and other services in flight.

The competing service, called Connexion by Boeing, expects to see its first installations in aircraft by the middle of 2002, Boeing and the three airlines have said.

Friday May 18 7:49 PM ET

Soviet SST Wings Its Way to Internet

By Chris Stetkiewicz

SEATTLE (Reuters) – For sale: Soviet-built supersonic Tu-144 jetliner. Top speed 1,650 mph, seats 135. Low miles. Price $10 million or best offer.

The plane is nearly 20 years old, but was fully refurbished for high-speed flight testing by NASA four years ago and would make a stunning executive jet or, more realistically, a spectacular flying billboard for corporate advertisers.

“It could go to a person who likes to own the fastest car or it could be used by a cola company who wants a marketing effort with global reach,” said Randall Stephens, a Texas aviation expert working with Russian jet maker Tupolev to sell the jet.

Nicknamed “Concordsky” because it closely resembled the Concorde built simultaneously by Britain and France in the late 1960s, the Soviet jet holds 35 more passengers and flies about 5 percent faster than its cousin.

But the Tu-144 was too noisy and inefficient for even the Soviet airline Aeroflot (AFLT.RTS) and deadly crashes at the Paris air show in 1972 and again in 1977 sealed its doom. Only a handful were ever produced.

Yet NASA found the price was right to lease a Tu-144 for over 300 hours of flight testing, three times what it had flown previously, and replaced its four old out-of-production engines with powerplants borrowed from a Tu-160 supersonic bomber.

Boeing, which announced plans for a near-sonic speed jet earlier this year, participated in the flight tests and probably got some good ideas along the way, experts said.

With the upgrades and flight testing costing about $35 million, the $10 million Tu-144 asking price is a steal, said Paul Duffy, an Irish aviation consultant.

“For $10 million you could probably buy a 12-year-old Boeing (NYSE:BA – news) 737,” Duffy said. “But this (Tu-144) is very special. If you can make any use of it you are getting a real bargain.”

EBAY GETS COLD FEET

Stephens posted the jet for sale on Internet auction house Ebay Inc. (NasdaqNM:EBAY – news) and got at least one tentative bid. But after a week Ebay grew concerned over U.S. laws banning imports of big Soviet jets and withdrew the item to make legal checks.

Ebay would earn $125,000 if the jet sold for $10 million, nearly 10 times the next most expensive Ebay sales — a Kentucky resort and a famous baseball card, a spokesman said.

Undaunted, Stephens has posted the Tu-144 for sale on his own Web site, (http://www.tejavia.com), and says he and Tupolev can provide maintenance and spare parts and operate the airplane for prospective customers.

For Stephens, the commercial project also represents his faith in the people and technology of the failed Soviet empire and his desire to forge closer ties between the onetime Cold War enemies by marketing other Russian planes.

“I believe in capitalism and I believe in the possibility of us working together. I find people over there feel the same way,” Stephens said. “Russians are a tenacious, long-suffering people and the people on the street actually like us.”

The cost of operating the Tu-144 could prove prohibitive, experts say. The Concorde, undergoing a make-over after crashing for the first time near Paris last summer, is more efficient than the Tu-144. But airlines still charge thousands of dollars for a one-way transatlantic trip at twice the speed of sound.

“A blimp or a Boeing 727 would be much cheaper and present fewer regulatory worries as a flying billboard,” said Richard Aboulafia at Virginia aviation consultancy Teal Group. “The Tupolev 144 has baggage, including the most spectacular disaster at an air show in recent memory.”

Recent reports suggest French fighter jets, equipped with cameras to snap photos of the Concorde competitor, actually caused the Tu-144 crash by swooping too close, forcing the Soviet jet into a steep climb well outside its design limits.

But regardless of the cause, the jet’s lousy track record could be its own worst enemy. “It’s a piece of junk,” said Colorado aviation consultant Mike Boyd. “You don’t want be seen in it or around it.”

NOSTALGIA OR REAL VALUE?

Western manufacturers like Boeing have sifted through the rubble of the Communist Soviet economy to find inexpensive technology and engineering talent and put them to work researching or operating commercial projects.

Boeing officials privately marvel at the advanced Russian jet designs that rivaled Western ones on smaller budgets. But public perception of Iron Curtain engineering could hardly be worse with memories of the nuclear reactor explosion at Chernobyl and the sinking of Russia’s Kursk nuclear submarine last year still fresh in many people’s minds.

And just this month Russian space officials reportedly got $20 million from Dennis Tito to make him the world’s first space tourist, subsidizing their share of the International Space Station, but angering their NASA counterparts.

Ever optimistic, Stephens insists the Tu-144 will fly once more, a tribute to the human obsession with superfast flight.

“Even 30 years later, people still stop and stare open-mouthed when the Concorde takes off,” Stephens said. “This is going to be a great advertising medium.”

🙂

-Ian.

——- http://www.latimes.com/business/20010506/t000038149.html Cisco’s Slump Kills Off Some High-Tech Myths

Technology: Unfinished buildings and a sagging stock price are symbols of the hardware giant’s stumble. Observers predict the firm will regain its footing, but few expect it to return to the glory days.

By CHARLES PILLER, Times Staff Writer

    SAN JOSE–George W. Bush came calling. So did British Prime Minister Tony Blair and China’s President, Jiang Zemin. All sought the counsel of John Chambers, chief executive of Cisco Systems, which a year ago reigned as the most valuable corporation on Earth.     Chambers’ lofty goal was to wire the world for the Internet. And for a decade Cisco surged to prominence by selling arcane hardware that directs the Internet’s trillions of messages and images each week like an army of electronic traffic cops. The company became the crowning achievement of the “new economy.”     Cisco’s sales shot up from $69 million in 1990 to nearly $19 billion in 2000–a phenomenal average annual rise of 75%. Unlike many Internet firms, Cisco sold real products and made real money–nearly $5 billion in profit last year.     But to understand the breadth of the technology industry’s meltdown, just look at the problems Cisco faces today.     A recent series of miscalculations has sent Cisco into a catastrophic tailspin. The company’s sales have nose dived 30%. It is laying off 8,500 workers, or 18% of total employment, and is paying college students “severance” to walk away from recent job offers. Cisco’s stock also has melted down by 76%, some $400 billion in total market value–or the current value of General Motors, Bank of America, Wal-Mart and Boeing combined.     As orders plummeted, Cisco wrote off a staggering $2.5 billion in unsold inventory. The company also halted a building binge and plans to install windows on empty shells to prevent the incomplete structures in San Jose from becoming eyesores.     Cisco’s unraveling has raised questions about the theory that technology-driven growth is inherently more efficient and manageable than in past eras.     This slowdown also debunks Chambers’ faith–shared by other tech executives–in the power of sophisticated software systems to closely monitor orders, manufacturing, accounting and inventory to precisely track sales growth and anticipate demand.     “The belief in the new era–that we have much higher levels of productivity because of information flow, and that we won’t make mistakes that past generations have [caused Cisco’s predicament],” said Fred Hickey, editor of the High-Tech Strategist newsletter.     “Chambers was going around telling world leaders that they don’t get it,” Hickey added. “He was lecturing Alan Greenspan . . . because his stock was the top stock in the bubble.”     Chambers described Cisco’s unforeseen drop in orders as greater than a 100-year flood. “We never built models to anticipate something of this magnitude,” he told financial analysts last month.     Yet for nearly a year, danger signs had piled up. The dot-com universe–including key customers for many of Cisco’s biggest customers–had imploded.     Chambers remained convinced that demand for Internet hardware would keep climbing. He spent heavily last year to buy almost two dozen computer networking firms and stockpiled inventory to satisfy frantic demand. But large corporate customers, including telephone giants Sprint Corp. and WorldCom Inc., cut spending in December and some smaller carriers went bust. Today, failed dot-coms are unloading barely used Cisco gear and thousands of its products are being sold on EBay at fire-sale prices.      Cisco declined to make top officials available for comment.      Despite its problems, though, Cisco clearly is no dot-com teetering on the edge of bankruptcy. The company had nearly $4 billion in cash at the end of the last quarter, and it still dominates key markets.      Still, the magnitude of Cisco’s sudden slowdown stands at odds with a decade of relentless growth.      The company’s founders invented the router–one of most important technologies of the Internet Age. Routers look at nearly every piece of data that crosses the Internet and direct information to the correct recipient.      Some of these bland boxes–ranging in size from laptop computers to 6-foot-tall consoles–are literally worth their weight in gold. Internet companies, telecom providers and enterprises that operate large computer networks pay a few thousand dollars to as much as $1.5 million per product.      Cisco dominates the market it invented–selling about 80% of all routers and half of all computer network switches. The company also provides software and other hardware tools that manage high-speed connections to the Internet. And Cisco has recently mounted a challenge in the new market for optical switches–devices that direct data over light beams traveling through fiber-optic cables.      During Cisco’s boom, the company’s stock became a license to print money, soaring from less than $1 a share in 1993 to $82 last year. In that period, Cisco gobbled up 71 competitors and promising start-ups.      For years the model worked. Technology originated by the company’s first acquisition–Crescendo Communications, purchased for only $89 million–has earned Cisco billions of dollars in switch sales. A few other purchases have proved nearly as prescient.      But critics say the strategy–buying untested companies and overpaying for their potential–was unsustainable. By issuing so many new shares to make those acquisitions, Cisco diluted the value of its stock dramatically.      The tech-stock crash derailed Cisco’s growth strategy. After acquiring 23 companies in 2000, Cisco has bought none this year.      And Cisco may now be choking on some of the costly purchases. In August 1999, Cisco paid $6.9 billion for Cerent Corp.–a 2-year-old money-losing start-up with 287 employees–at a jaw-dropping $24 million per employee. Cerent was supposed to jump-start Cisco in the optical network components market, but it has yet to gain a foothold.      Also in 1999, Cisco paid $500 million for another optical company, Monterey Networks. But Monterey’s $1-million-plus optical router flopped and Cisco was forced to kill the product last month.      Such episodes are familiar to Ian Bell, a middle manager who left Cisco in 1999 after a year with the company. Bell worked in a Cisco division that developed products to bring voice communications onto the Internet.      Cisco bought several voice companies, he said, but many of the new–and newly wealthy–employees knew that their products would be late to market or noncompetitive.      “From a customer’s perspective, Cisco was really good at making people pregnant, but not so good at [delivering] babies,” Bell said.      Viranjit Madan, a Cisco engineer for three years who left the company in November, said jealousy often erupted between established Cisco engineers and newcomers.      “People . . . came in far wealthier than you, just because they happened to be from a company with a product [Cisco wanted],” he said. In some cases, Cisco engineers resigned en masse when newcomers took over their operations, according to Madan.      Critics suggest that Cisco may have been blinded by crushing pressure to keep growing fast enough to justify its stock price.      A shareholder lawsuit filed by Milberg Weiss Bershad Hynes & Lerach against Cisco in April in federal court in San Francisco alleges that Cisco’s purchases were ill-advised and contributed to securities fraud.      According to the lawsuit, Cisco financed its own customers’ purchases in “loan amounts [that] frequently exceeded the cost of the equipment . . . by more than 100%.” Cisco “knew [that many customers] were not credit-worthy and would likely never repay the loan . . . in full,” the suit says. And it alleges that Cisco falsely inflated revenue figures because the company knew some customers probably would fail before they could repay the loans.      A Cisco spokesman called the suit “groundless.”      David Rogan, head of Cisco’s financing unit, said Cisco now has $800 million in outstanding loans to customers, and that loans for more than the purchase price of equipment are typical in the industry.      “The risk is rising, and we are doing the prudent thing . . . by increasing the reserves,” Rogan said. Cisco has set aside $700 million to cover the possibility of customer default, he said.      “Cisco always had supply problems,” said Bell. “You build a product that’s really exciting, then you can’t build enough of it and drive up demand. Some customers were double- and triple-ordering products just so they could get them on time. When those orders stopped, they stopped hard.”      Another reason for Cisco’s inventory troubles–and for those of other technology companies–dates from the Y2K fiasco, said Mike Moone, former vice president for Cisco’s consumer products. Like many companies, Cisco expected a drop-off in orders for network gear in late 1999 as customers prepared for disruptions from the 2000 software bug. But the Y2K bug proved a dud. Instead, demand grew and some customers had to wait months for certain products, so Cisco overcompensated.      “They started ignoring [the] just-in-time supply model and stocked up on inventory,” Madan said. “They deluded themselves into building [for an] . . . unsatisfiable demand.”      During the boom times, thousands of Cisco employees became paper millionaires via stock options and top executives received Hollywood-scale compensation packages. Chambers, 51, exercised more than $150 million in stock last year, and a trio of other Cisco executives exercised $138 million in options in the same period.      Now with many Cisco employees’ stock options worthless, the company may face an exodus of talent.      “It’s always been difficult for people to leave because of the golden handcuffs [of valuable stock options],” said Richard Lowenthal, a former Cisco vice president and general manager. “Loyalty was based on [stock] options. That’s a real problem for Cisco now. How do they keep people motivated?”      But to rebuild, Cisco may need to return to a philosophy credited to Chambers, an earnest, soft-spoken West Virginian: Avoid Silicon Valley’s swagger, listen carefully to customers and deliver what they need.      Despite his own staggering wealth, Chambers has enforced unusual frugality at his company.      A Cisco management meeting last summer was held at Chambers’ vacation home in Pebble Beach, Calif. Top executives carpooled from San Jose in their own cars–Cisco has no corporate fleet–and stayed at Chambers’ house.      “Here we are bunking in sleeping bags at John’s house,” and Chambers paid for dinner out of his own pocket, Moone said. “This is how a company should be run.”      Madan also praised the skill and integrity of Cisco’s management. He said Chambers held monthly breakfasts with employees who had birthdays that month. The events were no-holds-barred question-and-answer sessions.      Such modesty and receptiveness could prove pivotal to Cisco’s future.      Experts say that with economic recovery, the company will gradually regain its footing. But few now predict Cisco will recapture its past momentum. At its current stock price, Cisco’s shares would have to grow 20% a year for nearly eight years just to match the peak of a year ago.      “Remember Smith Corona? They owned the typewriters. Wang? Pan Am–worldwide icon? Gone,” Moone said. But he predicts Chambers will never allow Cisco to die–partly because Chambers was one of the Wang executives who presided over that once-towering tech company’s free fall in the late 1980s. He still feels the pain of the experience, Moone said.      But the glory days will be hard to recover. Said Moone: “It’ll be years and years before there’s another rush to the stars.”       * * *

     Cisco’s Stock Price Has Plunged…      Monthly closes and latest on Nasdaq      Friday close: $19.64, up $0.98      …And Acquisitions Have Stopped.      Number of companies acquired by Cisco      As of May 3: 0      Source: Cisco, Times research, Bloomberg News

So amid the doom and gloom of the economy, you might’ve missed the reports that the US have gotten themselves into a bit of a quandary.

http://abcnews.go.com/sections/world/dailynews/china010402_intel.html

The big question is: what were they doing?

The plane that the US Navy were flying is not your traditional layman’s view of a spy plane, zooming over the continent at Mach whatever and merrily taking super-high-res snapshots of the Chinese countryside.

The P-3 Orion airframe is actually a turboprop aircraft designed to operate efficiently at VERY low-altitude (50-500 ft.) and perform close-in reconnaissance for tasks like submarine hunting, search-and-rescue, fisheries enforcement, etc.

The US also tends to load up the P-3 with all kinds of wacky electronic equipment for more nefarious missions, as the article below indicates. According to Jane’s and the FAS, the EP-3 is a Signals Intelligence aircraft, which means it carries numerous antennae for collecting and interpreting electronic signals.

http://www.janes.com/aerospace/military/news/jema/jema010402_1_n.shtml

Here’s what they were doing:

The easiest way to check out your foe is to make them a little curious about you. Fly in at a low level, close enough to their airspace, and they’re bound to check you out. When you cross a certain threshold, they’ll light up their surface radars, anti-aircraft batteries, and they’ll launch a few fighters and send them up to get up-close and personal.

Each time that happens, you get scanned by radar. By collecting these signals, you can tell a lot about the capabilities of the systems that are scanning you. You can measure signal strengths at various distances, you can measure resolution of the scan, etc. If you measure that against the attributes of known radar systems, you can tell what make & model of radar they’re using.

You can also monitor the behaviour of the various parties involved in tracking you. You can scan and record their radio traffic for later codebreaking on your shiny new SGI ONYX.

Collectively, by interpreting their signals, tactics & procedures, and their capabilities you can develop a very strong sense for how their air defenses work overall.

The EP-3 was almost certainly not working alone. The US Navy destroyers in the region were probably scanning the skies with their active radar systems and listening in to radio traffic as well, and an E-3A (based on a Boeing 707 airframe) AWACS aircraft was probably watching the whole South China Sea. Everything was going according to plan until the P-3 made a hard turn and sent one of China’s fighter hurtling into the South China Sea. Clearly a major operation to probe China’s air defenses and figure out what an attacking force would be up against.

Before the Persian Gulf War erupted with a 60-day bombing campaign, many such missions were flown against Iraq.

In that case, it was determined that their surface anti-aircraft weapons systems were too strong, and so on the first night the US launched a salvo of nearly 400 target drones (unpiloted planes used for missile testing) as the first wave. Behind them flew “Wild Weasel” aircraft, which are mostly F-15Es and F-4F Phantoms using HARM Antiradar missiles. As each Iraqi missile battery fired up its radar and locked onto one of the drones, it was quickly picked up by a Wild Weasel and dispatched with a HARM missile, often before it even had a chance to shoot the drone.

In that case, the Americans knew exactly which versions of the Russian-built radar and targeting systems the Iraqis were using, and they were ready for it long before the attack.

Throughout the 60s, 70s, and 80s this dance went on between the Superpowers, too. Russian “Bear” aircraft notoriously roamed the globe provoking Western fighter aircraft who would not-so-politely escort them back toward their homeland. As a result, both built up enormous quantities of data regarding the capabilities of their respective combat radar systems. There were several collisions in those days, too.

In this case, the US are VERY concerned that the equipment on board the plane might be compromised. The aircrew likely had orders to destroy the hardware before landing, but right now the U.S. Navy has to assume that they were not able to.

The reason that China is not allowing the US to communicate with the crew is simple: they do not want the crew to be able to pass a message confirming or denying the success of their sabotage.

If the crew didn’t destroy the equipment, the Americans will get their plane back alright… but you’ll be able to play handball where all of the crew’s workstations once were.

-Ian.

———- http://www.janes.com/aerospace/military/news/misc/aries010402_1_n.shtml

USA and China wrangle over US ‘spyplane’

By Martin Streetly, Editor of Jane’s Electronic Mission Aircraft

US and Chinese officials were today wrangling over the return of a US Navy EP-3 surveillance aircraft that landed at Lingshui military airfield on Hainan island on the morning of Sunday 1 April 2001. The US aircraft diverted to Lingshui following a mid-air collision between itself and one of two Chinese J-8 interceptors that had been launched to shadow it while it conducted a reconnaissance mission over the South China Sea.

The Chinese have reported that the EP-3 veered into one of the fighters, hitting it with its nose and port wing. The US aircraft broadcast a ‘Mayday’ distress call prior to making its emergency landing at Lingshui, while, as of 11.00 GMT on 2 April, no remains of the J-8 fighter had been found. The EP-3’s 24-man crew was reported to have survived the emergency landing.

The US government has been quick to stress the view that the People’s Republic of China has no reason to hold the aircraft’s crew (claiming that the aircraft was operating in international air space at the time of the collision) and that the EP-3 itself is US ‘sovereign territory’. This latter point is of considerable significance, since the longer the aircraft is in China’s hands, the longer its intelligence services will have to examine the extremely sensitive surveillance technology carried by such platforms.

EP-3 or ‘Iron Clad’? While referred to as an EP-3, initial reports concerning this incident do not specifically identify the type of US aircraft involved. Jane’s analysis suggests that it is either a Lockheed Martin EP-3E Aries II signals intelligence (SIGINT) aircraft or a Lockheed Martin ‘Iron Clad’ P-3 covert surveillance platform.

EP-3E Aries II The US Navy’s EP-3E Aries II aircraft is a long-rang, tactical and strategic, SIGINT platform based on the P-3C Orion maritime reconnaissance airframe. Normally flown by a crew of 20, the type is in service with Fleet Electronic Reconnaissance Squadrons VQ-1 and VQ-2 that are home-based at Naval Air Station Whidbey Island, Washington State, and Naval Station Rota, Spain, respectively. If the aircraft involved in the described incident is an EP-3E, it is most likely to belong to VQ-1 and to have originated from the squadron’s detachment at Misawa Air Base, Japan.

Capable of collecting both radar and communications intelligence, the US Navy currently operates 11 EP-3Es with an additional example planned to replace the aircraft that crashed at Souda Bay on Crete during September 1997. Equipment carried by the EP-3E includes the AN/ALD-9(V) direction-finder, the AN/ALR-76 radar band electronic support system, the AN/ALR-81(V) receiver system and the OE-319 and OE-320 antenna groups. A fuller description of the EP-3E Aries II aircraft can be found in Jane’s Electronic Mission Aircraft.

‘Iron Clad’ P-3 The US Navy’s ‘Utility Patrol’ Squadrons VPU-1 (Brunswick, Maine) and VPU-2 (Kaneohe Bay, Hawaii) operate a small number of ‘Iron Clad’ P-3B and P-3C aircraft that are configured for covert, multi-sensor surveillance. Externally very similar to their maritime reconnaissance cousins, the ‘Iron Clad’ aircraft are reported as being equipped with a sensor suite that, over time, has included SIGINT, acoustic recording and analysis and chemical analysis equipment together with optical and electro-optical cameras. A fuller description of the ‘Iron Clad’ programme can be found in Jane’s Electronic Mission Aircraft.

Cisco’s been reeling since this came out yesterday. It’s a brutal slamming of Cisco’s print-your-own-money acquisition strategy. There’s a Silicon Valley saying that if Cisco’s stock ever drops below %20 they’ll be killing each other trying to get out of the parking lots along Tasman Drive.

I have personal experience with the “House of Cards”, and for me the place was so miserable that even the prospect of lifelong wealth didn’t at all encourage me to stay. Imagine what happens when the stock collapses?

Cisco hasn’t done a good job of integrating recent acquisitions. The TDM guys just don’t get along with the IP guys, the switching guys hate the routing guys, and the business units are all trying to eat each others’ lunch. Also, 80% of Cisco’s revenues still come from less than 20% of its product line — curiously the same stuff they’ve been selling for the last 6 years.

Is Cisco a good investment? Who knows anymore. But it’s clear that the blush is gone and now they’re going to have to prove to the Street that they can make some of these new acquisitions stick, and retain their employees.

-Ian.

>From: “McColl, Matthew”
>To: “Ian Bell (E-mail)”
>Subject: FW: DJN BARRON’S: Cisco’s Bids: Its Growth By Acquisition Will Po
> se P roblems
>Date: Mon, 8 May 2000 19:06:42 -0600
>X-Mailer: Internet Mail Service (5.5.2650.21)
>
>
>Have you seen this article? What are your thoughts?
>
>
> DJN BARRON’S: Cisco’s Bids: Its Growth By Acquisition Will Pose
> Problems
>
>Symbol: CSCO
>Industry: CMT TEL
>Subject: BRN DJN DJWI ANL CAC FNC PRO STK WEI
>Market Sector: MMR TEC TPX
>Geographic Region: CA NME PRM US USW
>Product/Service: DAR DTE
>
> By Thomas G. Donlan
> Is it possible not to love Cisco Systems? The most successful company in
>the hottest sector of the Internet economy, it provides routers, switches and
>thousands of other products that power the communications revolution. The
>San Jose-based company enjoys revenue growth of more than 50% every year. At
>the peak of its share price, it boasted the greatest market value in the
>history of Wall Street — nearly a half-trillion dollars, almost all of
>that wealth created in the past five years. At the moment Cisco is second
>only to
>General Electric in market value.
> How does Cisco do it? It is a great engineering company, brilliantly
>managed and technologically astute. But for the full story of Cisco’s
>success,
>it’s
>important to realize that Cisco is a great financial-engineering company as
>well, and therein lies a host of dangers.Growth is at the center of both
>engineering stories.
>More than any other successful high-tech company, Cisco has grown by
>acquiring
>other companies.
>How it chooses those companies defines its corporate strategy. How it
>integrates
>them into the
>Cisco empire defines its corporate politics. How it retains the people
>acquired
>with the companies
>defines its corporate culture.
>Cisco is a modern house of cards, in which the cards are Cisco stock and
>the companies acquired for Cisco stock. Indeed, Cisco stock has all the
>trading
>power that a boy in the 1950s would have had if he could print his own
>Mickey Mantle rookie cards. Beyond routers, switches, software and services,
>that’s
>what Cisco does for a living: It prints its own trading cards.
> After a recent split, there were about 7.0 billion Cisco shares
>outstanding,last week worth more than $67 3/4 each.
> At 67, Cisco shares sell for 190 times the company’s 35-cent-a-share
>earnings in the fiscal year that ended July 31, 1999. The price is 130 times
>Street estimates of 52 cents a share for this fiscal year, and 100 times the
>estimate of 67 cents for fiscal 2001.
> Cisco earnings, by the way, are remarkably predictable: The company has
>beaten the Street estimate by a penny per share for eight consecutive
>quarters. Cisco attributes its accuracy to its high-tech accounting system,
>not to any legerdemain. Its next quarterly report is scheduled for release
>on Tuesday.
> Such enormous P/E ratios make for powerful trading cards, and Cisco has
>used its stock to make acquisitions valued at more than $30 billion.
> Though questions have arisen about both the price and the earnings side of
>Cisco’s P/E ratio, the prices Cisco pays for other companies validate the
>prices of its previous takeovers and its own still-sky-high price, despite a
>recent tumble. The latest example is Cisco’s acquisition of the “intelligent
>Web switching” company ArrowPoint Communications, announced on Friday. Cisco
>paid about 90 million of its Mickey Mantle cards, shares valued at about
>$5.7 billion, for a company whose market cap a week earlier was $3.67
>billion
>and
>which went public March 31 at a price that valued the company at about $1
>billion.
> Cisco has accelerated its acquisition budget every year, just as its
>revenues have shot up and its stock has done the same. The three things are
>so intertwined, in fact, that if any one of them falters, as the share price
>has been doing, the other two are likely to stumble as well.
> Typically, Cisco acquires a company developing a new technology a year or
>so before its first product goes on the market. Cisco uses the year to
>incorporate the acquired company’s product into its own product line. Then,
>instead of being the product of an unknown startup, it carries the full
>faith and credit of the leading company in the industry, one that dominates
>at
>least 15 market segments and sells 80% of the gear that runs the Internet. A
>successful takeover goes from negligible revenues as a private company in
>the year before joining Cisco to sales of several hundred million dollars
>two
>years later.
> Interestingly, Cisco’s success and market share have not attracted the
>trust-busting interest that Microsoft’s did. For one thing, Cisco sells no
>consumer products and is therefore almost invisible, politically. For
>another,where Microsoft’s Bill Gates is hyper-competitive, Cisco’s CEO John
>Chambers
>is famously ingratiating. Where Microsoft might demand that a little company
>sell out or be squashed, Cisco would keep bidding until the target falls
>happily in love.
> Cisco’s story began in 1984, when two computer specialists employed by
>Stanford University, Sandy Lerner and Len Bosack, decided to do something
>about the inability of computers at the business school to communicate
>directly with computers at the engineering school. They cobbled together
>existing network hardware called routers, modified existing software, and
>used existing Internet protocols to create a cheap, easy-to-use solution for
>their communication problem, which would become a solution for the world’s
>communication problems.
> In 1984, there were about 1,000 host computers connected to the Internet,
>and 99.9% of the world’s people did not know they had a communications
>problem. Those who did beat a path to Lerner and Bosack’s door.
> The two married and began making customized routers in their home. They
>raised capital on their credit cards and were profitable from the start,
>eventually hooking up with a venture-capital firm before, in 1990, bringing
>the company public at $18 a share. A short time later they were forced out
>by the management their backers had hired, and they divorced soon after.
> In 1993, Cisco was a one-product company, making nothing but routers. But
>that year one of Cisco’s big customers, Boeing, said it was going to build
>local area networks that would use not routers but switches, a type of
>communications computer different from anything Cisco made, and buy them
>from Crescendo Systems.
> CEO John Morgridge and John Chambers, a sales executive he was grooming
>for the top job, concluded that if the customer wanted switches, not
>routers,
>and wanted them right then, it would be necessary for Cisco to be a network
>company, not a router company. Cisco bought Crescendo for $95 million in
>stock.
> Over the next three years, Cisco would buy six more switching companies,
>including the $4.0 billion acquisition of StrataCom in 1996, which was then
>the largest purchase in the history of Silicon Valley.
> Counting the six networking companies, Cisco acquired one company in 1993,
>three companies in 1994, four companies in 1995, and seven in 1996. It
>picked
>up six more companies in 1997, nine in 1998, 18 in 1999 and has bought 10 so
>far this year, for a total of 58 acquisitions. Says Ammar Hanafi, Cisco’s
>director of business development: “Doing acquisitions is now wired into the
>DNA of the company.”
> Cisco is also a major venture-capital investor, pumping about $200 million
>into startups last year. Its portfolio of investments in companies that are
>still independent is worth about $3 billion on a cost of $400 million, he
>says.
> Beyond routers and switchers, Cisco also has acquired software and modem
>companies. It has picked up companies with software and other technology for
>IBM network equipment. Beginning in 1997, Cisco’s takeover emphasis shifted
>to the telephone network and the range of new gear for digital subscriber
>lines.
>No longer just a network company, Cisco reconceived itself as a
>communications infrastructure company.
>
> From there, Cisco acquired more advanced Internet technology and optical
>switching technology, maintaining its dominance in Internet gear. Last
>year’s $6.9 billion acquisition of Cerent Corp. underscored its
>determination to
>have the latest and best data transmission equipment, even in the face of
>competition from newer rivals such as Juniper Networks and Foundry Networks.
> Last year and this year, Cisco has extended its acquisition emphasis
>again.
>Its latest targets are telephony over the Internet, data over cable TV
>lines,wireless data networks and, for the first time, the specialized
>computer
>chips that make all the routers, switches, networks and phone systems fast
>and
>powerful.
> For a hint of how important acquisitions are to Cisco, consider these
>numbers: In the past three fiscal years, Cisco spent $3.3 billion on
>research and development internally and recorded an additional $1.5 billion
>in
>purchased research and development.
> Unfortunately for Cisco, the success bred by its acquisitions carries with
>it the seeds of self-destruction. As the company bids higher and higher for
>its targets, it drives up the market for all telecommunications-equipment
>companies — including Cisco itself. Acquisitions come harder and higher.
> Once upon a time, takeover artists looked for companies with shares
>trading far below the value of total corporate assets. Today’s takeover
>artists
>at
>Cisco and other such companies can’t do that. They are not buying assets,
>they are not buying products. They are not buying profits and they are not
>even
>buying revenues. They are buying people and half-formed technology that the
>people may someday turn into products generating revenues, profits and
>assets.
> Cisco’s takeover specialists run a risk: They must buy the right
>companies, with the right people, developing the right products for a market
>that may
>not exist for years after the deal is done.
> How well does Cisco do with its acquisitions? Very well, it says. One
>target company that had $10 million in revenues at the time of acquisition
>provided
>Cisco with technology that now generates more than $1 billion of revenues.
>But not all acquisitions are so successful, and for most of them, it’s hard
>for
>an outsider to gauge success.
> But Cisco does make it clear how high its hurdles are. The company has
>said it expects eight out of 10 investments to be successful.
> Until recently, Cisco accounted for most of its acquisitions through
>simple purchase accounting. More recently, however, it has made several
>acquisitions for prices that are astronomical even in this era of infinite
>price-earnings
>multiples, and accounted for them by the pooling-of-interest method. If
>these companies had been acquired for those prices with purchase accounting
>and
>entries for purchased R&D, Cisco’s reported earnings probably would have
>vanished in 1999.
> Pooling distorts earnings by failing to reduce them with amortization of
>goodwill and similar adjustments. And pooling can dilute the interest of
>shareholders. If Cisco issues 100 million shares of stock (before a recent
>2-for-1 split) worth about $6.9 billion to take over Cerent, a private
>company with $10 million of sales, stockholders ought to ask if the acquired
>outfit
>will be worth giving its owners roughly 3% of Cisco. It’s hard for anyone to
>imagine anything Cerent could do for the company to justify the dilution
>inherent in Cisco’s pooling-of-interest acquisition.
> Even with Cisco’s market cap of 39 times revenues, Cerent ought to have
>$176 million of revenues to join the Cisco family on a basis that’s
>equitable to
>Cisco’s existing shareholders. And if Cisco’s price should ever fall from
>here, the disparity would be worse.
> Friday’s acquisition of ArrowPoint should leave investors asking the same
>question. Cisco is issuing about 90 million post-split shares, with a market
>value of $5.7 billion, to acquire a company that had negative book value,
>has never earned a profit and had sales running at an annual rate of $40
>million.
>Applying Cisco’s revenue ratio, ArrowPoint ought to have sales approaching
>$146 billion.
> The Financial Accounting Standards Board has proposed doing away with
>pooling-of-interest accounting. FASB says investors can be confused if two
>equally sanctioned accounting methods produce vastly different valuations.
>Last week Congress held a hearing on the proposed ban, and Cisco officials
>joined executives of other high-tech companies in opposing it. They said it
>would make it more difficult to do mergers that apply the capital of
>established firms to the technology of new companies.
> Cisco fans seem anything but confused by Cisco’s reported earnings. They
>have awarded Cisco a share price that’s about 190 times reported fiscal 1999
>earnings. Yet there are serious questions about the quality of earnings at
>Cisco and other communications-equipment vendors.
> In order to close their deals, they are giving generous financing packages
>to their customers — sometimes to customers whose ability to pay ought to
>be more closely explored. Cisco failed to return calls on the question
>before
>press time, but it acknowledged in a footnote to its most recent quarterly
>report that it is experiencing increased demand for vendor financing, and
>has taken on increased risk as a result. The company does not fully disclose
>the
>extent of its vendor financing. A close reading of footnotes in the annual
>report shows that “net investment in leases,” a form of vendor financing,
>rose from $190 million in fiscal 1998 to $500 million in fiscal 1999, but
>fell
>again to $212 million at the end of the second quarter of fiscal 2000.
>Deferred revenues, which include accounting for deliveries where collection
>is questionable as well as other less problematic items, rose to $724
>million
>in fiscal 1999 from $339 million in fiscal 1998, and were not broken out in
>the
>quarterly statement.
> The company’s P/E alone should give investors pause, even though analysts
>strain to justify it. No established company has ever traded at such a high
>multiple and failed to come a cropper in the end — especialy not an
>established company with such predictable earnings.
> If Cisco sold at the multiples of its competitors, investors would be
>shocked. If the market valued $1 of Cisco’s earnings the way it values $1 of
>Nortel’s earnings, at a multiple of 100, Cisco stock would be selling for
>$35 a share. If it could command Lucent’s multiple of 46, Cisco’s share
>price
>would be around $16.
>
> How much does a company have to earn over the next 10 years to warrant a
>multiple of 190? By the old-fashioned one-to-one rule of thumb, matching the
>growth rate with the P/E ratio, earnings would have to grow 190% a year.
> Even bullish analysts do not believe that Cisco’s profits will even double
>from fiscal 1999’s $2.5 billion, much less that they will do so every year
>for more than a decade. If they did, the analysts would have to believe that
>Cisco’s existing businesses will produce profits of $2.5 trillion in 2010.
>If they believe that, then they should consider selling every other company
>in
>their portfolios, because a company that earns $2.5 trillion in 2010 will
>have taken over half the world. Of course, a company that successful will
>probably sport a P/E ratio way above a mere 190 times earnings, and it will
>be
>able
>to take over half the world for stock.
> Another question worth asking produces a different answer: If a
>hypothetical long-term investor buying Cisco at 67 3/4 at the end of last
>week
>were
>seeking what some bullish analysts expect, about 35% a year in price
>appreciation,
>what would the stock be selling at in 2010?
> Answer: $1,300 a share. At a multiple of 190 times earnings, Cisco would
>be making around $6.80 a share, or about $47 billion. That’s hefty, but a
>far
>cry from $2.5 trillion, the kind of earnings the P/E ratio implies.
> The absurdity of such speculation points up the ultimate impossibility of
>Cisco’s acquisition binge: It can’t go on forever. It also points up Cisco’s
>utter dependence on continuing an everincreasing string of successful
>acquisitions.
> —
>SHAREHOLDER DATA
>
>Market Value $495.6 bil.
>Shares Outstanding 6.94 bil.
>Insider Net Buys
>(shrs. Latest 6 mos.) 1.16 mil.
>Average Daily Volume 44.5 mil.
>Institutional Holdings 57%
>
>DIVIDENDS
>
>Current Rate None
>Current Yield None
>
>KEY DATA
>
>Profit Margin 17.1%
>Return on Common Equity 15.5%
>Return on Total Assets 14.2%
>Revenues to Assets 70%
>Debt to Equity 0%
>Current Ratio 2.0
>Business: Communications technology
>Headquarters: San Jose, California
>Recent Stock Price: 67 1/2
> —
>SNAPSHOT
>
> 1999 1998 1997 1996
>
>EARNINGS* $0.38 0.30 0.23 0.16
>(Per share)
>
>REVENUES $12.2 8.5 6.5 4.1
>(billions)
>
>NET INCOME* $2,096 1,355 1,051 913
>(millions)
>
>BOOK VALUE $1.78 1.14 1.06 0.48
>(Per Share)
> (END) DOW JONES NEWS 05-06-00
> 01:51 AM
>End of News