washingtonpost.com

FCC OK Unleashes XtremeSpectrum

By Michael Bruno Washtech.com Wednesday, May 29, 2002; Page E05

It’s been a long wait for Vienna-based XtremeSpectrum Inc.

The company has been developing semiconductor technology for wireless transmission of information since it was first funded in November 1998. But the ultra-wideband technology, caught up in a 3 1/2-year examination by the Federal Communications Commission, was just approved a month ago. The company now plans to ship its ultra-wideband chips to its business partners in the next two months.

The move means that by Christmas 2003, consumers may be able to wirelessly transfer movies, digital photos, MP3 clips and other large multimedia files between their computing devices at speeds 10 times faster than the current leading technology.

It also means that XtremeSpectrum hopes to become a leading provider of consumer-focused UWB technology, a field some analysts believe will burgeon soon.

UWB is the latest technology to take on the personal-area-network market, the mass of cables and electronic devices that pervades many homes and small businesses. For the past few years, users have had the option to go wireless, but the trade-off was that their data transfer speeds were not as fast.

Devices such as digital TVs, personal data assistants and MP3 players all use data formats where the speed of the data flow ranges from thousand of bits per second, such as MP3 at 320 Kbps, to millions of bits per second, such as DVDs at 10 Mbps.

Up to now, users had to choose from three formats — Bluetooth, Wi-Fi (802.11b) or 802.11a — to connect their equipment, and each has a downside. Bluetooth, once promoted by big-name tech companies, requires little power but offers speeds of only around 1 Mbps. Wi-Fi, the most prominent of the three technologies, offers speeds of 11 Mbps but needs more power. And 802.11a offers speeds of 54 Mbps but requires lots of power.

On the other hand, UWB promises speeds up to 100 Mbps and requires low power. A stand-alone device can be powered with a single AA battery, according to XtremeSpectrum.

The difference is in how the technology works. Traditionally, a carrier, such as a radio station, has an assigned frequency. UWB operates across a wide gamut of spectrum — 3.1 to 10.6 gigahertz and 24 GHz — and pulses the information instead of carrying it.

“We believe this will be a serious threat to Bluetooth and 802.11,” said David Hoover, an analyst at the Precursor Group in Washington.

Gemma Paulo, a wireless analyst with Arizona-based market research firm In-Stat/MDR, is less sanguine. She said UWB could complement Bluetooth but that it is “not really” a serious threat because federal regulations say it must limit its effectiveness to within 10 meters — although that limitation could be loosened.

According to In-Stat, the home networking market is expected to reach $3.5 billion in 2004 and $4.9 billion in 2006. The wireless portion of that market should hit $2.5 billion in 2004 and grow to $3.7 billion in 2006.

Neither Precursor nor In-Stat provide consulting or investment banking services, the analysts said. Their respective research groups also do not have financial relationships with the companies they cover.

The UWB concept was first developed in the 1950s but didn’t get anywhere until the late 1970s when the Defense Advanced Research Products Agency, a research and development organization for the U.S. military, became interested. In other forms, UWB can be a radar technology that can “see” through walls, forests and under ground.

“They got very interested in ultra-wideband because of its very low cost,” said Robert J. Fontana, president and founder of Germantown-based Multispectral Solutions Inc.

Multispectral Solutions has completed 64 contracts on UWB systems, such as ground-penetrating radar, with the military since late 2000. The 15-person company has been profitable from the start, and Fontana predicts that annual revenue will grow from almost $3 million to $4.5 million or $5 million as the federal government beefs up homeland defense efforts.

But before UWB could be applied commercially, the FCC had to approve it, and that was a long and controversial process. Since UWB spans a range of frequencies already used by wireless phone carriers and various federal agencies, including the global positioning system community, several established interests saw UWB as competition or merely interference. It took the National Telecommunications and Information Administration from September 1998 to February 2002 to negotiate a compromise. The FCC finalized its approval on April 23.

Because UWB pulses a low-power signal across a swath of radio spectrum, rather than streaming a signal on a specific frequency, it would not interfere with broadcasts on any one band.

“It probably produces less interference than a hair dryer being turned on,” said Rich Doherty, an analyst at the Envisioneering Group of Seaford, N.Y.

Still, the FCC is permitting its use in stages; the radio-frequency noise from a UWB device must be2,000 times lower than that emitted by a personal computer, baby monitor or garage door opener. If that produces no interference with other systems, higher levels of power — and increased range of effectiveness — may be approved.

Likewise, because UWB does not boost a signal on a particular frequency, UWB providers do not have to use equipment needed to carry a signal, which in turn knocks down the cost of UWB products.

XtremeSpectrum invested heavily in winning approval of UWB. Although Martin Rofheart, XtremeSpectrum chief executive and co-founder, declined to discuss how much was spent lobbying the government, the company hired 18 people for the effort.

“It was huge,” said analyst Hoover. “They spent a good portion of their [money] on lobbying.”

It was worth it, Rofheart said. Because XtremeSpectrum — formed a month after the regulatory debate began — was so intimately involved in the regulatory process, its chipsets were ready as soon as the FCC gave the final go-ahead.

“We’re trying to beat everyone to market,” Rofheart said.

“They basically designed their [chipset] around how they thought the FCC was going to rule,” analyst Paulo said.

Rofheart won’t discuss revenue projections for 57-person XtremeSpectrum, but he said the company won’t start counting sales until next year when its manufacturing partners start selling their consumer products during the holidays. He expects profitability in 2004.

Meanwhile, the company will rely on its venture capital. Funders include Cisco Systems Inc., Motorola Inc., Texas Instruments Inc., Alliance Technology Ventures, Granite Ventures and Novak Biddle Venture Partners. XtremeSpectrum officials have declined to discuss how much they have raised but plan to announce more funding, including new investors, within a month.

That’s good news since the competition is growing. Multispectral Solutions is expanding from government sales to the commercial market. Fontana said his company would introduce geolocation services and audio networking, such as audio systems in churches and arenas, over the next six months.

XtremeSpectrum’s leading rival, Time Domain Corp. of Alabama, has said its PulsON chipsets also will be available to its partners this year. Time Domain, which has an office in the District, is focusing on wireless broadband links and precision radar products.

According to analyst Hoover, Time Domain and XtremeSpectrum are sitting pretty: They are the leading companies in a marketplace that looks to take off.

“They definitely have their foothold,” he said. “They’re going to be around.”

Paulo with In-Stat said XtremeSpectrum has the edge.

“Time Domain wants to be in the consumer space, but they don’t seem to have an organized focus,” she said. “XtremeSpectrum is the only company that seems to know how to play in the commercial realm. The other companies seem to be a little bit more disorganized.”

© 2002 The Washington Post Company

———–

🙂

-Ian.

——– http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/12/19/BU44717.DTL

COMMUNAL BROADBRAND Neighbors sharing high-speed Internet access via wireless networks is popular and controversial Matthew Yi, Chronicle Staff Writer Wednesday, December 19, 2001 ©2002 San Francisco Chronicle

Sean Berry shares his broadband Internet connection with three neighbors – – including one across the street — but doesn’t have any wires running out of his windows or doors.

And in return, his neighbors sometimes pitch in to help pay the monthly $80 DSL service fee.

“There’s no formal money that changes hands. I’m not looking to make any money on it, but they do chip in every once in a while,” said Berry, a 27-year- old Unix systems engineer who lives in a one-bedroom apartment in Menlo Park. “It’s about the same rate as people chipping in for pizza.”

With the cost of rigging local-area, high-speed wireless networks plunging during the past couple of years, some tech-savvy Bay Area neighbors are finding economies in sharing broadband Internet service.

The movement is rubbing at least one broadband service provider the wrong way.

“We view it the same way as cable theft . . . and that’s against a variety of state and federal laws,” said Andrew Johnson, spokesman for AT&T Broadband, which provides cable modem service to 1.4 million customers across the nation.

The cable company even conducts flyovers in selected areas twice a year looking for any unauthorized “leakages” of cable TV and broadband signals, he said. When found, AT&T said it simply disconnects the customer.

While there may be some who splice and split broadband connections illegally, there are plenty of ways to share bandwidth legally, users say.

And many are finding online groups such as the Bay Area Wireless User Group to swap ideas on how to do it.

The user group, which began a year ago, now has about 1,200 people in its digital ranks. The list of techies who publicize their own wireless networks on the group’s Web site for others to use for free has grown from just a few to more than 20 in a year.

“And that’s just the tip of the iceberg,” said Tim Pozar, co-founder of the user group. He shares his wireless network and DSL connection with his next- door neighbor and a friend two blocks away, using a directional antenna atop his three-story Sunset District home in San Francisco.

The technology that enables this sharing is 802.11, also known as Wi-Fi, which can be found in such consumer products as Apple’s AirPort, Lucent’s Orinoco and Intel’s AnyPoint II Wireless Home Networking Kit.

With a range of little more than 100 feet, the gear is designed to help users wirelessly connect their broadband-linked desktop computer to laptops, PDAs or other peripherals such as printers and scanners.

But if you attach an external antenna, the range can easily go beyond just a couple of hundred feet.

And more importantly, the cost of setting up such networks has dropped substantially, from more than $2,000 two years ago to about $300 to $400 or even lower, depending on the latest closeout sales.

The network typically has one access point device tethered to a desktop computer and uses radio signals to communicate with other computers or devices.

That’s what Berry has done. Using an external antenna to increase the range,

his next-door neighbors, friends who live a floor below and other friends across the street can all tap into his network and the Internet.

“It’s wonderful stuff,” Berry said. “I work in the tech industry, so it’s fun to play with this stuff at home.”

Others have taken ideas off the Internet, such as using a Pringles potato chip can to build a directional antenna with a range that extends for miles.

“Hey, it cost me $6 (for parts) and it works,” said Sameer Verma, assistant processor of information systems at San Francisco State University.

Raines Cohen and 19 other neighbors in their downtown Oakland condo building each pay $4 for their DSL connection by sharing a single $80 DSL line using a combination of traditional Ethernet connections — which the building developer installed before the residents moved in — plus a wireless network.

“It is a backdoor way of saving money,” said Cohen, a 35-year-old software consultant. “All our neighbors (which include nurses, teachers, retirees and architects) now have computers at home and several have laptops using the wireless connection.”

While cable modem carriers such as AT&T may have stringent rules about sharing bandwidth outside the customer’s home, some DSL providers are lax about the issue.

“We don’t think it’s good policy to open up your line to people you’re not responsible for, but it’s not an expressly forbidden policy,” said Hunter Middleton, Covad’s group manager of consumer product marketing.

He said customers need to know there are potential liabilities, such as unauthorized users downloading illegal material like child pornography, and that sharing bandwidth with others may slow the connection speed.

“It seems like a lot of effort for a service that’s fairly low priced,” Middleton said, noting that DSL services can be had for as little as $50 per month.

Pacific Bell also doesn’t specifically forbid the practice, but does discourage customers from doing it, said Shawn Dainas, spokesman for SBC Communications, the utility’s parent company.

“It’s not in the policy, but that’s not the intended use,” he said.

Dave Solomon, systems administrator at an East Bay Internet service provider, Idiom.com, said his company doesn’t mind customers sharing connections.

“The angle most smaller ISPs will take is that this will make our customers happier, and happy customers are what we’re looking for,” he said.

But security is something users need to be aware of because the current encryption standard on Wi-Fi networks — known as Wired Equivalent Privacy, or WEP — has been broken, said Tony Bautts, a security design consultant who currently works for Wells Fargo Bank.

The bottom line is that hacking into a wireless network is “really, really easy,” he said.

An 802.11 industry group plans to announce a fix to the WEP security problems in existing units next month, while continuing to work for a more complete solution in future products.

For now, though, not only can hackers tap into the wireless network bandwidth, they can also look through files in your hard drive — a dangerous proposition, especially if the user keeps such information as bank account and credit card numbers on the computer. There are ways to keep people out of the computer files — such as instructing your OS to not share files — but these are precautionary steps wireless network users must actively pursue, Bautts said.

Despite these possible pitfalls, the benefits do outweigh the downsides, especially if proper precautions are taken, users say.

“You don’t trip over Ethernet cords, I take my laptop to the kitchen to look up recipes, take it outside when the weather’s nice . . . and I have social contact with others using the network,” Berry said.

E-mail Matthew Yi at myi [at] sfchronicle [dot] com.

🙂

-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

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