Stephen’s Posterous

Want To Position Your Start-Up To Be Acquired? Follow These Tips
By Scott Austin, WSJ.com

Last August 2008, Hewlett-Packard Co. signed a letter of intent to pay $360 million cash for LeftHand Networks Inc., a venture-backed provider of storage systems. A few weeks later, Wall Street’s collapse sent the economy in a tailspin and threatened to knock the screws out of the deal.

But after a two-week pause the two sides got back together and in November 2008 closed the acquisition on the same terms. LeftHand was able to hold its ground because it had proven itself valuable well before Hewlett-Packard offered to buy it. H-P had been reselling LeftHand’s software on some of its servers for nearly three years, and realized it couldn’t do without it.

The deal signifies the importance of setting up strategic relationships with possible acquirers, especially in this environment, said the aforementioned investor, Matthew McCall, a managing director with Draper Fisher Jurvetson Portage Venture Partners.

“When your hair’s on fire as a corporation, you’ll try anything to make the pain go away,” he said. “Now’s a great opportunity [for start-ups] to enter partnerships, distribution agreements, and dialogues with larger corporations.”

McCall was on hand at the National Venture Capital Association’s annual meeting in Boston last week to provide some pointers on how start-ups can position themselves effectively for a possible exit. McCall, who says his firm has scored 10 exits in the past 18 months, offered a few “key elements” that have helped his portfolio companies exit the past couple of years:

Form a strategic relationship with a potential buyer.

“Companies that have been successful in this enviroment are great at identifying who the strategic players are out there that would rather see you alive versus dead. Some of our portfolio companies are aggressively approaching them as a sugar daddy, as a protector in the market place.

They’re going to them and saying, ‘We’re going to get a production line out for you, but getting lease financing is very difficult, would you do that for us?’ And we’re seeing some of these guys come up with corporate lease lines for them or helping guaranteeing those lease lines.”

Look at it from the acquirer’s perspective. “Too many people try and sell from the position of fear. Especially in this marketplace, instead of saying, ‘How can we sell this?’ you need to get into their shoes and say, ‘Why do they need to buy it?’

One of our most successful sales in the last year happened because this was a critical piece of the buyer’s portfolio. You could see this was a hot part of the market, that they didn’t have a strong position in it and there are two or three competitors. If you can identify that and position it accordingly, you’re in a great position.”

Identify the alternatives. “If you’re the clear superior company in the market and there are no alternatives, you’ve got leverage. If you’re the No. 2 or 3 technology out there, you can push as hard as you want, but they’re going to push back on you. And then at the end of the day they could buy one of your competitors and could really put you in a bind.”

Make sure at least two mortal enemies are bidding on your start-up. “We had a company that was looking to sell, and went to a potential acquirer and said, ‘If you don’t move now, so and so will.’

They said, ‘Go ahead sell to them, we’d love to kick their ass in the market.’ About three weeks later we engaged their mortal enemy - the two had a Coke/Pepsi type of relationship. Two weeks later, we signed a letter of intent and closed it in six [weeks], at twice the original bid.”

Source.

The Twitter Revolution by Michael S. Malone, WSJ.com

"Twitter is the side project that took," says company co-founder Biz Stone, 35. "Now it's our chance to do something transformative."

When I arrive at Twitter's headquarters on a recent morning, Jerry Brown is waiting in the lobby, just another day at the world's hottest high-tech company. "It's pretty bizarre," says co-founder Evan Williams, 37. "At least once per day we look at each and say, 'What the hell?' It's like we're living out the script of the ultimate start-up company story."

But other than the familiar face of California's attorney general standing near the steel front door, you would hardly know that this little company of about 30 employees is the epicenter of the Web, used by an estimated 20 million Americans on a daily, even minute-by-minute, basis. Just how fast Twitter is growing is a company secret, but its traffic appears to be more than doubling every month.

The company itself seems calm and casual. The employees drift in, grab some free food and eventually make their way to their desks. It's located in an anonymous warehouse just a couple blocks from South Park, the once-frenzied environs of the dot-com companies of the first Internet boom.

In his sports shirt and slacks, sipping a bottle of apple juice, Mr. Williams exhibits indifference to the trappings of success. So does Mr. Stone, who last year won an Oxford Union debate wearing a borrowed bow tie and a pair of black sneakers.

The company is hiring like crazy, it expects to double its size in the next month or two, and is also adding a senior management, notably new vice-president of global operations Santosh Jayaram, hired away from Google. "We've never had a company that grew past 15 to 20 people," says Mr. Stone, "We're kind of excited about that."

Even faster than Google, Amazon and eBay in their days, the three-year-old Twitter has become deeply embedded in the culture. President Barack Obama twittered the words, "We just made history," on the night of his election. It was a twittered image that first captured the forced landing of US Airways Flight 1549 in the Hudson River.

Scores of people trapped in the Mumbai terrorist attack twittered desperately for help. And in a much discussed event, a San Francisco technology writer twittered his surprise to discover his home was being broken into.

Strictly speaking, Twitter is a social networking application that enables users to post short text messages,  called tweets, of no more than 140 characters on their personal feed. These real-time diary entries can then be read by other users, called "followers," who have subscribed to that page.

Twitter is much more than a novel way to share updates of one's daily life with friends. It's now evolved into a powerful new marketing and communications tool. Regional emergency preparedness organizations are looking at Twitter as a way to reach millions of people during a disaster.

NASA is using it to regularly update interested parties about the status of space shuttle flights. And one journalist solicited help from fellow Twitterers to get himself out of an Egyptian jail. It worked.

The real Twitter revolution may prove to be much more everyday. When I stop for a latte at Peet's Coffee on the way to the interview, the manager tells me that he plans to start sending out tweets to let regular customers know when a table is open. He isn't alone.

A Manhattan bakery twitters when warm cookies come out of the oven. "It's those small stories that really inspire us," says Mr. Stone. "Those are the things that transform people's lives."

Mr. Stone vividly remembers the first time he appreciated the power of Twitter. He and his now-wife had just bought a house in Berkeley and, having spent the day scraping up carpet and painting walls, he was tired and sweaty. "That's when I got a twitter from Evan saying, 'Up in Sonoma drinking pinot noir after a massage.' I just started laughing. That's when I realized that this technology could be entertaining too," as opposed to a basic communications tool, he says.

"It took us a while to figure out that it really was a big deal," says Mr. Williams. It was at the annual South by Southwest tech conference/music festival in Austin, Texas, in March 2008, that the social power of Twitter came home to the co-founders. "I found myself watching groups of people twittering each other to coordinate their actions, which bar to go to, which speech to attend, and it was like seeing a flock of birds in motion," says Mr. Stone.

As with many Web entrepreneurs, Messrs. Williams and Stone took unconventional paths to success.

Mr. Williams was born on a soybean, corn and cattle farm near Clarks, Neb., pop. 361, where he attended the single public school there. In a class of just 14, he took part in everything from sports to band. "In a school that small, everyone does it all," he says.

But he was an indifferent student and felt like a black sheep at home, too. His father and brother loved to farm and hunt, while Evan, a vegetarian, preferred to read and ponder schemes for building enterprises.

Eventually he made it to the University of Nebraska, but he never declared a major, took as few classes as possible, and eventually dropped out. In the years that followed, Mr. Williams drifted around the country, Key West, Dallas, Austin, working various technology jobs and trying to pursue start-ups.

But every time he got started on one idea, some new idea would pop into his head, luring him away and preventing him from ever following through on a project. "It was turning into a constant pattern," Mr. Williams recalls.

By 1996, Mr. Williams found himself back on the family farm, with little money and few prospects. "I was in the dumps," he recalls. He had long worshipped California's Silicon Valley from afar, and now, with nothing to lose, he decided to move there. "Unfortunately, my aim was a little off," he says, since he landed in the farming town of Sebastopol in Marin County, working for the old-guard media/conference firm O'Reilly Inc.

In the end, that proved fortuitous. What began as a marketing job ended up as an independent contractor job writing computer code, and in short order, Mr. Williams parlayed that into freelance work with legendary Valley companies like Intel and Hewlett-Packard. "For the first time, I learned what it was like to work in an office and have a normal career. To be in real meetings. I also learned that I didn't want to do that."

Did Mr. Williams ever feel that there was something wrong with his inability to hold a traditional job? "No," he says. "I always figured there was something wrong with everybody else."

In 1999, Mr. Williams teamed up with another contractor, Meg Hourihan, and founded Pyra Labs to make management software. A much admired product which allowed managers to handle complex projects online, Pyra earned him a reputation as a brilliant entrepreneur who didn't know how to make money.

"The truth is," Mr. Williams protests, "we had revenues from the first day . . . there just wasn't enough of them." It should have ended in yet another business failure -- but in computer parlance, Mr. Williams decided to 'turn a bug into a feature.' This meant taking one of his distracting brainstorms and turning it into a company.

The new company, called Blogger.com -- Mr. Williams invented the term -- which was developed from a note-taking application on Pyra, was the original blog prototype. It proved to be one of the few successes of the era. Better yet, Mr. Williams even managed to nail down some real venture investment just as the bubble burst.

Mr. Williams finally had a real company and real money. Now he needed a team.

Enter Christopher Isaac "Biz" Stone. Raised in Wellesley, Mass., Mr. Stone had an early love for graphic arts and theater. But at the University of Massachusetts, he too had proven to be a distracted student, and when a job at publisher Little, Brown evolved from moving boxes to designing book covers, Mr. Stone dropped out of college.

In the years that followed, he, like Mr. Williams, discovered a natural gift for Web design and programming. In fact, the two young men had admired each other's work from opposite coasts.

So when Evan invited Biz to join Blogger, Biz moved West. He arrived just in time to get the news that Google decided to acquire Blogger. Messrs. Williams and Mr. Stone, neither of whom technically qualified for the CV-obsessed company, were suddenly Google employees.

The gig lasted 20 months and both men say they thoroughly enjoyed it. Mr. Williams even met his future wife at the firm. But the entrepreneurship gene couldn't be denied forever. And in 2005, both men decided to strike out on their own. "It was about the toughest decision I ever made," recalls Mr. Stone, "and if I'd known how high Google stock would go, I'm not sure I would have made it."

Once out of Google, Mr. Williams teamed with another entrepreneur, Noah Glass, to found Odeo, a podcasting company. It was a brilliant plan, until Apple decided to offer its own podcasting application in iTunes. Says Biz, who had also joined the firm, "I remember asking Evan, 'Do you really want to be the King of Podcasting?' And he said, 'No.' And that was it." Looking back, Mr. Williams says, "I didn't follow my gut. I intellectualized myself into Odeo."

Mr. Williams had taken venture capital money to build Odeo and to change its business model, and he had to buy out those investors with a big chunk of his Blogger cash. Once again abandoning the main idea for a sidelight, he transformed Odeo into Twitter by stripping down and selling off the podcasting component and keeping the social-networking tool, the last a concept proposed by Jack Dorsey, now Twitter chairman.

Under the guise of a fun communications tool, Twitter is building one of the world's most valuable real-time information caches. And as Twitter's profile continues to explode, Oprah just sent her first tweet on yesterday's show, many wonder whether the company will ever find a revenue model.

Others speculate about who will buy the young company. Google seems to be the leading candidate. "We know there are a lot of people looking at Twitter right now," says Mr. Stone.

For now, Messrs. Williams and Stone are keeping their plans secret. With patient investors who just put in $35 million in third-round funding, the company is in no hurry. Mr. Stone will only say that "we are enamored with the idea of going all the way." Adds Mr. Williams: "We want to have as large an impact as possible."

Mr. Williams says that the amount of money it would take to buy Twitter right now is more than any company could justify to its shareholders, but suggests three other possible scenarios.

First, that Twitter could go public, probably without him, as he has little interest in running a public company. Second, Twitter could remain private and somehow buy out its investors. Or third, they discover some other option no one has thought of yet.

Of course, there's still one more possibility: Yet another one of Mr. Williams's obsessive distractions, as he calls them. Lately, he's been pondering a way to revolutionize email.

Source.

Fund manager Richard Parower is proving that it is possible to generate bull market returns even in a tough investment environment.

Parower is the portfolio manager of the Seligman Global Technology Fund (ticker: SHGTX), which recently earned a five-star Morningstar rating.

So far this year, the fund has generated total returns of 15%, outpacing its benchmark by 5.4 percentage points and the Standard & Poor's 500 by 23 percentage points.

So what's the winning strategy? It's pretty simple. Parower sticks to the No. 1, 2 or 3 industry players that can generate double-digit earnings and revenue growth. In this economic downturn, he looks for companies that have defensive cash flow and earnings power.

In addition to constructing financial models and dissecting trends, Parower travels to get a sense of what products and services are hot. In places like India, China and Taiwan, he visits companies, Internet cafes, looks for advertising campaigns and does a lot of people watching to see what mobile phones they use.

Parower recently discussed his investing approach with Barrons.com.

Q: Some technology chief executives have been saying over the past several months that an economic recovery will be led by the tech sector. Do you agree?

A: Generally, I agree with that. I don't want to get too complacent about that though. The reason why we are thinking that technology should lead out of the cycle is the proper application of technology generally helps companies reduce costs and makes them more efficient.

These are usually rapid return on investment projects. For instance, with systems-management software it ends up being a way to reduce the overhead cost of your IT [information technology] department using zero people to manage that many more resources.

Q: Overall tech spending has been on the decline. Where are the bright spots?

A: If we look at the enterprise [side], what has gone on so far this year and to a significant degree last year as well, corporations are being very careful about what they are spending. They are spending on things like security, risk and compliance. We've owned some of the storage names like EMC (EMC) and NetAPP (NTAP).

As this year progresses, the real surprise at the beginning of this year has been this inventory restocking that has gone on in the hardware food chain. They got caught shorthanded in terms of the comfort level of the components they had on hand to meet end demand. It doesn't mean it is getting better, but it has just stabilized.

Q: What are you seeing on the consumer side?

A: The consumer generally is still pretty tough at this point. One interesting thing that is going on with the consumer, and I kind of laugh about it, is flat panel TVs are doing really well.

Q: That's a surprise.

A: Exactly, you would figure in this more frugal environment that they wouldn't be doing that well. But I guess people decided, "Well, I'm going to stay home more, and I want a big TV to stay home with." But really what it is, too, is there has been very competitive pricing at retail and so TVs have generally done pretty well.

The numbers have been good so far this year in the U.S. In China there is a stimulus program that tends to work actually relatively quickly where the government is subsidizing purchases of things like handsets, low-end PCs, TVs up to a 32-inch panel, major appliances such as refrigerators and stuff like that, mostly outside of the Tier 1 cities.

Q: What companies are benefiting from these flat-panel sales?

A: We've owned some of the Asian names: AU Optronics (AUO) is not one of our top holdings, but it is one of our bigger holdings in Asia and they're a panel manufacturer. We've also owned some LG Display (LPL). With demand picking up they are able to crank up their factories more, cover their fixed-costs better. Pricing was actually modestly improving at the beginning of this year.

Q: What's driving security and what are your favorite stocks?

A: Security is one of those areas that if you are a corporation or a consumer you end up having to continue to spend on it, because there are always new bad guys or bad guys trying different ways to hack into your enterprise or to get access to things like your social-security number at home, credit-card information, bank information. New attacks make for a new demand or for new products from the security-software vendors.

We like three of the bigger players in security: McAfee (MFE), Symantec (SYMC) and Check Point (CHKP). One really good feature about that part of the security-software business is that they get their customers to sign up as subscribers. Most enterprises will re-sign with the same security vendor, and so you have this recurring revenue stream that generates nice consistent cash flow.

You still have Symantec, even today, trading at under 10 times free cash flow. You have McAfee, which is a better growth profile right now, trading probably somewhere around 11 times free cash flow. This is for calendar '09. Check Point's earnings and free cash flow are pretty similar, "[but they aren't] as big on the subscriber side as McAfee and Symantec. But Checkpoint is trading at about 8.5 times calendar '09 earnings.

Q: What is a good way to play risk and compliance?

A: In risk and compliance the companies that we like in that space are Open Text (OTEX), a Canadian company. They do content-management software. When a company gets sued now, there are e-discovery requirements. It is not just e-mails, it's instant messages, it's any content across the enterprise. And it is not just finding [the content], it is getting it into a database and getting it deliverable and searchable.

Q: Are you expecting further earnings downward revisions or are earnings hitting a trough?

A: I think we are getting pretty close to the trough here especially, knock on wood, for the companies that we own in the portfolio. We would not typically own a company where we thought we were going to have a negative revision. In general things are stabilizing. The business environment is stabilizing, that's what we are hearing from salespeople, and that's what we are hearing from the buyers as well.

We are starting to hear more noise about M&A [mergers and acquisitions] and that's actually a good sign. Obviously, we saw IBM (IBM) and Sun Microsystems (JAVA). I think Sun was crazy not to take that deal [with IBM] because I don't think there is going to be a better offer.

Q: Do you think Sun is good as a stand-alone company?

A: No. We don't own Sun. We are not very positive on the company. We don't think they're terribly well positioned in servers. They have some interesting products in software, but they don't make that much money in the business and they are not going to be a big player in it.

Q: What do you think about the prospects of Apple (AAPL) as a company and as a stock?

A: Over the past 12 months, we've seen things like the iPhone and the iTouch really start to take off because of the App Store. [The store's applications] can only be delivered to an Apple device, and the Apple devices are very attractive. So I think that model continues its virtuous cycle.

We believe there is going to be new lower-cost version of an iPhone later on this year. There is going to be certainly some new notebook products as well from Apple, and we do think they'll continue to do well. We are still pretty happy owning [the stock] at this point.

Q: What do you think about the flurry of netbooks being released? Is it a growth driver for PC companies?

A: It is sort of a catch-22 for most companies because you are selling a notebook for $300 or $400 instead of selling one for a $1,000. It does expand the market, but a certain part of the market it certainly cannibalizes for companies like Hewlett-Packard ([HPQ) and certainly Dell (DELL).

It is a big issue because Dell is not that good in notebooks to start with. To now have a lower selling price for a product that you are not really competitive in, where all the growth in the market is, becomes a big problem for them.

The one way to play netbooks and get good positive leverage in terms of earnings and revenue growth from netbooks is Acer, which is a Taiwanese company. Quite frankly, we have been lightening up on it some, but it is one of the things that we have played.

Q: What tech areas are you avoiding right now?

A: Communication equipment in general, so the infrastructure guys we are avoiding at this point. The telcos are not buying that much equipment right now. IT services are generally a late-cycle play in technology; that also means that when things start to rollover, it is one of the last things to rollover.

Q: Thank you.

Source. Subscribe to Barron's. Seligman Global Technology Fund.

Cisco Systems (ticker: CSCO), long a favorite among growth investors, is better known these days as a value investment. Despite worries over the global economy, there's still abundant value in the stock at a recent price of $17.

The company did most of its growing in the early 1990s selling machines, called routers and switches, that connect together personal computers in offices by directing the flow of packets of data. It got even bigger later in the decade as the Internet went mainstream.

Now Cisco would seem to be moving far afield of its networking roots with its $590 million all-stock purchase last month of consumer video camera maker Pure Digital. The company makes the wildly popular "Flip" video cameras, praised for their simplicity and small size. It's sold two million of them since 2007.

The payoff for Cisco is uncertain. But if history is any judge, buying shares of Cisco at just above a market multiple has tended to be a good time to place a bet. At a price-to-earnings multiple of 16.5 times the next four quarters' earnings, Cisco's premium to the Standard & Poor's 500 index is 1.2, well below its premium over the last two decades of 1.5 times, according to Thomson Reuters.

In fact, Cisco is cheap by a few measures. The company had $4 billion in cash on its books and $25.4 billion in investments at the end of the January quarter, and $6 billion in debt. Given that, Cisco trades at about four times the cash on its books, a steal compared to large-cap tech stalwarts such as Microsoft (MSFT), at 9.2 times, or Intel (INTC), at 8.6 times.

While Cisco's sales are expected to fall by roughly 10% in the fiscal year ending in July, there are signs business is stabilizing in its traditional networking market. In a technology rebound, a giant with unparalleled resources such as Cisco is one of the best horses to bet on.

Gone are the days of 50% sales growth at the height of the dot-com bubble, when Cisco held 90%-plus market share of Internet protocol routers and switches. In recent years, as Cisco's growth has slowed, the stock's main value for investors has been as a relative outperformer in a bear market.

What concerns Wall Street these days are two very large initiatives on Cisco's part, the Pure Digital buyout, and Cisco's announcement on March 16 that it will start selling servers this year in competition with Hewlett-Packard (HPQ) and IBM (IBM), each of which resell Cisco routers and switches.

At first blush, both initiatives offer growth at the expense of profit. Cisco's gross profit was 64% of sales last year. In contrast, servers offer a gross profit margin of 20%, and consumer gadgets like the Flip, offer even less. Then, too, Cisco stands to lose an estimated $2 billion annually in router sales through partners HP and IBM, analysts estimate.

But both deals make more sense upon further reflection. Hewlett-Packard has increasingly been selling its own router products in place of Cisco's. So the partnership was already headed for trouble. Relations with IBM are not as fragile as they may seem because Big Blue sells millions of dollars worth of chips to Cisco for routers and switches, so it has an investment in Cisco's continued success.

In both cases, Cisco is trying simply to follow where networking is headed. Where the company once sold machines that sat between computers, corporations today are trying to manage the networks evolving inside of large data-center computer installations.

Cisco can't just sell routers and switches anymore; it must provide the network that's inside all those metal racks of server computers.

As for Pure Digital, Cisco bought the company not just for the device itself, but to gain access to the design and marketing talent on staff at the company, which Cisco needs in a technology market increasingly driven by sales to consumers. "It's really all about creating fantastic consumer experiences, with easy-to-use software, and that's what Pure Digital has done," Charles Carmel, Cisco's vice president of corporate development, tells Barrons.com.

And so Cisco has chosen to bring its expertise directly to those gadgets that would otherwise be "off the grid." Meantime, there are bright spots amid the gloom for Cisco. In a note dated April 5, Goldman Sachs analyst Simona Jankowski argues that consensus earnings estimates are too low for this year and next.

Jankowski believes Cisco is taking share from, among others, Nortel Networks and HP. Cisco's sales will likely trough in the July-ending quarter, she writes.

Selling servers and digital video gadgets represents Cisco's biggest departure from business as usual in the company's 23-year history. While there's little proof either move will pay off, Cisco still has the resources to set the agenda in computer networking and the Internet.

Source.

VentureSource, the research firm that tracks venture investments in start-up companies, isn’t due to release first-quarter funding data for another week or two, though anecdotal evidence points to a drop in the year-over-year numbers. Venture firms are generally more guarded with their capital these days, and more suspicious of taking new stakes in start-ups.

On April 7, 2009, two technology companies are proving that the most promising and innovative businesses can still attract massive amounts of venture capital.

Fusion-io, a maker of storage drives that recently hired Apple co-founder Steve Wozniak as its chief scientist, announced it raised $47.5 million in Series B funding from a group of investors led by new shareholder Lightspeed Venture Partners.

Fusion-io has received a lot of attention for its flash-memory drive that can transform a low-cost Web server into a high-end storage area network transferring data at far faster speeds.

Fusion-io boasted in a press release that Hewlett-Packard and Fusion-io worked together on a server that used flash technology and became the first to process more than 1 million data transactions per second, a performance that would seriously improve data-intensive operations like order fulfillments or database mining.

That’s the kind of innovation that stands out in a depressed funding environment. Fusion-io isn’t simply modifying an existing product, it’s creating an entirely new way that data is stored at corporations.

Another start-up, online payment-processing company Revolution Money, said Monday it picked up $42 million from a consortium of large financial firms and individual investors. As Dow Jones VentureWire reported on April 6, this company is red-hot because it helps both consumers and retailers immediately save money.

By harnessing the Internet for its payment platform, the company slashes costs for accepting credit cards by up to 75% for merchants, who in turn pass part of those savings on to consumers to drive loyalty. Considering the money and minds behind Revolution Money, AOL co-founder Steve Case is the start-up’s largest shareholder, this business model could produce a sizable jackpot.

These two start-ups are defying the odds as they’re the only U.S. tech companies to disclose a venture round worth more than $40 million so far this year. Other start-ups that have done so work in the energy or health care sectors which traditionally require loads of capital for product development.

In last year’s first quarter, 14 technology companies raised at least $40 million in a single round, according to the VentureSource database.

Expect the median size of venture rounds to continue falling this year. According to VentureSource, the median amount invested in first rounds fell steadily last year to $3.8 million in the fourth quarter, a sign that venture firms are deploying capital cautiously.

The first-round median for the year stood at $4.2 million, the first year it has been below $5 million since at least 2001. The median size of a later-stage round in the fourth quarter was $9.1 million, the lowest since $8.9 million in the fourth quarter of 2004.

Source.

Amid the worst downturn ever in the disk drive business, there are still cutting-edge data-storage technologies that can grow rapidly and profitably. These emerging technologies won't help the industry's established vendors, but could boost the fortunes of smaller specialty companies.

One potential beneficiary: STEC (ticker: STEC). After 19 roller-coaster years in the solid-state disk-drive business, the Santa Ana, Calif., company is hitting its stride. Though shares are down 41% from their 52-week high, the stock has more than doubled, to 8, since November 2008, giving STEC a market capitalization of $394 million.

STEC's disk drives are much faster than traditional spinning hard-disk drives, and use far less power. That is because they are made of flash-memory chips, similar to those in Apple 's (AAPL) iPod.

STEC has a lock on the most expensive kind of drive, which it sells to EMC (EMC) and other makers of storage equipment for large corporations. Unlike disk drives, STEC's wares cost thousands, not hundreds, of dollars. The payoff is far greater profitability than traditional disk-drive makers, which could help the shares outperform in a recovering market.

STEC trades at 1.7 times this year's projected sales, 17.4 times 2009 earnings estimates, and 11.5 times 2010 forecasts. Yet profit is expected to increase by 51.6% this year, to 47 cents a share.

While many companies, including SanDisk (SNDK) and Korean giant Samsung (005930.South Korea), sell storage containing flash chips to consumers, STEC sells only to large storage-equipment makers, and in small quantities. By wrapping complex circuitry around flash, it gets market-beating profit margins.

This year is expected to be the worst on record for disk-drive makers, with sales falling by 15% or more from 2008. Yet shipments of flash drives like those STEC sells are expected to rise 227% between 2007 and 2012, according to research firm IDC.

It is STEC's game to lose. The company is supplying nearly all the top makers of storage equipment, including EMC, Sun Microsystems (JAVA) and Japan's Hitachi Data Systems. Deals with IBM (IBM) and Hewlett-Packard (HPQ) could be announced soon. As a result, STEC's main product, the ZeusIOPS, saw sales climb 300% last year, to $53 million.

Analysts think STEC's disk-drive performance has about an 18-month lead on competitors. "I look at the design wins in the marketplace, and right now, this market is all theirs," says B. Riley analyst Mike Crawford.

Intel and Hitachi could be next in line, but "it is going to take them till early next year to come out with a competitive product," and longer to get it accepted by storage-equipment vendors, adds Needham analyst Richard Kugele.

STEC's 50-year-old co-founder and chief executive, Manouch Moshayedi, came to the U.S. from Iran in 1979. He says the company's biggest advantage is its 30 flash-memory-drive patents, and 53 pending patents. Seagate filed a patent-infringement suit against STEC last April, but dropped all charges last month.

Little companies with hot technology will always have competition from big companies with more resources. But with its patents and customer deals, STEC is far more likely to be bought out than pushed out of this market.

Source.

Cisco Systems Inc. fired the first shot in the war for the data center on Monday, March 16, 2008, when the company announced it would begin selling servers later this year. Now International Business Machines Corp. may be firing back with news leaking out last night that the company is in talks to buy Sun Microsystems Inc. for $6.5 billion.

A number of venture capital-backed start-ups have cropped up over the last few years touting ways to make servers more powerful, more efficient and easier to manage, and these start-ups could be caught in a strong updraft as companies like Cisco, IBM and Hewlett-Packard Co. look to one up each other.

One such company is 3Leaf Systems Inc., which makes software that enables data centers to connect machines with far fewer cables. 3Leaf’s technology, called I/O virtualization has not been ignored by other start-ups. Xsigo Systems Inc. has developed an appliance with similar technology and Austin, Texas-based NextIO Inc. makes a chip that could add the same capability to almost any server.

Decreasing the amount of cables in a data center can significantly cut back on the amount of time and money an organization spends on managing its servers. Servers today can have as many as 30 networking and storage connections. I/O virtualization products can reduce that number to as few as two or three.

Much of the attention of the big boys will be focused on server virtualization, the technology that has greatly improved data center efficiency by allowing more than one operating system to run on a single server. Few start-ups are left that compete in that space; one of them is Virtual Iron Software Inc., which sells a low-cost version of the software popularized by VMware Inc.

Blurring the line between hardware and software has created a whole new host of problems in the data center and numerous start-ups have sprung up to help manage those. Cisco has partnered with BMC Software Inc. and HP and IBM each have their own in house offering, but many investors and analysts doubt that these traditional products are up to the task of managing new data centers, where virtual servers jump from one physical machine to the next.

One such company is Fortisphere Inc., which makes software that helps IT administrators put in place policy and controls to govern the behavior of virtual servers and track their physical location. But tracking and compliance are just some of the problems created by virtual machines.

Another start-up, V-Kernel Corp., is selling software that warns administrators when a server is getting overused and also ties the usage of the free-flowing computer resources to specific divisions and groups within a company for budgeting purposes.

Several others have recently raised venture capital to compete in this market, including Embotic Corp., Evident Software Inc. and Hyper9 Inc., which have raised a combined $15 million in the last few months.

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Stock indexes are retracing levels last seen 12 years ago, but in many cases sales and earnings are still coming in higher than ever for leading tech companies. That phenomenon has turned once-mighty Oracle (ORCL), maker of database software, into both a value stock and also one of the last growth stories left standing in tech.

The $75 billion market-cap company has fallen 19% in the last 12 months to a recent $15.01 on worries that spending on corporate software programs such as databases and middleware will evaporate completely this year. But among large-cap tech companies, Oracle is one of the few growth stories left in technology, a sector that has been devastated by falling estimates for all hardware products, including personal computers, cellphones and networking equipment.

Corporate software-industry sales are weak and the propensity among companies to spend on software is declining, according to a note put out Monday by Friedman Billings Ramsey's David Hilal, but Oracle has a balance sheet to weather the storm, not to mention the ability to grow faster in a recovery by buying cheap software companies during the current downturn.

Based on valuation, Oracle isn't getting much credit for its projected growth and its strong financial position. Oracle's forward four quarters' price/earnings multiple of 10.4 is in line with the 10.3 of the Standard & Poor's 500 index of large-cap stocks, which is the cheapest the index has traded in over 20 years.

Younger companies with higher growth are stealing all the limelight, with software-application company Informatica (INFA) fetching a 15.6 multiple, and Salesforce.com (CRM) garnering a 50 multiple. However, really tough times call for reasonable expectations to go with a reasonable valuation. If Oracle can return to something closer to its median 10-year forward four quarters' P/E of 16.6 over the next 18 months, the stock could rise from $15 to $25.

Oracle will probably increase sales 5% this year and next, and profit may grow 9% this year and 8% next year. That's certainly better than the 11.5% decline expected this year for the S&P 500 companies' average earnings per share.

Nor is 5% sales growth poor relative to expectations for Oracle's large-cap technology peers. Microsoft's (MSFT) revenue will probably grow only 1.2% this year, while IBM (IBM) and Hewlett-Packard (HPQ) are both expected to see sales decline this year, by as much as 5%.

The biggest risk to Oracle is not slowing software sales, but rather the rise in the U.S. dollar, which drastically reduces reported sales and earnings growth. In the November quarter, total revenue was up 13%, year over year, when counted on a "constant-currency basis, but up only 6% counting the dollar's rise.

While no one can predict the direction of the dollar, it's important to bear in mind a countervailing factor: Oracle's been buying its shares, thus helping reported earnings down the road.

In the November quarter, the company purchased $1.8 billion of its shares, at an average price of $17.14. That added one penny to earnings per share.

With $10.5 billion in stock, debt trading above par and not due until 2014 at the earliest, Oracle has a rock-solid balance sheet with which to weather the current downturn.

Buying tech stocks when tech spending is falling apart takes nerve, to be sure. If a great company like Oracle can return to high growth in a market upturn, such nerve could reward investors handsomely.

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It's far too soon hang a "Do Not Resuscitate" sign on Dell's door.

For one thing, the company is sitting on $9.5 billion of cash, equal to $5 a share. Back that out of the stock price, and you're paying just $3.61 a share for a computer-wholesaling business that just netted $2.5 billion, or $1.39 a share in the fiscal year ended Jan. 30, and could earn $1.11 in fiscal '10. Average these estimates, and the business sports a price/earnings multiple of just under three.

You won't find Dell's other key asset on the balance sheet, but in the executive suite. Founder, Chairman and Chief Executive Michael Dell returned to lead the company about 25 months ago, and is busily crafting a turnaround strategy to see it through some of the darkest days the U.S. has endured in decades.

If the CEO can implement his plans, shares of Dell could get a new lease on life. For now, pessimism rules.

Amid the global economic rout, PC sales have plunged, and IDC, a market-intelligence firm that tracks demand, sees a continuing erosion. Both consumers and corporations have delayed purchases; the latter is particularly painful for Dell, as corporate buyers still account for almost two-thirds of its sales, which topped $13.4 billion in its latest fiscal year.

Dell is more exposed to the PC slump than either Hewlett-Packard or Apple, both of which also recently reported disappointing earnings. The toll was apparent in Dell's fourth-quarter results: Revenue fell 16%, to $13.4 billion, and earnings from operations slumped 30%, to 29 cents a share, two pennies more than the market's subdued expectations.

In a conference call with analysts, Dell executives focused on the company's cost-cutting initiatives, particularly a plan to eliminate $4 billion in costs in the four years ending 2011. In the past three years, Dell has lost the competitive edge it enjoyed for so long from its low-cost assembly lines, mainly because rivals like HP have been opening even lower-cost plants in China. It's Dell's turn to play cost catch-up.

Dell's other turnaround efforts have borne little fruit so far. Plans to boost higher-margin server and services sales have stalled, while a deliberate move away from direct consumer sales via the Internet has flopped. Although Dell PCs can now be purchased in 24,000 retail outlets, Dell gets only 2% more revenue from the consumer than it did a year ago.

Nothing came of last year's carefully leaked rumors that Dell would try to leverage its brand name with a planned MP3 music player and smart cellphone. That's a good thing. It's difficult to see what Dell could bring to a party that includes Apple's iPod and iPhone, and Research In Motion 's BlackBerry.

"A revitalized Dell must first accept that the Dell of 1999 is gone forever, and that the company must go down a new and different road to prosper," says Richard Kugele, an analyst at Needham.

First, says Kugele, the company should accept that expansion into consumer products like smart phones would be stupid, as would any grand plan to try to grow consumer PC sales. It would be best, he argues, for Dell to expand in its core commercial market via the sale of higher-value software and services.

But the only way for Dell to "really make itself over" would be through an acquisition, he says, noting that NetApp, a leading provider of storage and data-management solutions, and Accenture might make logical targets.

For that matter, Dell itself could become a takeover target, given its sterling brand, entrenched manufacturing network and not least, that stash of cash. That the patient is under the weather is all too clear. But nearing death's door? Not a chance.

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Microsoft plans to open retail stores to peddle its wares in competition with Apple’s hip outlets. But the software giant’s focus on software, rather than cool gadgets like the iPhone, will make it difficult to generate the same level of buzz.

It’s easy to see why Microsoft wants to follow Apple’s foray into retail. Apple’s roughly 250 outlets brought in hefty average revenues of $30m per store last year. And they’re great advertising. Many Apple stores, like its flagship outlet on New York’s Fifth Avenue, have become tourist destinations.

Microsoft does produce the popular X-Box video game console and the struggling Zune music player. But these are sideshows to the company’s software business. Unfortunately, software is just less sexy than hardware – and Microsoft’s offerings are hardly exciting enough to draw in gawkers and computer nerds, the way Apple’s stores do. Also, most sales of Microsoft’s flagship operating system come pre-installed in computers. Selling PCs from manufacturers like Dell or Hewlett-Packard could hurt sales at the retail chains it currently depends on, like Best Buy.

Meanwhile, there are indications that the company’s grasp of “cool” is somewhat tenuous. It hired 25-year Wal-Mart veteran David Porter to head the retail venture. Apple’s retail boss, Ron Johnson, had been with Wal-Mart’s hipper competitor, Target.

Microsoft’s stores could aim for a different demographic than Apple and become a magnet for PC buyers. That would position it well for the much anticipated launch of Windows 7, its forthcoming operating system. But to succeed like Apple, the company will have to work hard to overturn its image as a dull monopoly.

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