How Much Is the Engineer in the Window?
A rule of thumb in Silicon Valley is that a big company like
will pay about $5 million per engineer when acquiring a development-stage company. That's the kind of company that typically doesn't have revenue or products but that presumably does have killer technology and brainy developers focused on a fast-growing market.
exploded the $5 million rule when it announced in August that it would buy
for $6.9 billion, or about $24 million per employee. The per-engineer figure, had Cisco disclosed it, would have been even higher. Cerent had revenue, of course, and it likely was worth whatever Cisco paid considering the dramatic move up since then in shares of other companies in the optical-networking segment of the communications-gear industry.
Fortunately for Cisco, the Cerent acquisition also proved a high-water mark, as the accompanying chart shows. That deal was unusual because Cerent was about to go public and Cisco was forced to pay a premium of about what it reckoned Wall Street was poised to pay. Since the Cerent deal, Cisco has paid an average of $3.5 million per employee for the 11 acquisitions in which it has disclosed price and worker information.
Helping the average last week was the purchase of
, a 53-employee maker of "Internet switching fabrics," a new type of silicon used for telecommunications equipment. At $355 million, Cisco is paying $6.7 million per Growth Networks employee.
Mike Volpi, Cisco's top internal dealmaker, confirms that his company does indeed make a per-engineer calculation when acquiring private companies. "The metric has been rising with the increased liquidity in the market," he says in an email, without elaborating specifically on the value of an engineer.
FreeMarkets and the Reactive Press Release
An item here a month ago suggested that shares of
, the Pittsburgh-based online industrial auction site, had lost its momentum at around 171. "Hah!" answered FreeMarkets an hour and 15 minutes after the column was posted on
. The company announced that its customer base nearly had doubled. Its shares shot up almost $70, or 41%, in a day.
It turns out that FreeMarkets has a knack for the rapid response worthy of the
campaign's famous war room in 1992. The problem is that sometimes the device works, and sometimes it doesn't.
To wit, on Jan. 4, FreeMarkets disclosed the "expected cancellation" of its business relationship with
. That came a day after a Wall Street analyst said competitor
had wooed GM as a customer. On Jan. 14, FreeMarkets shareholder and No. 1 customer
announced that it was creating an online exchange called
, using software from
. The release made no mention of FreeMarkets, which put out its own release about six hours later, quoting United Technologies reiterating that FreeMarkets remains "an integral part of its strategy." That release didn't say why UT isn't using FreeMarkets for its MyAircraft.com online marketplace. Finally, for no apparent reason, FreeMarkets said Friday that its clients had reached the apparently noteworthy level of $575 million worth of products that have been auctioned on its sites. Might that news release have had something to do with the Feb. 17 announcement by Commerce One that it will be the brains behind a new Internet portal operated by
"These releases are made during the normal course of business," says a FreeMarkets spokeswoman.
No matter, the stock has drooped along with the rest of the market. It closed Friday at 176 5/8.
Here's the Silver Lining
Boris Feldman, a litigator with
Wilson Sonsini Goodrich & Rosati
in Palo Alto, Calif., makes his living defending companies sued by plaintiff attorneys. They're the bunch who scour the wires for stocks that have plunged and then file suit, alleging that the companies failed to warn investors of potential problems.
Feldman argues that such "missed-quarter suits" will be relatively few and far between for Internet-oriented companies because of their standard risk disclosures. New-age technology companies basically say in their filings with the
Securities and Exchange Commission
that they can promise almost nothing and that nearly everything about their business is an unknown.
To choose an example of risks highlighted in a very successful IPO, hardware maker
VA Linux Systems
disclosed in December that it expects to generate losses "for the foreseeable future," that it has a limited operating history, that investors "should not rely on the results of any past periods as an indication of our future net revenues or results of operations," and other scary warnings.
In other words, new technology companies are telling investors so blatantly that they can't predict the future that it will be more difficult to sue them for the future not turning out well.
Don't start raising that fund to keep Feldman clothed and fed, however. He predicts that the bulk of shareholder-rights suits in the future will turn on instances of alleged accounting abuses, such as the suits involving
. And there's no shortage of companies willing to commit accounting fraud, especially when their stocks are in free fall.
Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at