Daunting issues and lame-duck status shadow San Jose Mayor Ron Gonzales

BY DAVID SPEAKMAN

San Jose’s mayor is a busy man. After easily winning re-election to a second and final term, the mayor of the 11th-largest U.S. city is turning to childhood lessons as he faces the daunting tasks of dealing with a recession, launching new initiatives and shaking a lame-duck image.

Despite his large corner office with a panoramic view, being mayor of San Jose since 1999 has been an almost thankless job for Ron Gonzales regionally, as public attention in the Bay Area tends to focus on San Francisco and Oakland.

“I think for years, San Jose lived in the shadow of our two neighbors to the north,” Gonzales says. “I think we suffered from a lack of identity because we were trying to copy other people’s identity rather than shape our own.”

This from a man whose own image has remained enigmatic, despite having one of the most public jobs in the valley.

“He has a presence about him that says, ‘I know what I’m doing,'” says San Jose Councilman Ken Yeager, who met Gonzales 14 years ago when the mayor was running for county supervisor. “He has been more successful as mayor than he was on the board of supervisors.”

A guarded expression in Gonzales’ eyes betrays a painful first term in office. A Democrat, Gonzales has been savaged by the left wing of his party for not supporting expensive measures that would have benefited labor causes. His relationship with local media is icy after news reports dug into his personal life in 2000 and revealed his sexual relationship with a female aide and the break-up of his long-term marriage.

Two-and-a-half years later, a now-single Gonzales says he wants to focus on building a world-class city. With a population approaching 1 million, San Jose is the largest city in the Bay Area, beating San Francisco by a hefty margin of about 200,000.

Gonzales believes the days of the world ignoring San Jose are over, even if the rest of the Bay Area hasn’t caught up to reality.

“Because of our size and proximity to the high-tech industry, we’re getting more and more notoriety and recognition,” Gonzales says. “And certainly, we are taking our rightful place in the politics and economy of this state and this nation.”

When Gonzales speaks like that, you know you’re listening to a natural politician — someone with change-the-world dreams in his DNA. That genetic predisposition can be traced to his father, Bob Gonzales, a celebrated labor and Latino activist in the 1960s and 1970s.

The mayor says his life was irrevocably altered almost a generation ago because of the teachings of his father.

“My father was very involved in the community, social justice, the civil rights movement,” Gonzales says. “He was really the first person who instilled in my mind, and in the minds of my brothers and sisters, that whatever we were pursuing in terms of a career, that alongside of that, we had an obligation to find some way that improved the lives of others.”

The mayor’s cool demeanor thaws as he talks about his father, who died in 1994. Gonzales says he strives to keep lessons alive even though his views are not as liberal as his father’s.

“I have found that public service has been the best way that I have found to É improve the lives of others,” says Gonzales, pausing to collect his thoughts. “To provide an opportunity for a child to check out their first library book, to play their first soccer game and to feel safe doing it because they are living in the safest large city in America, to start public education at age three though our Smart Start center — these are the kinds of new things that you can bring to a community than can improve the lives of others.”

Besides his father, the mayor points to his career at Hewlett-Packard Co. as the other major influence in the way he approaches life. Many believe Gonzales’ 11-year career at HP tempered his father’s more leftist influence.

“One of the things you learn in business is to be results-oriented, and I pride myself on making sure to the extent that is possible that government can be run like a business,” Gonzales says. “You can be focused on results and outcomes rather than just spending.”

He says coming to politics from the private sector brought the experience of knowing the bottom line and how to manage costs, even though applying those lessons to a city can be difficult.

“I think the challenge we faced when I came in is that the city of San Jose is a large organization of 5,000 to 6,000 workers trying to serve over 900,000 residents. And big organizations, whether in the private or public sector, tend not to be very nimble,” Gonzales says.

He is fighting to keep control of the city’s agenda. For the first time in his political career, Gonzales may face a hostile council majority after two new members, Judy Chirco and Terry Gregory, won seats despite the mayor’s endorsement of their opponents. Some council members have voiced interest about being the city’s next mayor.

“The first four years, he got what he wanted,” Yeager says. “Now he is a lame duck, and I think the tough times are still ahead for him.”

Gonzales’ primary focus these days is San Jose’s Norman Mineta International Airport, which continues to deal with the double whammy of the dot-com recession and aftermath of the Sept. 11, 2001 attacks. Gonzales is lobbying for a special March election to get voter approval of funds for emergency projects to improve the airport.

In that special election, city voters will decide on Measure A, which would allow San Jose to proceed with airport improvements, which can’t start under current regulations until the airport is linked to the county’s light-rail system.

“We have to meet federal safety inspections and we can’t do that now,” Gonzales says. “The federal government knows we can’t do it with the existing facilities and the public knows it.”

Although he is tight-lipped about his post-mayoral plans, he has formed an exploratory committee to possibly run for governor in 2006. So far, Gonzales says he is confident his father would be proud of the strides San Jose has taken under his watch with its school initiatives and efforts to build affordable housing.

“He’d be ecstatic about our effort to bring BART to San Jose, although it won’t be implemented by the time I leave office [Jan. 1, 2007].”

SGI’s latest facelift may be its last

BY DAVID SPEAKMAN

Fresh off its 20-year anniversary, money-losing Silicon Graphics Inc. says it knows where the future is. This is another makeover for the Mountain View-based company, which Hoover’s Inc. describes as having had more facelifts than Michael Jackson.

Like IBM, Hewlett-Packard Co., Sun Microsystems Inc. and Apple Computer Inc., SGI hopes for a comeback featuring the market demand for cost efficiency and low-cost Linux to expand its stronghold of high-margin servers and supercomputer clusters to scientific and engineering research.

“We are 100 percent focused on science and engineering,” says SGI CEO Bob Bishop. “We live or die on what we do in that space. Plan B is Plan A. We have no backup.”

SGI has not earned a quarterly profit since June 1999. Recently, it reported a loss of 8 cents a share for the second quarter ended Dec. 31 on revenue of $263 million, down from a loss of 2 cents a share the previous year. That’s much better than the 13 cent loss the Street had expected, according to Thomson Financial/First Call. Analysts expect the company to lose 10 cents a share in the current quarter.

“With a cash burn rate of $20 million in the [current] quarter, a revenue pickup is clearly needed in 2003,” says Buckingham Research Group analyst Jay Stevens, noting that on the positive side, the company is lean with a gross margin of between 42 and 43 percent.

At LinuxWorld in New York earlier this year, SGI won the “Best of Show” award for its system that pairs Santa Clara-based Intel Corp.’s 64-bit Itanium chips with its Altix 3000 family of servers and superclusters. Altix 3000 machines are set to ship in March and sales may appear in the company’s results in June.

Trim and focused, SGI is hoping its 3-year-old Linux initiative is more successful than past flirtations and failures in high-end personal computers, video game chips, streaming media, 3-D animation software, Hollywood special effects and computer graphics cards.

Under Bishop’s leadership since 1999, SGI has quit its consumer products business, killed off all software operations not linked to its operating system and either sold or closed down its enterprise operations, resulting in pink slips to thousands of employees since 1998.

“We have a tight mission to be the unchallenged supplier of tools to scientists and researchers,” Bishop says, pursuing a market that he estimates is worth $15 billion.

Growth is possible because SGI has only tapped about 10 percent of the higher-margin scientific technology and engineering market. It wants to conquer industries dependent on researchers such as defense, biotechnology and Linux-based computing.

Sales to the defense industry make up about one-third of SGI’s projected fiscal year revenue of $1.3 billion, up from 25 percent in 1989 when many high tech companies abandoned defense for the Internet.

On Jan. 28, SGI unveiled its most recent defense deal with Lockheed Martin Naval Electronics & Surveillance Systems of Akron, Ohio, to double the number of SGI-built F-16 Mission Training centers to 10. Both companies say it is a multi-million dollar deal, but its exact worth won’t be
determined until the custom systems are installed. Each system is expected to exceed $1 million.

SGI’s CEO is content to let bigger fish fight over the consumer market.

“PCs just run out of horsepower,” he says. “Local defense labs waste billions of dollars a year on inefficient computing. We don’t give a damn about the $1 trillion consumer PC market. Let Dell and HP fight it out in that market, which is a commodity anyway.”

Only time will tell if SGI, known for the high-powered computers behind the blockbuster movie “Jurassic Park,” will finally turn a profit or go the way of dinosaurs.

BY DAVID SPEAKMAN

Greater Bay Bancorp, the valley’s largest, independent bank, faces a mid-July deadline to comply with Federal Reserve Board rules about risk management and money-laundering prevention. Financial analysts are at odds about how the greater scruntiny will affect the Palo Alto-based bank.

The bank (Nasdaq: GBBK), said on Jan. 15 it reached an agreement with the Federal Reserve to address the central bank’s concerns. GBBK has 180 days to prove it has the ability to cover its debts and prevent money laundering under the Bank Secrecy Act, which is more rigorous since the 2001 terrorist attacks.

GBBK, with nearly $8 billion in assets, has been criticized by some analysts as being overexposed to the lackluster regional real-estate market. The bank may have attracted the Fed’s attention by re-incorporating as a holding company Feb. 1, 2002.

In a written statement, GBBK’s CEO and president David Kalkbrenner downplayed any effects of the compliance process.

“We have already dedicated significant time and resources to addressing these items and expect to complete them in a timely manner,” he said. The bank declined further comment due to a U.S. Securities and Exchange Commission-mandated “quiet period” prior to its Jan. 22 earnings release.

Recently, the bank chose Kenneth Shannon as its chief risk officer, a new position created out of the regulatory concerns.

While some Wall Street analysts agree the bank likely will meet the deadline, they differ on the agreement’s likely effect.

“Put simply, adding regulatory scrutiny on top of stubbornly low, short-term rates and a stagnant É commercial real-estate market should reduce [GBBK’s] 2003 operating earnings below 2002 levels,” says Charlotte Chamberlain, an analyst with Jefferies & Co.

Joe Morford, an analyst for RBC Dain Rauscher Inc., offers a different view.

“All things considered, the issues appear fairly mild to us,” he says, explaining the bank’s fundamental indicators such as capital levels and reserves remain sound.

Morford says the biggest issues facing GBBK are related to the deterioration of the region’s commercial real-estate market, further cuts in interest rates and possible future regulatory restrictions.

BY DAVID SPEAKMAN

Those who haven’t heard the word “blog” before better get used to it. The American Dialect Society says of all the new terms entering our lexicon last year, this four-letter word is the most likely to stick around permanently.

With the ability to instantaneously update diary-like logs remotely over the Internet, Weblogs, or blogs, are attracting financial pundits.

Based on a technology that nearly died with the dot-com bust, the blog has made a comeback and is making its mark on time-sensitive communication.

For some, the blog is a natural fit with financial market pundits since it allows updates from any personal computer or mobile device connected to the Web.

“Blog is the modern day financial newsletter,” says Marc Canter, founder of Macromedia Inc. and current president and CEO of San Francisco-based Broadband Mechanics Inc. “In the case of a financial trader, he may have a private blog that only a few people have access to,” Canter says. “But if you get the right people to listen to you, you can move a mountain.”

The company that popularized the blog almost died before the blogging movement began. San Francisco’s Pyra Labs LCC, owner of www.blogger.com and its blog software was saved from extinction after the 2000 dot-com bloodbath by an angel investment from VisiCalc founder Dan Bricklin’s Trellix Corp.

With blogs passing the 1 million mark Jan. 1, the company claims a 67 percent share.

Pyra’s software won over investor Donald Luskin of Trend Macrolytics.

“There is essentially no learning at all involved in using it,” Luskin says. “It’s about as easy as e-mail. Believe me, I don’t have much [programming] knowledge, and I’ve set up some cool blogs. Blogging means you can create a collaborative, interactive and frequently-updated site with virtually no upfront investment in custom-software design.”

Pyra’s Shellen says market watchers and the financial community are not the only industries adopting blog, noting the first group outside of the tech savvy to adopt blogging were political pundits after the 2001 terrorist attacks. “September 12 was our highest sign-up day ever. But lately we’ve seen an increase of blog use among the legal profession.”

“You can see your thoughts spread out through the Internet and watch them evolve and come back,” says Mitch Ratcliffe, president of Internet/Media Strategies, which publishes a media trends blog using software from Userland Software Inc.

The blog free-speech evolution has at least one world government on edge. Recently the Communist China government, which is tightening its control over Web technology used for political dissent, blocked its citizens’ access to Blogger.com’s Web site.

Many stock watchers, still reeling from high-profile accounting scandals, are wondering whether new accounting rules mean earnings reports can be trusted.

“Most of the change is coming from the SEC and companies looking to change their images,” says Ron Gruner, president of Maynard, Mass.-based investor-relations service Shareholder.com.

While the goal is a clearer, simpler way of reporting the fiscal health of public companies, there is still no consensus on what earnings thermometer should be used.

“There are two questions facing earnings today,” says Robert Green, a Boston-based analyst with stock market tracker Briefing.com, “What is the proper definition of earnings? And, are earnings all you should
look at?”

Currently, analysts use three types of earnings results to dissect company performance: as reported, operational and core earnings. Pro forma earnings, popular throughout much of the 1990s, have fallen out of favor.

As-reported earnings — also known as GAAP (generally accepted accounting principles) numbers — are by far the most popular. GAAP includes most costs and sources of income.

Biz Ink reports this number as corporate profit or loss.

“GAAP is great for accounting purposes — for five-year trends,” Green says. “But I think people are still looking for a number” to judge short-term performance.

Expenses related to discontinued operations and extraordinary items can swing a company from the profit column into the loss column, he says.

“Cash flow is almost as important as earnings — if not more so,” he says. “You can’t lie about cash flow.”

BY DAVID SPEAKMAN

Year-end earnings, now in full bloom, show Silicon Valley is leaner, meaner and poised for a comeback.

Biz Ink looked at the recent earnings reports of three of the biggest brand names in technology, as well as how Wall Street analysts reacted, to see if any trends were emerging.

For the most part, analysts praised corporate focus on core product, gains in market share and company readiness to capitalize on an economic turnaround.

Intel chips not down

Santa Clara-based semiconductor giant Intel Corp. (Nasdaq: INTC) said revenue from its fourth quarter, ended Dec. 31, came in at $7.2 billion, a 10 percent increase from the previous quarter. That translated to a profit of 16 cents per share, up 54 percent from the previous quarter, beating most analyst estimates.

Intel said growth in its Xeon family of chips helped its Intel Architecture quarterly revenue rise to $5.9 billion, a 2 percent increase from last year. The company has high hopes for its new Banias and Centrino chips for laptops.

“We believe that Intel’s continual investment in cutting-edge technologies enables the company to maintain its leading position and gain market share,” said David Duley, Wells Fargo Securities analyst, in a Jan. 15 research report.

Duley says Intel could see an uptick this year, beginning in July as Microsoft stops supporting most corporate Windows 9x/NT products, forcing business to buy more powerful machines to take run Windows 2000 or XP.

“We view the potential corporate upgrade for Windows 2000/XP in 2003 as a likely spark,” say Pacific Crest Securities analyst Michael McConnell.

Yahoo surfs past Wall Street

Yahoo Inc. (Nasdaq: YHOO) reported fourth quarter profit of 8 cents per share, up from a loss of 2 cents in the year-ago period. That result was 2 cents higher than the Street’s consensus, according to Thomson Financial/First Call.

The Sunnyvale Web portal reported quarterly revenue of $285.8 million, up 51 percent from 2001. Last year, Yahoo said its revenue suffered because of the Sept. 11, 2001 terrorist attacks.

“Yahoo is the best-performing portal and, as such, is well-poised for upside from an improving ad market,” says Safa Rashtchy, a U.S. Bancorp Piper Jaffray analyst.

Margins for Yahoo improved across the board, reflecting increased leverage, a more favorable revenue mix and well-controlled costs and expenses, according to Standard & Poor’s analyst Scott Kessler.

“Earnings-per-share were higher than we anticipated not only because of operating improvements, but also due to a lower-than-forecasted tax rate and an active stock-repurchase plan,” Kessler said in a Jan. 16 research note.

Also cited as a key factor in Yahoo’s turnaround is the company’s staffing reductions and restructuring during the past two years.

S&P says not to expect much of an increase in Yahoo’s share price since — at more than $18 a share — the stock is already overpriced.

“Although the fourth quarter gave investors reason for encouragement, we nevertheless remain bearish on the near-term prospects for the shares, based largely on their excessive valuation,” Kessler says.

Kessler says Yahoo trades at about 65 times 2003 operating earnings estimates, which exceeds those of its peers. Consequently, Kessler believes Yahoo shares should be trading in the $12 to $14 range.

eBay continues winning streak

San Jose-based eBay Inc. (Nasdaq: EBAY) saw more than $4.6 billion of gross merchandise sales in the three months ended Dec. 31 — that’s about one-third of all online sales for the quarter, according to Nielsen/NetRatings. eBay reported fourth quarter profit of 28 cents a share on revenue of $413.9 million, beating the Street consensus by 4 cents and doubling last year’s result.

“Perhaps even more impressively, the company generated an incremental 6.8 million registered users,” says Bear Stearns analyst Jeffrey Fieler, saying the company performed ahead of his expectations by attracting a total of 61.7 million users as of Dec. 31.

“Building on a strong holiday online retail season that favored bargain-conscious and time-starved consumers, eBay’s operating performance exceeded expectations in virtually every category,” says Christa Sober, an analyst with Thomas Weisel Partners. “The outperformance should assuage doubters’ concerns that the company might not reach its 2005 targets of $3 billion in revenue and over $1 billion in free cash flow.”

Adding it up

As for tech trends so far, judging by Wall Street, successful valley companies paid attention to the bottom line.

Whether launching new services to grow lucrative markets, or cutting back on services, location or staffing in losing ventures, a focus on growing core business profits garnered most analyst praise.

Donald Luskin’s premise for his analyses begins with the concept that everyone is wrong

Investor Donald Luskin has won foes and friends by butting heads with the Wall Street establishment for 25 years with a no-holds-barred approach to economics and finance.

Luskin’s take on the stock markets appears regularly in The Wall Street Journal and on business cable channels CNNfn and CNBC. A passion for technology and innovation made Luskin start his own company after a career that included stints as vice chairman and co-chief investment officer at Barclay’s Global Investors, and founder of the investment technology group at Jefferies & Co. But he was burned by the dot-com flare-out when his OpenFund mutual fund, which was started with $35 million in September 1999, closed two years later with $10 million worth of investments.

Reporter David Speakman talked with Luskin about his venture, Trend Macrolytics LLC of Menlo Park, and life in the valley.

How is Trend Macrolytics different from similar services?

The starting point for our macroeconomic analysis is that everybody else is wrong. That everything you read in the media, hear from politicians and are taught by Ivy League economics professors is bullshit.

Our analysis is based not on academic theories, political ambitions or media clichés, but on a hard-headed analysis of what moves economic actors. We track and measure the ever-shifting incentives and disincentives to various types of economic behavior and extrapolate their results.

What led you to strike out on your own rather than work under the
umbrella of a large corporation?

Been there, done that. This is the kind of work where a couple of smart guys can take on the world and win, so why not?

When you retire, what do you want to be remembered for professionally?

I’ve already retired from several careers. In each one I produced something of lasting value for the world. The common thread has been the application of technology to the challenge of investing. Whether it’s pioneering real-time options valuation and hedging techniques; creating the world’s first institutional crossing network POSIT [and electronic stock trading platform] and founding the investment technology group; helping to make index funds into a trillion-dollar industry; or founding the world’s first, full-disclosure mutual fund — it’s always been about technology and investing.

How do you quell your itch to tackle those big issues now?

Now I’m working along entirely different lines. In my work at Trend Macro, and in terms of the book I’m writing, “The Conspiracy to Keep You Poor and Stupid,” I’m trying to do something much broader. I’m on a crusade to immunize people against the terrible anti-capitalism, anti-freedom, anti-wealth economic ideas that are threatening to destroy the world. We are now in an age of backlash against capitalism. We had seven fat years. Now we’re in the seven lean years.

You refer to your company as small, but you get some big media attention. Why?

I developed a lot of media contacts from my days as a dot-com CEO, and I’ve kept them alive. I do a lot of pundit work myself. So, I guess you could say I am actually part of the media myself. In my media work, I try to be very honest, which is surprisingly unique and surprisingly difficult in the media. The reality is that reporters are constantly trying to use their sources, and interviewers are always trying to use their interviewees, to say stuff that the reporter or interviewer himself wants to say. So if you want to get quoted, you have to guess what they want to hear and give it to them; mostly that involves lying. I won’t do that. There’s a core group of media people who respect that and seek me out for it.

Why does humor have such a strong emphasis on your Web site?

I don’t see why economics has to be “the dismal science.” So much of the ponderous solemnity that pervades most economic discourse is just to disguise the fact that there’s nothing there. One acts seriously in order to be taken seriously. But as I said earlier, most of what most people say about economics is bullsh*t. Humor is one very potent way to keep on your toes and not get sucked into the false seriousness of the people who are trying to lie to you.

You’ve lived through the highs and lows of the valley economy. What lessons have you learned?

The most striking lesson is the asymmetry of those highs and lows. There is a boundary on the lows. The worst thing that can happen is that you go out of business, get fired, whatever. But the best thing that can happen is entirely unbounded. You could be a billionaire. The people who have won big here are the ones who were willing to take risks É and then, even more courageously, were willing to build their successes to a scale that no one ever thought was possible. It takes much more courage to succeed than to fail — much more imagination.

What lessons should venture capital firms or corporate execs take away from this recession?

This recession is surely the aftermath of a boom that took on ludicrously speculative dimensions. But more fundamentally, this recession was “caused.” It is the direct result of a set of regulatory interventions by the federal government that knocked the underpinnings out from under the technology revolution of the 1990s.

The combination of Alan Greenspan’s jihad against irrational exuberance, the FCC and Congress’s inept handling of telecommunication deregulation, and the anti-trust crusade of the Clinton justice department all conspired together to destroy what could have been a sustainable boom.

The lesson is that Silicon Valley is no longer a free port. We are now important enough to be the target of all the pirates and lice that have afflicted other large businesses throughout history.

Sadly, no, sickeningly, some executives here have taken the wrong lessons from this. They have joined the pirates and the lice and used them to try to damage their competitors. There is nothing more reprehensible to me than the anti-trust persecution of Microsoft at the behest of its competitors like Sun, Netscape and Oracle. The result has been that the pirates and the lice have literally been invited into Silicon Valley by the very people who should have sought to keep them out.

BY DAVID SPEAKMAN

Apple Computer Inc. says reports of its imminent demise are, once again, premature.

With a newly-installed base of
5 million users of its OS X operating system, Apple claims it’s the largest seller of UNIX-based computers worldwide and disputes reports its market share is eroding.

Contrary to Apple’s assertions, a December research report by Al Gillen of IDC of Framingham, Mass., calculates that Linux-based personal computers (a derivative of UNIX) make up 4 percent of the desktop marketplace, passing Apple Macintosh’s 2 percent (25 million users) and landing in second place behind Microsoft Corp.’s Windows.

“If you count the number of desktops out there, any Linux provider would like to get 4 percent of that,” says Joseph Eckert, spokesman for Oakland-based SuSE Inc., the second-largest Linux software company worldwide.

The debate may be simply semantics. Apple touts it’s not a victim of Linux. Rather it expects to convert more Linux users to the Macintosh platform with a new strategy offering programmers free operating-system software critical to creating Linux-based applications used by a wide range of professions.

Brian Kroll, Apple’s senior marketing director for OS X, says “I think [IDC] is confused.” IDC researcher Gillen did not return telephone calls requesting an interview.

Kroll claims 5 million Macintosh users have adopted OS X since last year’s debut, moving Apple ahead of IBM and Santa Clara’s Sun Microsystems Inc. as the largest seller of UNIX-based computers.

The “X” in Apple’s OS X has two meanings. It represents the Roman numeral 10 version number and is programmer shorthand for the UNIX-based operating systems such as Linux and Sun’s Solaris.

Apple executives say their newest operating system attracts people who in the past didn’t look at Macintosh computers. The days of Apple being seen as a company dependent on graphic designers and publishers are no more, Kroll says.

“I think you can say its over — definitely,” he says.

The UNIX technology behind OS X allows the Cupertino company to gain acceptance with professionals in bioinformatics, government, animation and developers of Linux-based scripting applications, he says. In bioinformatics, for example, Apple began making inroads after programmers adjusted the popular UNIX/Linux BLAST program, used in gene sequencing to decipher DNA, to run on OS X.

In the world of computer operating systems, the availability of new and useful applications is the difference between life and death.

Last week Apple began offering a free, open source X11 that’s critical to many Linux users for Mac OS X. Apple’s new X11 is an operating system environment designed to run alongside and integrate with Macintosh OS X operating system.

The availability of X11 on the Macintosh platform will accelerate Linux-to-Mac application conversion and attract new Linux and UNIX-based applications, Kroll believes.

“Suddenly [Linux] applications that were not available before will just show up,” Kroll says. “Our core is open source. This is a huge change from Apple’s previous strategy.”

Linux Journal Senior Editor Doc Searls agrees. In a Jan. 12 report he writes, “while the obvious purpose of the [X11] move is to give Apple parity with other UNIXes, the more important purpose is to allow easier porting of [or UNIX-based] applications to OS X.”

Apple counts on its version of X11 being declared best of breed in the open-source market and attracting programmers — particularly UNIX users who wouldn’t have given a Mac a second glance a few years ago — to drive up computer sales.

With Apple’s two new Powerbook laptop computers offering mobility to
UNIX users, Linux fans may be featured in Apple’s next “Switch” ad campaign.

BY DAVID SPEAKMAN

Humboldt Bancorp is aiming to become a major player in community banking in Northern California beyond its Eureka roots, but don’t expect a face-off with Silicon Valley’s monster banks.

To pay for expansion, the company plans to sell lucrative, non-core businesses. Humboldt says it may be able to grow by opening branches or acquiring other banks.

Humbolt’s strategy is to let the big banks fight over the Bay Area while it focuses on rural areas and second-tier cities. With nearly $1 billion in assets, the company is dwarfed by behemoths such as Bank of America, Wells Fargo and Citibank. It even runs a distant second to larger community banks such as Greater Bay Bancorp of Palo Alto, which boasts assets of nearly $8 billion.

Humboldt CFO Pat Rusnak says Humbolt plans to become a major force in community banking with a footprint that stretches from the Oregon border to Fresno.

“But we have [left] the East Bay and South Bay out of that vision,” he says.

Humboldt, which also operates banks under the names Capitol Valley Bank and Tehama Bank, has a minor Bay Area presence with one Capitol Valley branch in Napa.

Rusnak said Napa is as far south as his bank plans to operate along the Interstate 101 corridor, saying more lucrative territory lies in Central Valley cities such as Stockton, Modesto and Merced.

“We have plenty of opportunity to grow our franchise along Interstate 5 between Sacramento and Fresno,” he says.

Tim Rogers, chief economist with Briefing.com in Chicago, says Humboldt is smart to focus on geographic areas the big banks may view as an afterthought.

“With the banking consolidation, smaller banks can’t compete in the same market with big banks, which dominate with the convenience of location for consumers,” he says.

According to banking industry mergers and acquisitions tracker, Charlottesville, Va.-based SNL Financial, there were 213 banking mergers in 2002 compared with 261 in 2001. The biggest deal was last November’s $5.8 billion merger of Citigroup and Golden State in California.

But Humboldt doesn’t have that amount of cash and may not be able to grow organically in the Bay Area.

“I don’t think they can finance themselves as cheaply as the monster banks,” says Briefing.com’s Rogers.

Humbolt may succeed by looking for openings in all the right places.

Low valuations, increased federal scrutiny prompting more public companies to go private

BY DAVID SPEAKMAN

Like most equity-intensive markets, mergers and acquisition deals have been depressed for years, but one specter of the 1980s and ’90s is reemerging.

After years of sitting on their bulging bank accounts, leveraged buyout (LBO) firms started buying late last year, including one local firm that brokered a deal to take fast-food chain Burger King off the public market.

This conversion trend — especially for companies with capitalizations ranging from $5 million to $100 million — is predicted to continue throughout 2003,
fueled by depressed stock valuations and heightened federal scrutiny of public companies.

Last month, the San Francisco offices of the Texas Pacific Group paid $1.5 billion to buy Miami-based Burger King from the U.K.’s publicly traded Diageo plc.

Since August, other big-name brands
exited the public market — Qwest Communication’s directory business, TRW Automotive and the Dole Food Co.

Buyers included a who’s who of 1980s-era LBO firms, including Bain Capital, The Carlyle Group, the Blackstone Group and Hicks, Muse, Tate & Furst.

Local representatives from Texas Pacific Group and Francisco Partners declined to be interviewed.

“These companies employ the smartest minds in the business. It’s a kind of a clarion call to the rest of the equity industry that valuations have hit a bottom,” says Santa Monica-based Mergerstat LP’s Eric Moskowitz, who predicted the resurgence of private equity leveraged buyouts at the end of 2001.

Although Moskowitz was talking primarily about private corporate buyouts, he says a buying trend could spill over into the public arena.

“If that happens, 2003 could be a good year,” Moskowitz says, “this kind of thing happens once or twice a decade — it’s very cyclical.”

For many, the idea of increased LBO activity conjures Hollywood imagery perpetuated by films “Wall Street” or “Barbarians at the Gate” depicting inflated-ego dealmakers strong arming banks to underwrite debt and troubled companies to sell.

“This time around [leveraged buyouts are] not using much debt, yet, but it could go that route again,” Moskowitz says.

Recent leveraged buyouts are less leveraged, according to David Carey, a
senior writer for finance-focused The Daily Deal, who has been covering the M&A
market for more than a decade.

“You see new deals from time to time,” Carey says, “but for the last two or three years, because of the economic decline, banks have been very cautious about these deals.”

He says banks are less willing to allow an LBO firm to mortgage a company’s valuation to pay for a buyout when market valuations are low. That means buyout firms are left footing deals with their cash. And, their coffers are fat.

“A lot of money has been sitting on the sidelines just waiting to be put to work,” Carey says.

But some analysts continue to worry about LBOs repeating their reckless past.

“Wall Street is all about manias,” says Mergerstat’s Moskowitz, explaining current LBO activity is a matter of math, not mania, because the deals are not like the past hostile takeovers that garnered headlines.

“Hostile takeovers signal the top of a market,” Moskowitz says, explaining those days are past. “It’s a valuation game very simply put with [today’s] stock market at 1996 to 1997 levels, private equity players say company valuations are not going any lower.”