Reader,

This is the first edition of BlueLake Partners' new Newsletter - The Perspective from BlueLake© - which we will continue to publish periodically. The Newsletter will focus on and analyze trends in the three sectors we follow: Enterprise Software, Semiconductors and Materials, and Enterprise Storage Networking, as well as in the technology market overall. We hope you find it informative and thought provoking and we welcome any suggestions or thoughts you might have on the content. If you would not like to receive subsequent editions, please click here.

Sincerely,

BlueLake Partners, LLC

In the mid 1990's, the onset of the Internet had an incredible effect in the technology arena. New categories and companies were created quickly and product cycles were made even shorter. The ISP, router, switch and other networking-related products, outsourcing and hosting, browser-based software, storage area networks and network attached storage were a few of the new categories. The leaders in the new market segments were blessed with high market multiples and huge market capitalizations and were eager to use their stock as currency to pay for acquisitions at attractive prices.

The entrée of Cisco into the merger and acquisition game in the mid 1990's marked a new period in technology M&A. Cisco first, and others later, used their high P/E stock to effect a new corporate strategy for technology firms - they used frequent, and rapid-fire M&A of companies as a corporate strategy to enter new markets, absorb new technologies and increase market share. In the past, a multiple acquisition strategy was used as a consolidation or roll-up strategy. Cisco became the role model on 'how to' do an acquisition from a tactical perspective. The Company would descend upon the recently acquired company with a team of HR personnel, detailing the new assignments, and organizing and assimilating the employees into Cisco in a short period of time. Suddenly, pre-revenue, venture-backed companies were being sold for hundreds of millions, even billions of dollars. In a reversal, the acquisition became the liquidity option of choice for venture capital investors.

Companies prominently employing an M&A strategy included: Cisco (of course) Broadcom, JDS Uniphase, Northern Telecom, Yahoo, AOL and EMC to name a few. The acquisitions were used to enter new markets, fortify current product offerings and, the ultimate goal, enhance growth. Since 1993, Cisco has made over 70 acquisitions; Broadcom has made 16 since 1999; and JDS Uniphase has made 17 since 1995. These numerous acquisitions and hyper-growth had wide spread ramifications in every sector of our economy. In the wealth that was created from these acquisitions, 'venture capital,' 'stock options' and 'IPO' became household words. Particularly affected was the venture capital industry, where increased returns led to larger funds, increased competition for deals and more numerous and larger investments.

The financial markets have changed dramatically. The number of acquisitions has fallen by at least 50 percent, more so in dollar value due to depressed stock valuations created by the bursting of the technology bubble in 2000. Furthermore, the recession in '01 has further reduced M&A activity as companies are husbanding their cash until the economy bounces back, which is looking more and more like an '03 event. Without the rich stock valuations and the desire to keep balance sheets strong until the turnaround, it is no wonder M&A activity has declined so markedly.

Current Trends In Technology
The aggressive companies in the mid 1990's such as Cisco, Broadcom and JDS Uniphase demonstrated how a well-executed merger & acquisition program could lead to industry dominance. While the technology industry may presently be suffering from a hangover from the torrid pace of the 1990's, the following major trends continue unabated:

Circuit geometries continue to get smaller and more complex with the following major trends:

• System on a Chip (SoC)
• 300 mm wafers
• Mixed modalities

The semiconductor equipment sector has suffered the greatest, Applied Materials' fourth quarter revenue is forecast to be down 63 percent quarter over quarter. Semiconductor plant utilization has inched up to 64 percent, inventories have decreased to 44 days from 57 days. Intel's fourth quarter revenue was down 20 percent.

• Network management
• Router for convergence of voice, video and data
• Optical switching
• Last mile infrastructure solutions

Overcapacity in network infrastructure has been widely noted, with Cisco showing 30 percent revenue declines in their January quarter. Component manufacturers are showing similar results, with JDS Uniphase fourth quarter revenue down a stunning 70 percent quarter-over-quarter. Still, IT and communication networks are the critical part of any enterprise. While results may be off, the importance of these companies remains undiminished.

• Anywhere, anytime access to data
• Managing the complexity of the storage network
• The challenges of managing heterogeneous networks
• Merging of SANs and NAS networks
• New, faster standards for storage controllers
• Blending of storage and collaboration software

• Software will be largely browser-based
• J2EE compliance is assumed
• XML has superceded HTML
• Continued growth and dependence on the database and database standards
• Integration of collaboration-based software into the application

The following are selected representative transactions, and reflect the lower stock prices of the purchasers and corresponding lower purchase prices of the target companies:

Probably, the most affected by the reduced share prices and slower merger and acquisition activity is the venture capital community - the new household word is "down-round." M&A will continue to be recognized as an important source of liquidity and profitability as the strategy has been validated, though less so than in the past due to the lower multiples. In some respects we may be back to the early 1990's, though with a twist. In the mid 1990's, companies successfully executed extraordinarily active acquisition strategies to build and grow their market position. While these companies may be taking huge asset write downs for these acquisitions, this reflects the valuation of the target at the current lower stock price rather than a failed strategy. And some of these companies continue to be active on the acquisition front: Cisco, after being virtually absent from the M&A market in 2001, has made two acquisitions thus far in 2002, and has stated that it intends to make twelve acquisitions this year. Acquisitions will continue to be an important growth engine for smart, opportunistic companies.