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Cabletron eyes Net incubator market in restructuring

The company wants to transform itself into the next CMGI and duplicate the success of the hard-charging Internet investment firm by sinking money into networking start-ups.

    Cabletron Systems wants to transform itself into the next CMGI and duplicate the success of the hard-charging Internet investment firm by sinking money into networking start-ups.

    After Cabletron spins off its four subsidiaries as part of its reorganization, the network equipment maker will become a holding company bereft of any major holdings. Chief executive Piyush Patel, however, will have between $1.5 billion and $2 billion in cash with which to play, and he intends to use it to invest in networking start-ups.

    His goal is to nurture the emerging companies and then sell them or spin them off with a public offering. He also plans to act as a bank for Cabletron's four subsidiaries so they can make acquisitions.

    "We will move to a CMGI-type model and aggressively invest in at least 15 to 20 start-up companies to seed the future," Patel said in a recent interview. "And we will definitely acquire some companies to beef up the existing infrastructure of our four companies."

    Hambrecht & Quist analyst Erik Suppiger said that most technology companies invest in companies that enhance their family of products. Cabletron's new strategy is novel because its main purpose is to invest in start-ups that can become leaders in whatever market niches they're targeting.

    "It's still undefined and an unproven model," Suppiger said. "But they've had some good successes and will likely be able to continue to incubate different kinds of companies."

    While CMGI focuses its efforts on Internet-based firms, Cabletron will target networking companies that build the high-speed equipment and software that can handle the explosion of Internet traffic.

    The company's transformation could be hampered by the company's heritage, however. During the past few years it has lost a big chunk of market share to the likes of Cisco Systems, because it was slow to respond to emerging markets.

    Though the company has rebounded in the past year with a string of profitable quarters, it hasn't been able to shed its reputation in some circles as a slowly dying company in the networking business.

    In addition, not every start-up wants to associate with Cabletron. Network entrant Ellacoya Networks, currently in stealth mode, recently had to shed its overt ties with the company to gain funding from venture capitalists, who did not want Cabletron's name on the firm's list of investors, according to the company.

    That reputation is just what Cabletron hopes to erase with its recently announced restructuring. First, the company plans to split into four separate firms and to hold public offerings for each: Aprisma Management Technologies, which will sell software that monitors and manages the health of networks; Riverstone Networks, which will sell high-speed networking equipment to service providers; Enterasys Networks, which will target corporate networks; and Global Network Technology Services, which will offer consulting services.

    Cabletron plans to remain a shareholder in the four independent firms. The company's plan to become an investment firm is the final step in its reorganization.

    Analysts say Cabletron has a good shot at prospering because of its success in past investments, including Yago Systems, which gave Cabletron the routing technology it needed to compete against Cisco.

    Dataquest analyst John Armstrong believes Patel--the former head of Yago before becoming Cabletron's chief executive--will have no trouble recruiting start-ups, because he came from one himself.

    "Most people in the networking industry realize Cabletron is under different management, so the company is operating with a clean slate," Armstrong said. "Patel is a (Silicon) Valley guy. He's brought that cultural mentality with him, and he has created his own culture and environment."

    Cabletron has investments in about 15 to 20 companies, a Cabletron spokesman said. Last month, the company had about $2.5 billion in cash and short-term investments, which include 11.5 million shares of stock in high-speed modem maker Efficient Networks.

    But the amount of cash available fluctuates day to day and has dipped to between $1.5 billion and $2 billion because Efficient's stock has fallen in recent weeks, the spokesman said.

    Riverstone president Romulus Pereira said his new firm, which will focus on equipment for Internet service providers, will have an advantage over other start-ups because it will have Cabletron as an investor.

    "It's like having a big grocery store and a bank in my neighborhood. It makes my life easier," Pereira said. "We're creating a Cabletron ecosystem where all the companies work to help each other. I have a financial partner...and every company they invest in potentially becomes a customer or technology partner for us."

    News.com's Ben Heskett contributed to this report.