Cabletron gets analyst boost after reorganization

Cabletron's shares have shot up $14.50, or 45 percent, to $50 since the once embattled network equipment maker announced plans last month to split into four separate companies. After dipping to $7 in April, Cabletron has jumped sevenfold, breaking its 52-week high.

The company recently received $200 million from investment firm Silver Lake Partners and said it plans to float public offerings within the next 18 months.

"It's a great strategy and we're bullish on the outlook," said Hambrecht & Quist analyst Erik Suppiger. "All of them will be successful. And they're all undervalued at this point."

Cabletron was once thought to be a networking industry after-thought, trampled over by giants like Cisco Systems and Nortel Networks, among others. But the firm has found new life because of Internet-driven technology markets that are expanding faster than the equipment providers can make products. Even firms such as Cabletron, once riddled with slow-growing businesses and executive shuffles, can thrive in this environment, according to Wall Street.

The company is the latest equipment provider to reorganize to regain Wall Street's favor. This week, 3Com spun off its Palm Computing unit, and Lucent announced it would spin off its corporate networking business.

The four separate companies will sell networking equipment, software and consulting services to telecommunications firms and other businesses. Riverstone Networks will focus on selling high-speed equipment to telecommunications firms and Internet service providers, Enterasys Networks will target corporate networks, and Aprisma Management Technologies will hawk Cabletron's network management software. The fourth firm, Global Network Technology Services, will provide consulting services to customers.

Cabletron executives say that as four separate entities, the company can better compete in the highly competitive but lucrative networking market that includes big players such as Cisco, Nortel, and hot upstart firms such as Juniper Networks and Foundry Networks.

Cabletron, which has rebounded from fiscal woes in the past few quarters, can focus on the individual markets better as individual firms rather than as one big company, said Henry Fiallo, Cabletron's chief information officer and president of Enterasys.

"We were spread too thin. The enterprise and service provider areas beat to different rhythms," Fiallo said. "We really thought we could drive much more value to our customers by providing a much sharper focus in transforming the company in each dedicated space."

Fiallo said the new firms can react more quickly to wrinkles in the marketplace, a shortcoming that sent Cabletron into a financial tailspin several years ago.

Once a high-flyer in the networking game, Cabletron has been trounced by the likes of Cisco in the past few years, as it was slow to make the move to high-speed switching equipment. When Cabletron finally bought firms to round out its product family in 1998, it had already lost a big chunk of its market share.

"By creating these four companies, we gain a start-up mentality," Fiallo said. "At the same time, we have a lot of momentum. We're not starting at ground zero. We have a lot of loyal customers for our technology."

Fiallo said the spinoffs and the allure of public offerings also have boosted morale for a workforce of 4,500. Although Cabletron's shares have increased in recent months, the company hasn't reached the eye-popping levels of a Juniper.

As with 3Com's recent spinoff of its popular Palm Computing subsidiary, investors who own shares of Cabletron will receive shares of each of the four newly created subsidiaries.

Analyst Mike McConnell, of market watcher at Infonetics Research, said the company's strategy is smart because it allows it to move more quickly into new markets. But the company runs the risk of confusing its existing customers.

"They had to do something. And it's probably a good strategy in the long run because they stagnated as Cabletron," McConnell said. "But I think it will confuse customers. I'm confused with the different names and what products fall where. There's a lot of issues that need to be ironed out."

McConnell believes the new companies can compete, however. Enterasys, for example, will compete with 3Com, Cisco and others, as they all try to provide businesses with the equipment they need to connect their customers, partners and employees to the Web.

"They have some good technology and this might give each of the pieces a chance to shine," McConnell said. "But they need to execute. Just splitting into four is not enough."

Hambrecht & Quist's Suppiger expects Aprisma and Riverstone to spin off first, with Aprisma's public offering as early as May or June.

Aprisma, which will compete with Computer Associates and Micromuse, among others, in the network management software market, will have revenues of about $100 million this year and a market value of $1 billion, according to a Hambrecht & Quist report.

Riverstone will start off with $150 million in sales this year and have a market value of $4.5 billion, while Enterasys will have revenues of $1.25 billion and a market capitalization of $2.5 billion, the report predicted. Global Network Technology will rake in $50 million in revenue and have a value of $500 million.

Cabletron representatives declined to comment on the timing of the spinoffs, saying the company will announce more detailed plans and technology road maps this spring, possibly at the end of March when the company announces its quarterly earnings.