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Cabletron looks to rebuild, but considers buyout

The firm's CEO believes Cabletron can rebound by returning to its technology roots. But analysts think that strategy has come a little too late.

Cabletron's new chief executive believes the embattled networking firm can rebound by returning to its technology roots. But analysts think that strategy has come a little too late.

Two months since taking the helm, chief executive Piyush Patel says his primary goal is to return Cabletron to its former glory after getting trounced the past few years by the likes of Cisco Systems. But like Craig Benson, Cabletron's co-founder and CEO before him, Patel said he would consider selling the company if the right offer came along.

"My primary goal is to build a long-term value into the company, but I'm aware of consolidations in the industry," Patel said. "I'm not ruling out any options that may come up. I'm open to a partnership in any shape or form."

Cabletron began its decline several years ago when it was slow to make the move to high-speed switching devices. When Cabletron finally bought firms to round out its product family in 1998, it had already lost a sizable chunk of its market share. Cabletron executives now appear determined not to let that happen again.

The networking firm is gunning after the lucrative service provider market and is working on a high-end routing device that will help Internet service providers and emerging communications companies build a higher-speed Internet.

But Forrester Research analyst Charles Rutstein says regardless of the new strategy, the firm won't remain independent for long.

"It's an uphill battle," he said. "They can't stay independent for too much longer. Otherwise, they'll stay a third-tier provider and muddle along. In this job market, it's tough to keep good people unless [a company] proves they're on an uphill slope."

New strategies
Overall, Patel has a three-pronged strategy for Cabletron. He plans to focus on the hot service provider market, pushing technology for high-speed Internet access. He also wants to continue selling network equipment to corporate offices--the company's bread and butter--while growing revenue from its services organization.

At the Network+Interop show next month, the company will showcase some of its next-generation technologies, including its latest offerings in three emerging areas: wireless networking, Internet telephony, and Virtual Private Networks, which allow businesses to create inexpensive, easy ways to securely connect their corporate computer systems through the Net.

Within 18 months, Patel wants to double Cabletron's yearly revenue, from $1.4 billion to $3 billion--an ambitious goal for a company facing formidable competition from Cisco, Nortel Networks, and Lucent Technologies, as well as from hot start-ups, such as Juniper Networks.

"I feel strongly that it's realistic," said Patel. "Look at the service provider market and the growth potential. We have good infrastructure--the products and services and support. We feel we're in the center of the marketplace."

Making it happen
Most analysts say it's smart for Cabletron to chase after the service provider market, but the company needs to execute well strategically--something it's had trouble doing in the past.

"They have to specialize. It's too late to be all things to everybody and compete with the Nortels and Ciscos," said Cahners In-Stat analyst Shannon Pleasant. "Cabletron needs to find its niches, stick with it, and be consistent. If they try to be everything in networking, they will struggle."

The service provider market is big enough for the firm to find a secure place and start bringing in the cash, Pleasant said. "Cabletron's problem in the past is execution. If they can execute, there's enough market for them."

If Cabletron spins off its Spectrum software unit as planned, the remaining parts of the firm will be strictly hardware, such as routers and switches.

The company plans to gear its products toward a handful of areas in the service provider space. Cabletron is focusing on the "edge" of the network--the connection between local area and wide area networks--by going after cable and digital subscriber line access, as well as points of presence--the areas where long distance carriers connect to local phone networks. The company is also looking at Web outsourcing, which includes renting software over the Internet or hosting Web content.

With the new high-end router, the company will compete head-to-head against Cisco, Juniper, and others for the more lucrative "core" of an Internet service provider's network.

"We're doing a focused approach, not doing a machine-gun approach," Patel said.

Staying alive
Rutstein says Cabletron's weaknesses may work against it. The struggling firm needs to convince service providers that it will survive the recent market shakeout.

"They have to convince the carriers they're here to stay. That's the fear," Rutstein said. "If I buy a new piece of gear for my network, I want to make sure the service and support is there for the life of the product. Some people could question that for Cabletron."

Rutstein believes potential Cabletron suitors include Ericsson and Nokia--telecommunication firms that have yet to invest in a data company. Last year, the move to provide voice and data on a common Internet-based network inspired several such mergers, including Nortel's purchase of Bay Networks.

Hambrecht & Quist analyst Erik Suppiger believes Cabletron can rebound with two strong products: its SmartSwitch Router and new DSL technology. Still the company has watched its stock sink from the 40s to the teens in the past two years.

Yet Cabletron recently reported a strong fourth quarter, earning $7.28 million, or 4 cents a share. Suppiger expects the company will earn 8 cents a share in the next quarter, with 39 cents per share for fiscal year 2000.

"I think they've bottomed out and are rebounding," Suppiger said, adding that he expects to the stock to rise to $20 to $25 within 12 months.

Cabletron executives believe they're in good shape. While revenue for the past two years was essentially flat, 85 percent to 90 percent of the revenue in 1999 was from new products, such as network switches and DSL routers.

Cabletron had a good first quarter, and must offer a repeat performance for the second to show the company is capturing new customers and is back in the game, executives said.

"This is the quarter that proves to Wall Street that the last quarter was not a fluke," said Trent Waterhouse, Cabletron's senior technology architect.