Cabletron spinoff tests IPO waters in crowded market

Cabletron spinoff Riverstone Networks is poised to potentially become the next hot network equipment maker to go public this year, Wall Street analysts say, with initial public offering papers expected to be filed within the next two weeks.

While dot-com public offerings have lost their luster among investors this year, networking firms have continued to fare well on Wall Street. Avici Systems, Corvis, Sonus Networks and ONI Systems have all had successful offerings this year, adding to the huge gains made by the so-called class of 1999: Sycamore Networks, Juniper Networks, Foundry Networks and Redback Networks, among others.

The company's technology is largely derived from Yago Systems, a high-speed start-up Cabletron acquired in 1998 to help the company tackle emerging markets it could not through internal efforts. The start-up also spawned Riverstone's and Cabletron's current chief executive Piyush Patel.

Riverstone competes against Cisco Systems, Nortel Networks and other formidable players in the lucrative market to equip telecommunications carriers and service providers with networking hardware to speed the Internet. The former Yago technology also is part of another Cabletron spinoff, Enterasys Networks.

Wall Street analysts say Riverstone is the most attractive spinoff from Cabletron. Spinning off the unit will allow it to realize the potential it had two years ago as Yago, before Cabletron acquired it. The company may also benefit from growing within a larger operation, some say.

"It's better than your traditional start-up," said SG Cowen analyst Christin Armacost. "This is a company that has a mature product, mature base of customers and a mature management team, and they're going after a rapidly growing market."

Cabletron has struggled the last few years, losing market share to Cisco and other competitors and switching strategies and executives several times in the process. The company recently split into four separate companies, a move Cabletron executives said would give each company a new focus on growth opportunities and a better chance for success.

Riverstone's primary strategy as an independent company is to target the emerging, but fast-growing market for metropolitan networks--the construction of fiber-optic networks within big cities. The company is also chasing after the lucrative market for Web switches, networking equipment that speeds Internet content to Web surfers.

Analysts believe Riverstone can find the same success in the stock market as other young, emerging networking players that went public in the past few years, such as Extreme Networks, Foundry Networks and Juniper Networks, whose share prices range from $80 to $170.

"They're playing in the lucrative Internet infrastructure market," said analyst Ron Westfall, of market research firm Current Analysis. "If the company can show 100 percent revenue growth, they can emulate what Foundry and Extreme have proven. Foundry and Extreme don't have a monopoly or a dominant market share, but they're growing dramatically in the markets they address."

In the 2001 first quarter, Riverstone reported revenue of $15.8 million, up 24 percent from the previous quarter. Analyst firm Morgan Stanley Dean Witter predicts the company will reach $85.6 million in revenue for the year and more than double to $180 million the following year.

Analysts say the metropolitan networking market is so young that all the players vying for a piece of the action should succeed. Cisco, Nortel and younger players like Extreme, Redback Networks and Sycamore Networks are all focusing their efforts on the market. The numbers in metro networks tell the story: The opportunity is expected to reap $6.5 billion in revenue this year and $19.5 billion in revenue by 2003, according to SG Cowen.

Riverstone's challenge is to market itself and shed the negative connotations associated with the Cabletron name, analysts say. Once a toe-to-toe competitor to Cisco, Cabletron has languished amid rapid changes in the networking industry.

Riverstone chief executive Romulus Pereira is optimistic and confident the new firm will succeed. Its association with Cabletron has helped Riverstone far more than it has hurt the firm, he said.

Yago was a 45-person company that grew to 280 people when it was a part of Cabletron, Pereira said. Since spinning off as Riverstone, the company has now increased the work force to about 420 people with plans to hire 80 more.

"When Yago went to Cabletron, we felt fortunate being able to incubate inside Cabletron. It afforded us a period to build the business," Pereira said. "We have rock-solid engineering, a huge distribution arm, a customer service infrastructure and the sales and marketing operations in place. We've built this thing to survive for the long term."

When the public offering occurs later this fall, analysts predict Riverstone will initially have a market valuation of about $5 billion--and they believe it can skyrocket like previous networking players that have gone public.

"Riverstone has the type of revenue growth that fits the profile of some of the successful companies that have grown in the service provider space," SG Cowen's Armacost said.