Cabletron's puzzling plight

After years of speeding along at a steady pace, the wheels have come off at Cabletron Systems (CS).

Wounded by the first round of financial woes in the history of the firm, the networking equipment provider added an unexpected twist to its plight when it announced yesterday that president and CEO Don Reed--who has spent less than eight months at the helm of Cabletron--has resigned from the firm, effective immediately.

Craig Benson, cofounder of the firm and current chairman, will take over Reed's responsibilities on a permanent basis. In announcing the unexpected move, Benson claimed that Reed was ill-equipped to handle the fast-paced world of computer networking and was more suited to provide long-term strategic direction for the company.

Reed's abrupt departure from day-to-day governance can only feed the perception that something is out of whack at Cabletron. The company has perplexed analysts in recent quarters by its inability to address the changing dynamics and maturation currently at work in the networking industry.

Runaway profits have given way to a period peppered by a dash of red ink, a sprinkle of slow growth, and heaps of market retrenchment. In this environment, a company can ill-afford to have observers questioning its leadership.

"It's not a smooth move on Cabletron's part," said John Armstrong, analyst with Dataquest. "It just raises a whole lot of questions about what's going on in the upper ranks."

"At this point, it's all a matter of execution, which is why this is puzzling," Armstrong continued.

Reed will remain with the company as a consultant and member of the board.

Cabletron is largely a product of the local departmental network, with the company initially focused on providing shared "hub" devices for customers interested in connecting multiple PCs or server computers to a single network link.

The firm eventually expanded into the dedicated switching equipment market, but until recently offered no way for those devices to communicate with a homespun router, a technology generally used as a backbone connection point.

Cabletron grew into a billion-dollar networking player using a direct sales force and a sometimes abrasive style that sometimes ruffled the feathers of competitors but won in the marketplace. That aura may have died with the departure of cofounder Robert Levine last August, but executives at the firm looked forward to a less confrontational era.

At the time of Reed's prompt arrival the same day as Levine made his exit, the executive was viewed as a long-sought savior who could add managerial expertise and knowledge of the service provider segment of the industry. Reed spent years at Nynex, before that telecommunications giant was gobbled up by Bell Atlantic.

Cabletron served as Reed's networking crucible. According to Benson, the veteran telecommunications executive essentially failed that test, offering a broad strategy without the nuts-and-bolts sense for the market.

"I think it's safe to assume Don got in and he realized what an asset I had in my brain," Benson said. "That I could make decisions faster than he could, but also knowing my strong suit has never been planning."

But some think that rationale masks an undercurrent of upheaval at the firm.

"I think that's pretty ridiculous. Reed really didn't have the ability to control the organization and call it his own," Fred McClimans, CEO of Current Analysis, said of Benson's reasons for the change. "You want to at least give somebody a year to figure out if they can do it or not."

"What we're seeing is an incomplete story," McClimans said. "There's got to be something else going on here--something with Reed or some sort of power struggle."

Most observers believe Cabletron is better positioned than it was when Reed took the helm. It acquired Yago Systems in January to add much-needed routing functions to its bread-and-butter line of switches.

In a more puzzling move, Cabletron also purchased the networking arm of Digital Equipment, largely an afterthought in the market. The jury is still out on how that deal will work out, according to analysts.

The firm also trimmed its workforce and streamlined its operations, signs that Cabletron was getting its house in order, according to some. Nevertheless, the company posted a $6.3 million loss for its most recent quarter.

In a hastily prepared conference call for industry press and analysts, Benson said the current woes stem from its historic roots. "Clearly, our issue has been the migration from shared networks to switched networks," he said. Reed was absent from the call.

On Wall Street, where the bottom line rules the day, news of Reed's departure was met with optimism.

"Overall, I think it was a positive move," said Martin Pyykkonen, an analyst with CIBS Oppenheimer. "But anybody following the company would be lying if they said they weren't surprised.

Pyykkonen currently rates Cabletron's stock as a "hold."

"It's really a case of Benson knowing the industry, knowing the company, and stepping back in," he said. "I think the extent of the slowdown and the missed quarter certainly heightened the need."

In a prepared statement, Benson said Cabletron's road to recovery would continue unabated: "Citing my industry experience--Don convinced me to manage the particulars of implementation--and proposed that he continue to oversee the broader business strategy from his seat on the board--and as a consultant to the company."

"Following considerable discussion--I--and the Board--have accepted Don's proposal. So today--our roles somewhat reverse. But the focus and intention of Cabletron going forward does not," Benson said.

Cabletron's stock closed at 14-7/8, down 2.5 percent. Reed's departure was announced after the close of trading.