Networking firm banks on new look to boost business

Yesterday's announcement that the company plans to break its business into four separate operating firms could either be taken as a sign of desperation or recognition of changing market dynamics in the networking industry, according to analysts.

Once a networking heavyweight that competed against Cisco Systems, 3Com, the former Bay Networks and others, Cabletron fell behind in the market for high-speed switching devices. At one point, executives had considered selling the company, as its market share and stock price dropped.

Now, Cabletron hopes to re-ignite investor interest amid high demand for stock in the likes of upstart competitors Extreme Networks, Foundry Networks and Juniper Networks.

Investors appear to prefer start-ups like Juniper, which do not have a large customer base to protect and provide for, and therefore can act more nimbly. These companies also have painted their technology as a necessary behind-the-scenes component of the Net.

As a result, Juniper's stock has increased an eye-popping sixfold to $215.88 since the company went public last June. Cabletron's stock, by comparison, was mired below $20 for much of last year.

"They were formidable competitors," Dataquest analyst John Armstrong said of Cabletron. "They were one of the companies in the late 1980s and early 1990s that created the (data networking) market."

Though Cabletron's stock has recently rebounded from a single-digit abyss, the company has struggled to regain momentum and has altered its course to compensate for market missteps. Its current growth is largely built on the acquisition of Yago Systems, a high-speed start-up.

"It's kind of an end of an era," said Mike McConnell, an analyst with market researcher Infonetics Research. "I don't think they had much choice."

But Cabletron chief executive Piyush Patel said, "Our products and solutions portfolio is the strongest it's ever been. Customer confidence and satisfaction is at an all-time high. We take this next step from a position of strength."

Cabletron envisions four separate and independent companies focused on high-end equipment for communications companies, corporate gear, network management software and services. The four new names for the company's businesses are: Riverstone Networks, Enterasys Networks, Aprisma Management Technologies and Global Network Technology Services, respectively.

Cabletron executives compared their standalone companies with hot upstarts in the networking space, with respect to market value and yearly revenue and profits, during a conference call with analysts.

For example, Patel said he hoped the newly christened Riverstone, the high-end equipment arm, would fall somewhere between Foundry Networks and Juniper Networks.

Patel also compared Aprisma--the management software spin-off--to network management software maker Micromuse, which made a profit of $7.9 million on revenue of $58 million last fiscal year. Aprisma makes up about $70 million, or 5 percent, of Cabletron's $1.4 billion in yearly revenue.

In the past year Micromuse's stock has jumped sevenfold, from $31 to $214.

The financial community applauded the idea of four separate Cabletrons, with one analyst noting that the separate companies could "unleash unrealized value" for investors. Eric Suppiger, an equities analyst for Hambrecht and Quist, pegged the value of Riverstone at 4.5 billion; Enterasys, the corporate business, at $2.5 billion; and Aprisma at $1 billion.

But some view the deal as Cabletron's admission that some older parts of the company were holding back efforts to gain share in emerging markets.

"They had to do something and this is what they came up with," McConnell said. "I think it's going to cause a lot of confusion for customers. It's going to be really hard to make each of these shine."

3Com, another networking firm in the throes of a spin-off with Palm, also hopes to gain from an increased focus from the move. Executives at that firm, which has also had its ups and downs in recent years, said Cabletron's step comes as no surprise.

"I don't think there's a single formula for success," said Irfan Ali, senior vice president and general manager for its carrier systems business unit. "They needed to do something differently."

News.com's Wylie Wong contributed to this report.