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Analysts: Cabletron may be bought out

Wall Street analysts say Cabletron is an attractive acquisition target for telecom companies, following media reports that the company may be seeking a buyer.

Wall Street analysts say Cabletron Systems is an attractive acquisition target for telecommunications companies, as media reports claim the troubled network equipment manufacturer may be seeking a buyer.

The New York Post today reported that Cabletron has hired investment bank Merrill Lynch to find the company a buyer. Rochester, New Hampshire-based Cabletron, which has posted losses in three of its last four quarters, aims to raise as much as $2.5 billion in a sale, according to the report, which cited an anonymous source close to the situation.

Cabletron executives today declined to comment on the report or whether the firm had hired the investment banker. Cabletron chief executive Craig Benson has said in the past, however, that his company is not for sale.

Merrill Lynch executives could not be reached for comment.

Financial analysts say it's possible Cabletron is seeking a suitor as the company struggles to recapture its prominence in a market now dominated by Cisco and 3Com.

Analyst Michael Davies, of Punk, Ziegel & Company, said large telecommunications companies, including Alcatel, Siemens, and wireless giant Ericsson may possibly be interested in acquiring Cabletron.

In pursuing such a deal, the companies would be able to offer customers a combination of voice and data-based services across a common network infrastructure; an arrangement that inspired Northern Telecom's purchase of Bay Networks in 1998.

"The telecommunications providers really need to get a better handle on the packet-switching world," Davies said.

SG Cowen's senior technology analyst Megan Hackett said that the most attractive technology Cabletron has to offer are its advanced switching and Spectrum network management products.

"It's a narrow band of potential buyers, but [Cabletron] does have some good technologies that would prove attractive," Hackett said.

Analysts said Cabletron began its gradual decline when it was slow to respond to the move from "shared" technology to dedicated high-speed switching devices. "Whereas Cisco and 3Com were aggressive in their acquisitions, Cabletron sat on the sidelines and watched their revenue go nowhere, while the other companies grew 30 to 50 percent," Hackett said.

With the growing use of Internet standards in corporations, Cabletron has improved its products portfolio through acquisitions. They have since added routers and built new technology that combines routing and switching in a single device. In fact, company executives have said the SmartSwitch Router has now captured 33 percent of the emerging advanced switching market.

Nevertheless, Davies believes Cabletron will still struggle in the future.

"Cabletron's sales strategy has been mainly through direct sales. That was a workable solution when the price per port [for networking equipment] was $2,400, but now it's $99 or below. You really need third-party distribution and that's been locked in place by Cisco, [Nortel] Networks and 3Com," he said.

"They're low on the totem pole. They've got a loyal customer base, but their ability to capture new accounts is questionable," he added.

In late December, Cabletron reported a third quarter loss of $21.2 million, or 12 cents a share--below the company's revised estimates for the quarter and far under Wall Street's initial expectations of a profit of 11 cents, according to consensus estimates from First Call.

Bloomberg contributed to this report.