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THE DAY AHEAD: Cabletron sans Benson may become takeover target

Cabletron Systems' (NYSE: CS) move to show co-founder, chairman and CEO Craig Benson the door should only be viewed as good news for Wall Street. Cabletron gets some new direction and could become a much more appealing takeover target.

Benson is stepping down from the networking company as Piyush Patel takes over. Patel had been CEO of Yago Systems, which was acquired by Cabletron last year.

Cabletron: Independent in a year?

A takeover won't happen in the next two months because Patel has a lot of fixing to do. If Patel puts Cabletron on the right course, the company could be gobbled up in a year or so.

Judging by Wall Street's reaction Friday, investors didn't connect the dots between the ouster of Benson and a potential Cabletron sale. But the leap between Benson's departure and Cabletron's sale isn't that large considering the co-founder was among the biggest impediments to a sale. Cabletron closed Friday at 13 15/16, up 65 percent year-to-date, but well below a high of 45 two years ago.

Benson, known for ousting CEO Don Reed in March 1998 and then failing to deliver consistent results, also happened to be afflicted with "I can't let go of the company" disease. Benson paid lip service to spinning off units of the company, but had been rumored to oppose a sale.

Craig Johnson, an independent analyst with the PITA Group and one of Benson's biggest critics, called for Benson to step down six months ago.

"The big question with this is whether it is an interim step to a sale," said Johnson, who recently bought Cabletron shares in anticipation of a takeover. "It's a logical step since they pushed the biggest impediment (to a sale) aside."

Cabletron's biggest decision now is whether to dress itself up as a date for a larger player or forge ahead independently. The case for remaining independent is definitely there. New CEO Patel is more entrepreneurial and can turn around the company, analysts said. There's also room for a niche player like Cabletron because it has a loyal customer base. However, few investors want a niche player long term.

The case for a Cabletron sale is much more compelling because the company is one of the few remaining independent networking players. Chances are that Cabletron will be independent long enough to fix itself. Cabletron has its valuable Spectrum network management product line that would look pretty good to a telecommunications company or another equipment vendor.

Indeed, there aren't a lot of independent networkers out there as customers gravitate to one-stop shopping for networking gear. Fore Systems (Nasdaq: FORE), Ascend Communications, Bay Networks, and Xylan have all been acquired. And 3Com Corp. (Nasdaq: COMS) will have to reinvent itself.

Patel will have six months to a year to point Cabletron in the right direction and give Wall Street something to cheer about. Rumors are also circulating that Cabletron may have -- or soon will -- hire investment bankers to pursue strategic alternatives, but nothing is definite.

And those potential buyers? Look abroad to Europe and Asia. Alcatel (NYSE: ALA) bought Xylan. Britain's General Electric Corp. bought Fore. Johnson said Ericsson (Nasdaq: ERICY) and Japanese conglomerates such as Fujitsu could be potential partners.

Any international company looking to establish a U.S. networking beachhead could find Cabletron attractive. But first the company has deliver consistent earnings results. Patel has a lot of work to do.

Reading the cable tea leaves

There will be a lot of hubbub about a Federal court ruling in Portland, Oregon against AT&T (NYSE: T) and its plans to offer Internet service via cable. Don't read too much into it.

A federal judge in Oregon upheld a local government order that AT&T allow other firms onto its network.

It's great news for America Online (NYSE: AOL) and shares may soar. Shares of At Home (Nasdaq: ATHM) and others in AT&T's universe may take a beating.

Shame the Oregon ruling doesn't mean much. There are appeals planned and the Federal Communications Commission isn't about to let ever city sound off on regulatory issues. The good news is that the Portland ruling will force the FCC to make a decision on whether AT&T should open up its network to competitors such as AOL.

The sooner the better.