The network equipment provider jolted Wall Street last week with news that earnings for the third quarter would fall far short of expectations. That news caps a tumultuous year for a once high-flying firm, haunted by executive upheaval and product sales slowness.
Momentum seems to have left Cabletron despite a string of recent acquisitions, high expectations for a recently launched set of switching devices, and a management overhaul that was expected to right the ship. The company now expects to post a loss for its current fiscal year, according to most analysts' estimates.
Cabletron retains, for now, a loyal base of customers. Yet the Rochester, New Hampshire-based firm may be the most obvious victim of rapid changes in networking technology that have made it appear out of touch. Once a dominant player, Cabletron has been slow to evolve from its roots in providing "shared" technology to dedicated high-speed switching devices.
"They really have an uphill battle," said Virginia Brooks, vice president of networking and telecommunications for the Aberdeen Group. "Momentum is everything in this industry. They've lost theirs."
What at one time seemed like a temporary downturn for a company that has rewarded investors with record quarters for years now seems like a far more systemic issue.
"I don't believe this was a temporary blip," said Michael Duran, financial analyst with Lazard Freres. "This revenue decline was a surprise, and that made us think things are worse than we expected.
"They're going to have losses for a little while," he added.
Cabletron had built a reputation in the industry for being a maverick company, largely due to its two founders--the now-retired Robert Levine and current chairman and chief executive Craig Benson, who took over day-to-day operations after an abbreviated experiment with outsider Don Reed. That spirit may have started the company on its downward spiral, according to some, with stubbornness compounding a slow reaction to changing market dynamics.
Long a foe of competitor Cisco Systems and its routing technology that dominates the Net, Cabletron has only now added routing to its portfolio through acquisitions--a necessity given the growing use of Internet standards across corporate layouts.
"They had an approach that didn't serve them well in the long term," noted Aberdeen's Brooks. "Kind of like a house of cards, it all came crashing down around them."
Cabletron believes it can retrench itself and move beyond its current woes by focusing on its most promising new technology--a combination of routing and switching in a single device acquired almost a year ago from Yago Systems. A spokesman for the firm highlighted recent market data that shows Cabletron's Yago-based SmartSwitch Router claiming 33 percent of the emerging market for advanced switching devices with routing capabilities.
"We have a product that's going to be right in the thick of it," said Mike Quinn, a Cabletron spokesman. "We think that's where the opportunity lies."
He points to a combination of shared-to-switched technology migration, "softening" domestic and international sales, and a back-ended quarter as reasons for Cabletron's latest shortfall. "We are looking at all possible cost-cutting measures," he said.
Like most firms that show signs of weakness, the acquisition rumor mill will probably gear up again regarding Cabletron--long-rumored to be in the sights of Lucent Technologies or Nortel Networks. Now, however, as both those giants have placed heavy bets on data equipment alternatives, Cabletron may be left out in the cold.
Wireless giant Ericsson continues to insist it will be active in the acquisition game, as it tries to gain a foothold in the data networking market. But the company is most likely focused on high-end technology that caters to service providers and carriers--a niche in which Cabletron has yet to show strength.
Another player could be Compaq Computer, a company that took over a sales contract with Cabletron as part of its acquisition of Digital Equipment and has made no secret of its desire to be a larger player in data networking.
Investment brokerage Tucker Anthony estimates that Cabletron could garner a price tag of $13 to $17 per share in a deal. The firm broke out the components of Cabletron's business to gauge break-up value in a report released last week, with a likely price coming in between $2.2 billion and nearly $2.9 billion. The most attractive portion of the business, according to Tucker Anthony, is Cabletron's Yago-based technology, worth around $1 billion, according to the report.
Some have not counted Cabletron out just yet. Brokerage BancBoston Robertson Stephens has maintained a "buy" rating for Cabletron's stock, citing Benson's return to the fold as reason for optimism.