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Compaq pays $123 million to cut Cabletron deal

The giant PC maker is shelling out $123 million to Cabletron Systems to cancel a deal that required the company to resell Cabletron's networking equipment.

Compaq Computer is shelling out $123 million to Cabletron Systems to cancel a deal that required the giant PC maker to resell Cabletron's networking equipment.

Compaq had signed a pact last summer to buy $300 million worth of Cabletron equipment a year. The PC manufacturer was planning to resell Cabletron's products under its own name, but wanted out of the agreement after deciding to move away from the networking business.

Cabletron agreed in September to revamp the deal. In recently filed documents to the Securities and Exchange Commission, Compaq agreed on a final purchase of $85 million for Compaq-branded equipment to sell to its customers. Compaq also gave Cabletron $25 million to remove minimum quarterly purchase requirements, and another $13 million to pay for its costs to manufacture the branded equipment.

Compaq's professional services unit will continue to sell Cabletron's networking equipment, and for the first time, sell its network management software for the next two years. However, there are no revenue requirements attached to the arrangement, according to the SEC filing.

In a separate agreement, Compaq invested $14 million in Cabletron's network management software subsidiary, Aprisma Management Technologies, the SEC document said.

The Compaq deal represented more than 20 percent of Cabletron's $1.4 billion in yearly revenue. Cabletron executives feel they can make up for the loss of the guaranteed revenue in two ways: Compaq's professional services organization will refer its customers to Cabletron equipment and the company will gain better access to a special niche of Compaq customers--buyers of Digital Equipment's networking gear.

In 1997, Cabletron bought Digital's networking equipment division with the stipulation that Digital would sell more than $1 billion worth of Cabletron equipment over three years. Compaq inherited the deal when it purchased the rest of Digital in 1998. Compaq re-worked the contract last year before deciding to get out of the networking business.

With the reselling agreement canceled, Cabletron can now sell directly to the former base of Digital customers, which historically accounted for $500 million to $600 million in sales a year, Cabletron executives have said.

But Dataquest analyst John Armstrong said sales of networking equipment to businesses have become stagnant. Cabletron is more likely to recoup the lost Compaq revenue with its new strategy to sell to Internet service providers and telecommunications firms, he said.

Cabletron also sold its manufacturing plants to Flextronics International for about $100 million. Flextronics, based in San Jose, Calif., will hire Cabletron's 1,000 employees based in manufacturing plants in Rochester, N.H., and Limerick, Ireland.

Flextronics will now manufacture half of Cabletron's hardware and software. A handful of other manufacturers, including Celestica, will build the other half of Cabletron's equipment, a Cabletron spokesman said.