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Too little, too late for Cabletron?

After many years off putting it off, Cabletron Systems stepped up to the plate in the big-league acquisition game in November, paying an implied $430 million for Digital Equipment's networking business. It's a step in the right direction for the foundering Cabletron, but it may be too little, too late.

After many years off putting it off, Cabletron Systems (CS) stepped up to the plate in the big-league acquisition game in November, paying an implied $430 million for Digital Equipment's (DEC) networking business.

It's a step in the right direction for be too little, too late. Coming from behind in the acquisitions game, Cabletron must compete in an arena of bulked-up companies able to pursue comparatively wider markets.

Consolidation has become a fact of life in the networking industry. As it matures and growth rates moderate, it is increasingly important for networking companies to make acquisitions in order to gain some measure of product or distribution scale. Companies that once concentrated on corporate business are ramping up in order to reach broader markets, including the telecommunications, Internet service provider, home, mobile, and consumer markets. In 1997 alone there were some 35 acquisition deals between networking companies.

While Cabletron has spent $926 million on seven acquisitions, its competitors have spent nearly $17 billion on 45 transactions. (Since 1992, Cisco (CSCO) has led the pack with 21 deals, followed by 3Com (COMS) with 13, and Bay Networks with 11.)

Compared to its competitors, Cabletron entered the acquisition game late, and even then focused only on smaller acquisitions. Cabletron's buys should shore up its position in the enterprise space, but they aren't likely to help it expand its market reach.

Cabletron's purchase of Digital's networking business does not fully address the company's underlying problem--that it continues to be underrepresented in key, high-growth markets such as WAN switching, remote access, and switch/router convergence. During the last few years, growth within the networking segments that DEC has served (about 5 percent to 15 percent) has been below Cabletron's growth (about 15 percent to 30 percent). Plus, DEC's profitability has been less than half that of Cabletron's.