Enterasys Does the One-Step
By Ari Weinberg
Aug 03 2001 04:00 PM PDT
The networking company is taking a backdoor approach to becoming publicly traded – no IPO.
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Enterasys Networks finally starts trading on the New York Stock Exchange on Monday. And like all newly listed companies, the New England-based networking firm has jumped through all the usual hoops: filing with the Securities and Exchange Commission, going around the country to drum up investors and applying for a stock exchange ticker.
Enterasys is missing just one thing: an initial public offering.
Like media software firm Roxio, Enterasys is taking a backdoor approach to becoming a publicly traded company.
Faced with a volatile and unfriendly IPO market, companies that are looking to spin off business units have had to rethink their strategies. Some, such as Credit Suisse First Boston, simply plan to reabsorb companies that they sold on the public market. Others such as Qualcomm simply scrubbed their spinoff plans. The value of those units will be reflected in the price of the parent company's shares.
Others went ahead with IPOs but accepted far less than they originally expected. A notable example was Lucent's spinoff of Agere Systems, which priced well below the parent's hopes.
Enterasys, owned by Cabletron Systems, doesn't have to worry about pricing, first-day pops and banking fees. Better yet, it was set to go public with all of its shareholders firmly in place.
They are both examples of a "one-step spinoff." In a one-step spinoff, the parent company issues shares as part of dividends to holders of the parent company's shares. Shares of the parent and the spinoff then trade on the "when-issued" market, a sort of ghost market where shares of companies without publicly traded shares trade. (This sort of market also exists for bonds and is instrumental in maintaining the price of government debt ahead of bond auctions.) The when-issued shares are traded from the record date of the dividend to the payment date. When the payment date hits, voila, a brand-new public company.
The saga of Cabletron Systems and its spinoffs has been particularly intriguing. The data-communications-equipment and software company has successfully fought an uphill battle to pull the company from dire financial straits in late 1998. The plan, engineered by CEO and Chairman Piyush Patel, was to split up what had been become a mishmash of networking operations.
"There were three objectives," Patel said. "Reignite growth, energize employees and fuel profitability."
Cabletron started that process in February, raising $120 million for switch-router maker Riverstone Networks. The next step comes Monday, when Enterasys begins trading as ETS on the New York Stock Exchange. Enteraysy will spin off network-management-software maker Aprisma later in the year. A fourth, smaller business unit, Global Network Technology Services, is being sold off, and parts of it have been distributed to Enterasys and Aprisma.
The flipside of this is that the parent company, Cabletron, will disappear Monday. Its shareholders will receive one share of Enterasys and 0.51 share of Riverstone for each share of Cabletron they hold.
Had the conditions been more favorable, Cabletron would have gone for the traditional two-step spinoff – an IPO followed by a divestment of the parents holdings in the spinoff, Patel said. Fortunately for Riverstone and Enterasys, the firms receive their portion of Cabletron's cash in the spinoff. But further off in the distance, Patel believes that Enterasys can raise cash in a "more efficient" secondary public offering.
Still, Enterasys has used the past few weeks to make sure its current investors – Cabletron shareholders – back them up. "Our roadshow had the marketing aspects of an IPO," said Enterasys VP Tom Eggemeier.
The one-step spinoff gives Enterasys something it hasn't had but needs: a currency for acquisitions. Vice Chairman Ernie Riddle says public currency will allow the company to be more nimble than major competitors Cisco and Nortel.
Enterasys isn't alone in using this strategy. In early May, network storage company Adaptec spun off Roxio, a software maker it had housed. The deal has a slightly different feel, in part because Adaptec still exists.
"The unit's true value wasn't being recognized by the Street," said Adaptec CFO David Young. Roxio filed and then withdrew its S-1 – the official SEC document for an IPO – after the firm's bank, Morgan Stanley, recommended pulling the offering in late December due to a sour IPO market.
When Adaptec officially severed ties with Roxio, Adaptec shareholders received 0.1646 shares of Roxio per Adaptec share.
The downside of a one-step spinoff is that the companies raise no cash. But neither Enterasys nor Roxio need money. And in the current market, there is a very real chance the companies would leave money on the table if they went with the two-step IPO.
"When you are not trying to raise money, there's a whole different set of decisions," said IPO.com CEO Marc Baum. "Some companies are just trying to get their assets fully valued by the market."
The one-step spinoff, says Baum, is shareholder- and company-specific and allows for a smoother spin off. It removes the one part of the process the company can't control: the market's pricing of its companies.
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