Cabletron breakup cheers Wall Street
Move may enhance value of telecom-equipment maker
By Jeffry Bartash, CBS MarketWatch
Last Update: 2:00 PM ET Feb 11, 2000
NewsWatch
ROCHESTER, N.H. (CBS.MW) -- It's been a long road back for
Cabletron Systems.
Shares of the telecommunications-equipment maker briefly topped $40 on
Friday, the highest level since 1997 and well above the company's
52-week low of 7. The catalyst: Cabletron unveiled plans late Thursday to
break itself up into four parts in an effort to boost its overall market value.
The move is the culmination of a series of initiatives since Cabletron
bottomed out two years ago aimed at recapturing the company's glory
days of the mid-1990s. While industry observers say those glory days are
gone for good, shareholders who hung on during Cabletron's dark hours
certainly have reasons to rejoice. Analysts figure the broken-up company
is worth in excess of 50 a share.
"What's driving this
move is executives
saw a lot of value in
the company that
wasn't being reflected
in its shares," said
Matt Barsowskas of
First Albany Corp.
"It's a positive move.
Cabletron as a whole
wasn't strong, but parts of it were doing well."
After an early surge Friday, Cabletron (CS: news, msgs) shares fell back
with the overall stock market. In recent trading, it was up 5/8 to 37 1/4.
Anatomy of a fall
The causes of Cabletron's struggles -- it was once considered the chief
rival of Cisco Systems (CSCO: news, msgs)-- are complex. But at the
heart of it was an insular and inflexible corporate culture. The company
relied on outdated sales tactics, eschewed necessary acquisitions to
broaden its product line and relied too much on exorbitant, and as it
turned out, misguided internal research and development.
By 1998, revenue started to slip. At that point, co-founder Craig Benson,
the company's biggest shareholder, stepped in as chief executive,
replacing former Nynex executive Don Reed after less than one year on
the job. Over the next year, Benson trimmed the workforce, sold off
noncore assets, made several key acquisitions and revamped Cabletron's
marketing approach.
Yet perhaps his best move was to step aside in
mid-1999 in favor of Piyush Patel, the former CEO
of Yago Systems, one the companies that Benson
acquired. The younger Patel, who once served
stints in key positions at Intel (INTC: news, msgs)
and Sun Microsystems (SUNW: news, msgs), was
seen as more in tune with the marketplace and the
fast-evolving nature of the technology.
Even before he took over, Patel led the company's
efforts to focus on new routing and switching
technologies to link computers and phone systems
into seamless high-speed networks. Cabletron's
bread-and-butter product line, the award-winning
SmartSwitch router, is a descendent from other
Yago products.
( my note, it is PF who is runing NN, and BOD who is making decision)
Four-ward thinking
Cabletron's decision to split up into four parts is not a big surprise.
Benson broached the idea with Wall Street analysts last year before he
stepped down.
The biggest segment is Entersys Networks, a more traditional
telecom-equipment supplier that targets Global 2000 business customers.
Entersys has about $330 million in quarterly sales, but is the slowest
expanding part of Cabletron with a 10 percent to 15 percent growth rate.
The fastest growing segment is Riverstone Networks, which provides
high-end equipment to independent local phone operators, Internet
service providers and other carriers. Though it only has about $25 million
in quarterly sales, Riverstone is growing at a 100 percent annual clip.
Analyst Eric Blachno of Pennsylvania Merchant Group gives Riverstone a
market value of about $5.25 billion, likening it to the larger Foundry
Networks (FDRY: news, msgs), another hot, new telecom-equipment
stock. That's almost double the value Blachno assigns to Entersys ($2.8
billion).
"Right now the market is very keen on pure-play, high-growth
network-infrastructure companies," Blachno said.
The other two pieces of Cabletron to be spun off are GlobalNetwork
Technology Services and Aprisma Management Technologies.
GlobalNetwork is a consulting unit that advises corporations and carriers
on design, management and security of their systems. It's growing at an 80
percent to 100 percent clip and has about $14 million in quarterly
revenue.
Aprisma provides management software to help corporations and
telecommunications carriers run their networks. The unit is growing about
40 percent a year and has $22 million in quarterly revenue.
Right now, Cabletron's market value is about $6.8 billion. Separately, the
company could be worth more than $10 billion, analysts calculate.
A cautious eye
While analysts are gung-ho about the split -- a handful have raised or
reiterated "buy" ratings Friday -- they caution that the breakup could take
up to a year and that the company still has to handle the transition well.
"Execution is always the pitfall," Blachno said. "They have to do it right."
Another drawback is that the separate entities will no longer be able to
rely on the Cabletron brand. Despite the company's troubles over the past
few years, the brand still remains a strong and well-known one.
Nevertheless, Wall Street mostly sees a big alimony payoff coming to
investors of a happily divorced Cabletron. The breakup not only will
unlock hidden value in the overall company, but the separate pieces are
likely to become takeover targets. That could further boost shares.
Indeed, industry observers believe Cabletron decided to split up because
no one potential suitor wanted to buy the whole company. The separate
entities, especially the Riverstone and GlobalNetwork units, are likely to
turn a lot of heads once they're able to hit the singles scene.
Yet the less desirous parts, such as Entersys, may have a hard time
attracting attention unless they do a better job. "Now the struggling
businesses will be on their own," Barsowskas said.
Jeffry Bartash is a reporter for CBS MarketWatch. |
