Here is an interesting analysis of the Yago acquisition:
CurrentWIRE: COMPETITIVE INTELLIGENCE
CURRENTREPORT: Cabletron Acquires Yet Another Gigabit Organization
MODULE: Network Infrastructure,
ANALYST: F. McClimans
INDUSTRY IMPORTANCE RATING: High
VENDOR IMPORTANCE RATING: Very High
CURRENT PERSPECTIVE RATING: Very Positive
EVENT SYNOPSIS:
Jan. 14, 1998--In another bold move to expand its solutions-oriented offerings for the enterprise and service-provider markets, Cabletron Systems today announced it will acquire privately-held Gigabit Ethernet and switch router visionary YAGO Systems, Inc. The acquisition underscores Cabletron's commitment to provide affordable, standards-based solutions that extend network performance and bandwidth far beyond the capabilities of traditional router-based network infrastructures.
BOTTOM LINE ANALYSIS:
This is a very positive move on the part of Cabletron. It has held a minority (25%) stake since last year in this emerging gigabit startup and has now decided that this will be core to its network strategy. At this point, Cabletron's strategy of "invest a little money now for a potential payoff later" is very similar to the strategy that many venture funds use (invest a little seed money, then invest a lot later, at a higher valuation, if it actually takes off). We feel that this move will address several Cabletron needs, including both product and market viability (in the eyes of many users). It is important to note, however, that Cabletron still has a massive rebuilding period in front of it. And while the recent acquisitions of YAGO and Digital are part of that rebuilding strategy, such moves also add considerably to the level of complexity. This move should be of prime interest to both Cabletron's competitors and customers. Competitors should realize that the Digital acquisition was merely the warm-up with many more likely to follow this year. That means a renewed focus on Cabletron as a potential competitor. For users, this new acquisition binge could lead to a wealth of new products for the Cabletron channel, but also some potential headaches as the company goes through the digestion process.
BACKGROUND INFORMATION:
EVENT: Cabletron To Acquire Switch Router Visionary Yago Systems, Inc.
REPORT TYPE: Competitive Intelligence
TYPE OF EVENT: M & A Announcement
VENDORS: Cabletron Systems,YAGO
COMPETITORS: Cisco, Bay Networks, 3Com
MARKET SEGMENT: Intranet Switching,
TECHNOLOGY: Gigabit Ethernet, LAN, Routers, Switching (LAN),
TARGET MARKETS: Large Corporate Users
DATE OF EVENT: January 14, 1998
DATE OF ANALYSIS: January 15, 1998
ANALYSIS: INDUSTRY IMPORTANCE RATING: High.
This event is of high importance to the industry. While it is not a surprise announcement, it does change slightly Cabletron's position in the market, and other vendors should be prepared to counter this move - especially in the field where Cabletron's sales force is likely to make the most of this announcement.
VENDOR IMPORTANCE RATING: Very High.
This announcement is of very high importance to Cabletron. Cabletron previously held a 25% minority stake in YAGO, a startup gigabit switching/routing company. But, as we all know, ownership of core technology is a must in this business - and gigabit switching/routing is clearly core to the Cabletron strategy. On a more practical competitive view, Cabletron needed this move to remain on a par with archrivals Cisco and Bay - both of whom have been aggressive in the acquisition of switching companies (3Com has been active in the past, but has relied more on internal development for its competitive products). Cabletron also needed this deal to remain a player in the minds of many users - in a world of dog eat dog, users want to know who the big dogs are.
CURRENT PERSPECTIVE RATING: Very Positive.
We are very positive on this deal. YAGO, just one of many small startups in this field, had previously sold 25% of its firm to Cabletron, enabling Cabletron to "test the waters" of technology and determine if YAGO was the "right" firm for its purposes. With its strong gigabit technology, featuring both layer 2 switching and layer 3 routing, Cabletron has added a strong component to its arsenal of products.
Probably equally as important, this deal accomplishes several other important goals. First, it clearly puts to rest any of the rampant rumors that Cisco would outbid Cabletron for YAGO (as Cabletron tried to do with 3Com's acquisition of Chipcom several years ago).
Second, it helps to shift focus from Cabletron's ongoing acquisition of Digital. This is not to say that the Digital deal is a bad one - far from it. But it does put the Digital purchase price in a new light relative to the $213 Million price tag for YAGO (Digital looks more like the good deal that it was).
Third, this move demonstrates that Cabletron has the stock power to purchase hot startup firms. Much has been made of the "easy" acquisitions that Cisco has been able to pull off over the past few years due to its high stock valuation. Cabletron, on the other hand, has suffered of late with a stock multiple that was not overly impressive. Interestingly, this deal is as much a vote of confidence on the part of YAGO in Cabletron as it is in Cabletron's confidence in YAGO's technology (although it should be pointed out that the initial stock payment is valued at $85 Million and that it is not until 18 months from now that YAGO is guaranteed to reach the full value of $213 Million - either through the increase in value from Cabletron's stock or through the addition of up to 5.5 Million shares into the deal by Cabletron).
Fourth, this deal also provides access to some much needed routing expertise, something that has been missing since Cisco pulled the plug on Cabletron's access to Cisco routers in late 1996. Could Cabletron have recreated that code and expertise? Sure. But it still would have lacked industry (i.e., user) acceptance, as it had no previous widespread expertise in that field. Cabletron did buy into some routing code this past year with a small minority stake in IP switching vendor Ipsilon, a deal that was subsequently annulled with Nokia's purchase of Ipsilon late last year (Cabletron still has access to Ipsilon/ Nokia's technology, but will never "own" it outright). This deal fills the gap nicely, since YAGO is regarded as a routing company capable of building the big high-end routing platforms that Cabletron requires to sell into large corporate and ISP backend networks.
TOP COMPETITIVE POSITIVES:
* Cabletron now owns a set of technologies that will be core to its strategy in the future.
* Although it has not officially shipped product, YAGO is highly regarded within the industry.
* This move will help bolster Cabletron's market momentum - if the acquisition is played correctly by the Cabletron corporate marketing group.
* Cabletron has owned a 25% stake in YAGO, and had access to their products in development since earlier last year. This should translate into a fast integration cycle for YAGO products into the Cabletron product portfolio.
TOP COMPETITIVE CONCERNS:
* While highly regarded, YAGO has not shipped its product. As good as "beta" sounds, there have been many cases where beta test periods become extended due to the discovery of unplanned features.
* Cabletron, not widely known for its acquisition talents, is acquiring a company in California. How it manages this team will be very important to its ability to acquire other firms (outside of the northeast U.S.) in the future.
* While this move brings Cabletron's product portfolio closer to its major competitors, it also forces Cabletron to reconcile its previous product strategies (i.e., Ipsilon, Secure Fast Packet Switching), something it has planned for at ComNet '98 in January 1998.
* By setting a target in the financial community ($35/share within the next 18 months), Cabletron has clearly set a metric against by which it can be judged. Our concern here is not so much "can the company do it," but rather "will the market remain stable" to allow it the opportunity to reach the share price.
TOP VENDOR SUPPORT ACTIONS:
* Cabletron must articulate its strategy (by the end of January 1998) for how this new product set will be integrated into the Cabletron product family. Since it has been dealing with YAGO for some time now, a simple "road map" or product outline will not be adequate - it must be able to give specific details (especially regarding how this product will play against the Ipsilon and Digital product efforts).
* Cabletron should make this acquisition the first of many to be completed this year.
* Cabletron should work hard to expand its presence at the YAGO facilities. The company needs to have a stable and long-term presence in Silicon Valley.
TOP COMPETITOR ACTIONS:
* Given the change in Cabletron that this announcement indicates (a shift towards an acquisition strategy - especially following on the heals of the recent Digital acquisition), Cabletron's competitors should be aware of - and formulate a counter strategy to - this announcement.
* We expect that Cisco, Bay, and 3Com will all likely focus on the different elements of Cabletron's strategy that must now be reconciled (Ipsilon, SFPS, Digital).
* We expect that most vendors will focus on the lack of product shipment to date (this is not a strong concern of ours at this point).
* We expect that many will try to highlight the terms of the deal (especially the deferred, but guaranteed, payout) as indicating that YAGO was not convinced that Cabletron would grow significantly over the next 18 months.
TOP USER ACTIONS:
* Users should continue to view Cabletron as one of the top-tier players in this market sector.
* Users should recognize that Cabletron is in the midst of a rebuilding period and not only are more acquisitions likely, but that Cabletron should be watched closely for signs of overeating.
* Present SFPS users should query Cabletron immediately about plans for product integration, especially from an end-to-end management and administrative perspective, relative to both YAGO and Digital.
* As this product is still in beta, users should be cautious about early delivery promises on the part of Cabletron sales staff.
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