Nice article in Forbes...
Technology shifts lightning-fast in PC
networking. That fact has hurt Cabletron in the
past but may save the company now.
Hub bubble
By Daniel Lyons
SCOTT FITZGERALD WAS WRONG when he said
there are no second acts in American lives. Craig
Benson, the 43-year-old founder of Cabletron
Systems Inc., has returned after a brief
intermission. In the second act, he's probably
going to sell the company.
In August 1997, with Cabletron's fortunes
fizzling, Benson stepped aside from day-to-day
operations at the Rochester, N.H.-based
company and brought in Donald Reed, a former
Nynex executive, to turn things around. But after
seven months backstage Benson ousted Reed
and reinstated himself as chief executive.
"I hate to compare it to my children, but when
you found something, you want to see what's
best for it in the long term," Benson says. "You
want to make sure it grows up right."
It's not just the principle of the thing-it's the
money. In the past 15 months Cabletron's stock
price has dropped from $45 to $8, taking down
the value of Benson's 12% stake from $855
million to a mere $152 million. At its recent price
Cabletron is trading just a little above book value
and at less than its annual sales. Archrival Cisco
Systems trades at ten times sales.
In the first quarter of fiscal 1999, which ended in
May, Cabletron eked out a 1% sales gain, to
$366 million, and an operating profit of $6
million-before a one-time charge of $164
million associated with an acquisition. Cisco's
sales growth has been averaging 65%, and its net
margin, 22%.
Why is Cisco coining money and Cabletron just
getting by? An important part of the answer is
that the technology shifted ground. In its heyday,
Cabletron had a good business selling Ethernet
hubs, which connect several dozen PCs in a
hub-and-spoke arrangement but don't do any
sophisticated sorting of electronic messages. In
recent years hubs have been eclipsed by routers,
which do a lot of sophisticated message-sorting.
Cisco is the leader in routers. "[Hubs] were 70%
of our business-we had number one market
share-and now they're only 15%," Benson
says. "No one knew how fast it was going to
happen."
The technology shifted in Cisco's favor. Could it
shift away? It might. Recently it has become
apparent that routers can be displaced by
so-called Layer 3 switches. Unlike a router,
which sorts snippets of data one at a time, a
switch opens up the electronic equivalent of a fire
hose between two computers and lets the data
pour through. Layer 3 switches combine the
speed of a switch with the intelligence of a
router. Customers need that higher speed in
order to support applications involving voice and
video.
Layer 3 switches outperform ordinary routers
because they contain their intelligence in
hardware rather than software. Better yet, they
cost less than routers. The price/performance
advantage will translate into a sales boom in the
Layer 3 switch market, from $35 million in 1997,
to $690 million this year, to $4.5 billion in 2002,
according to the Dell'Oro Group, a market
researcher in Portola Valley, Calif.
Cabletron bought its way into the Layer 3
market with the acquisition earlier this year of
Yago Systems, a Sunnyvale, Calif.-based startup
whose product, the SmartSwitch Router, offers
100 times the performance of a traditional
software-based router at one-tenth the price,
according to Benson.
Cabletron's sorry stats
Is Wall Street overreacting? Cabletron sales
dropped off as demand for Ethernet hubs
dried up. But prospects seem to be improving,
thanks to new products and a smarter
distribution strategy.
Sources: Marketguide via OneSource Information ervices;
Bloomberg Financial Market.
*Indicates one-time charges related to acquisitions. Sources:
Marketguide via OneSource Information Services; Bloomberg
Financial Market.
Sources: Marketguide via OneSource Information ervices;
Bloomberg Financial Market.
Cabletron doesn't have an easy win here: The
three big networking companies-Cisco, 3Com
Corp. and Bay Networks-are also selling
Layer 3 switches. But Cabletron has a fighting
chance. Cisco, though formidable, is spreading
itself thin by attempting to compete not only
against data networking rivals but also against
telecom giants such as Lucent Technologies.
3Com is stronger on the low end of the switch
market, with boxes that connect 24 PCs and cost
between $500 and $3,000. And Bay, which so
far leads the Layer 3 market, may become
distracted by its acquisition by Northern
Telecom, says Benson.
Benson is a little more respectful of his
competitors than he used to be. In the past he
scoffed at the growth-through-acquisition
strategies of Cisco and Bay. He also scoffed at
their sales channels, which include both resellers
and a direct-sales force. Cabletron used to sell
only through its own salesmen. But now Benson
is embracing both acquisitions and the reseller
channel.
Cabletron has bought five companies in the past
year. These include Ariel and Flowpoint, two
manufacturers of Digital Subscriber Line
products that make the telephone network into a
high-speed computer network; NetVantage,
which brought Cabletron a much-needed switch
for 100-megabit-per-second office networks;
and the former networking division of Digital
Equipment Corp., a $430 million acquisition that
brought a channel of distributors and resellers.
"I hate to compare it to my
children, but when you found
something, you want to see
what's best for it in the long
term. You want to make sure it
grows up right."
During the transition, Cabletron has contained
costs by laying off 600 employees and by
revamping some manufacturing processes. It is
also revamping its style of doing business.
Cabletron has had a reputation as rough around
the edges, thanks largely to the antics of
Benson's cofounder, Robert Levine, an energetic
salesman known for aggressive motivational
stunts, such as appearing at national sales
meetings dressed in combat fatigues and
swinging a machete. Levine left the company last
year and has sold off 4 million shares, most at
about $30-a smart move, in retrospect. New
managers include one from Gateway, another
who has worked at Digital Equipment Corp. and
AT&T, and a third who was a former
Washington D.C. political campaign strategist.
There is less machete-swinging.
Resellers, who have long been leery of Cabletron
because of its focus on direct sales, now seem to
be warming to the company. FrontLine Network
Consulting, a $120 million integrator in Milpitas,
Calif., booked more than $1 million in sales of
Cabletron gear during its first three months as an
authorized reseller, says Thomas Bernet, vice
president of sales. The company hopes to sell
$20 million worth of Cabletron switches next
year. Cabletron is generating demand with
aggressive promotions, including one that cuts
the price of a SmartSwitch Router from $27,970
to $13,000.
Now what? Telephone equipment vendors like
Ericsson, Siemens, Alcatel and Lucent will need
data networking partners as the worlds of voice
networking and data networking converge over
the next few years. Benson is willing to be a
seller, but a deal is not likely unless he gets an
offer well above Cabletron's $1.3 billion market
value. "Clearly we're trying to take advantage of
the situation," Benson says.
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