Mary
Thanks for posting the url.
Here is the article for all to read:-)
BW ONLINE DAILY BRIEFING
NEWS ANALYSIS June 5, 1999
As Cabletron's Founder Steps Down, Will a Buyer Step Up?
Craig Benson, who was also CEO and chairman, says no. But analysts say the network-gear maker is now more attractive
When Craig R. Benson looks back over his career as CEO and chairman of networking-equipment maker Cabletron Systems, he sees plenty to cheer about. From his start cutting data cables to order in a garage in Acton, Mass., Benson and his partner, S. Robert Levine, bootstrapped Cabletron with no venture capital into the fourth-largest player in the hot networking industry, competing against Cisco, Nortel, and 3Com. With $1.4 billion in sales and 5,000 employees, "Cabletron has blown way past my expectations," Benson told Business Week Online on June 4, after stepping down as head of the company he founded. "It's the American dream."
How ironic, then, that Benson's continued presence at the top of the company he built was widely viewed as an obstacle to the best option Cabletron has left: selling off the business. While Benson says Cabletron isn't actively negotiating a sale, many analysts and industry executives say his resignation makes the company more attractive to potential acquirers. With a market cap of $2.4 billion, Cabletron offers a cheap way into the networking industry for European telecom equipment companies Ericsson, Nokia, or Siemens, or U.S. powerhouse Lucent, all of whom have expressed interest in Cabletron, according to sources close to the company. Two of Cabletron's directors did not return calls seeking comment.
SICK MAN. Clearly, this is a turning point for Cabletron, as well as for the 46-year-old Benson, who handed the company over to Piyush Patel, an talented product engineering manager and the leader of Cabletron's Yago subsidiary. Under Benson's leadership, the company became a technology high-flier, with a stock that soared to the highest gainer on the N.Y. Stock Exchange in 1991. For the past two years, however, Cabletron has been the sick man of a booming sector, struggling to cope with a market shift that rendered its core products obsolete while being slow to branch out beyond selling networking gear directly to corporate customers. A string of missed quarters, most recently in its fiscal fourth quarter ended Feb. 28, have hammered Cabletron's stock, giving it a market valuation roughly 1% the size of market leader Cisco's. Even worse, startups like Extreme Networks and Xylan have market caps similar in size to Cabletron's, despite being substantially smaller businesses.
Some in the industry blame Benson, whose self-confidence tied Cabletron to the business it grew big on: network hubs that can direct data as well as voice traffic around corporate networks, sold by an aggressive but expensive sales force that called directly on customers. When a faster switching technology began to replace hubs, Benson first tried to build a new class of products internally, while competitors like Cisco and Bay Networks acquired the technology they needed to quickly enter emerging markets.
Benson was also slow to adapt Cabletron's sales strategy to the sudden surge in demand from telcos, who need huge amounts of networking gear to become Internet data carriers but generally prefer to buy through resellers rather than directly from technology providers. "It takes a long time to build a channel, but it's hard to do," Benson said. "Part of it has to do with trust, and it's taken a long to do that."
"IN YOUR FACE." Some industry execs say Benson's stubbornness and tough negotiating style contributed to the difficulties Cabletron has had in expanding its sales channel partnerships. "He's got a personality you could characterize as in your face," says one exec who's been on the other side of the table. "A fresh face could change the perception in customer's minds and also in the [sales] channel's minds." Benson allows that "people think of me as bull-headed. I think people read a lot into what the company will and won't do based on my disposition."
In recent weeks, Cabletron shares have perked up, as the company's new switching product has shown early promise. Cabletron's highly regarded network management software, Spectrum, is also being readied for a spin-off. Benson told Business Week Online that a spinoff of Spectrum could come in the next nine months. Cabletron would retain a majority interest in the new Spectrum business, another factor lifting the stock.
But the company still lags behind its primary competitors in the networking industry, in both market capitalization and financial performance. That has increased the pressure from investors and Wall Street for Benson and the company's four other directors to seek a buyer. Benson, who owns 11.7% of Cabletron stock and will remain a director, says he didn't resign to improve the odds that someone will buy Cabletron. "I don't know why that logic makes sense," he says. But in a conference call on June 4 explaining his departure to analysts and investors, Benson acknowledged that his presence at the top of Cabletron was holding the company back. "The focus on Cabletron has been largely on Craig Benson, but we have 5,000 people," he said. "In order for the company to flourish, the focus needs to be not on me, but on the company in its entirety."
Others see a clear connection between Benson's decision to retire and the pressure to find a buyer. "Cabletron hasn't been bought yet because Craig Benson was still there," says Esmerelda Silva, an analyst with International Data Corp. "He was at the helm when all these things were going wrong. The perception is that he's old-world Cabletron and has not moved aggresively enough."
LOSS OF COLOR. Benson's brother, Larry, director of marketing and sales at Omnicom Inc., which sells network management software tied to Cabletron's Spectrum product, says his brother's resignation "doesn't increase or decrease the odds" that Cabletron will find a buyer. But he adds: "You may find that some companies who were concerned about the amount of stock Craig owned and were afraid to deal with Craig may now be interested. He still holds the same amount of stock, but he's no longer in control of day-to-day operations."
Benson's departure is sure to make Cabletron a less colorful place. Though he has mellowed somewhat since his early years at the company, Benson continued to draw a salary of just $52,000 with no bonus, justifying the scanty pay on the basis of his large ownership stake in the company. He and partner Levine once staged a mock fight on the other side of a closed door from the investment bankers who took Cabletron public in 1989, hoping to spook the bankers into quickly finalizing one of the financial terms.
Patel, Cabletron's new CEO, seems tame by contrast. He intends to quickly beef up marketing and sales, and focus with new vigor on the telecom service providers, which account for only 10% of Cabletron's sales today, despite being the fastest-growing segment of the networking industry. Patel's objectives are strikingly similar to those outlined by Donald R. Reed, a former Nynex executive brought in as CEO by Benson and Cabletron's board in August of 1997 to drive the company to a higher level of growth. Reed lasted only eight months before Benson reasserted control and resigned following two missed quarters.
Benson says Cabletron lacked the products it needed until recently to crack the service-provider market. Thanks to Patel's efforts at Yago, which Cabletron acquired in March, 1998, the company has addressed that problem: Its newest switch is currently the leader in its class, with about 25% market share, according to IDC. With his strong grounding in product development, however, Patel appears to lack the marketing skills Cabletron needs. "Patel's lack of nontech experience a is question mark," says Mark Lipacis, an analyst at Merrill Lynch & Co. But that may prove less important if Cabletron finds a buyer.
By Paul Judge in Boston
EDITED BY DOUGLAS HARBRECHT _ _
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