Enterasys looking to buy into big-time

Targeting security, wireless to reach $1 billion in revenue

Enterasys is looking to make one or two acquisitions this year in an ambitious effort to increase revenue to $1 billion - it isn't close today - by expanding the company's presence in security and wireless.

Enterasys is looking to make one or two acquisitions this year in an ambitious effort to increase revenue to $1 billion -- it isn’t close today -- by expanding the company’s presence in security and wireless.

The LAN switching vendor also is lining up partnerships with VoIP companies and expanding its security portfolio to include firewalls and VPNs in an effort to tap ancillary markets, company officials said in an interview this week. 

Currently controlling less than 1.5% of the $18 billion Ethernet switching market, Enterasys is hoping to reverse a multiyear trend that has seen its share slide from 1.8% in 2004 to 1.3% in the third quarter of 2007, according to Dell’Oro Group. Acquiring another vendor might do that as well as make Enterasys better able to compete in a market that just got more competitive with the entrance of Juniper Networks two weeks ago but is still dominated by Cisco.

“We are going to acquire this year,” says Mike Fabiaschi, Enterasys president and CEO. “We’ve always said from the beginning and the market has always said a clear alternative to Cisco would make sense. We think that the next player that can get close to $1 billion will start to emerge as a clear No. 2. We’re really going to try to make something happen in 2008 to that end.”

Privately held Enterasys does not disclose revenue figures, but they are believed to be about $350 million. Fabiaschi says the company is profitable and cash flow positive, and that revenue is growing.

Fabiaschi says Enterasys will look to make strategic acquisitions in security or wireless. Enterasys currently has an OEM relationship with Trapeze Networks for WLAN equipment, and is reported to be sizing up Bluesocket

In security, analysts have said Enterasys needs to extend into firewalls or SSL VPNs to augment its line of security-enabled switches.

Enterasys also is looking to acquire in order to grow and scale the company to better compete for the next wave of enterprise buying.

“I think in the next three to four years there’s going to be a lot of refresh, a lot of buy,” Fabiaschi says. “Companies are going to look to consolidate before a lot of that happens in order to bulk up and be ready for it. 2008 has all the right feelings that it is going to be a year of consolidation.”

A new buying cycle is not the only impetus for consolidation in enterprise switching – Juniper’s entry into the market will force companies to try to bulk up to compete with another multibillion dollar player, Fabiaschi says.

Indeed, Juniper itself believes its entry will dramatically change the market. CEO Scott Kriens recently stated that a mature market like enterprise switching can’t support more than two players, adding that Juniper is now that second horse in the race

Enterasys is not ready to concede that.

“It does seem like the No. 2 and 3 providers in this space right now are probably doing $600 to $700 million [in revenue],” Fabiaschi says. “We are far away from $1 billion. It will take one or two of the right acquisitions that we could get real close to that.”

Analysts say acquisition is a good way for Enterasys to go in order to grow.

“There’s a couple of companies out there in the WLAN space that are seemingly for sale,” says Steve Schuchart of Current Analysis. “There’s certainly opportunities for them to acquire an existing customer base and to grow their company via acquisition.”

Schuchart adds that firewalls and VPNs are gaps in the Enterasys product line that the company needs to fill “to be a complete player.” Enterasys plans to move on that front through internal development and external partnership, says Chris Crowell, Enterasys executive vice president of R&D.

Enterasys is also looking to strengthen its partnerships in VoIP, a market where the company is a virtual non-entity. The company plans to announce partnerships with three “top-tier VoIP players in the world” this year, one of which could come as early as next week, Fabiaschi says.

“We’ve made a conscious decision not to get into VoIP,” Fabiaschi says. “We think that we’d rather be a Switzerland – we support all the players who provide VoIP but I think we’d end up being a No. 13 or 14 player in a very crowded market.”

Enterasys would rather provide the secure infrastructure that recognizes and prioritizes voice traffic instead of a VoIP equipment provider, he says.

The partnerships will not preclude Enterasys from supporting VoIP vendors it does not have a close relationship with, Fabiaschi stresses.

“We will still support Cisco, Avaya, Nortel, Alcatel, Siemens,” he says. “The handset provider that you buy today may not be the handset provider that you buy tomorrow. We’ll never say to somebody that you don’t want Enterasys because you chose this voice provider or that voice provider. Voice is going to turn out to be just another application within another two years. When that happens I want to make sure that our customers realize they can stay with us.”

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