Rumors and deals fill Cabletron's week

By Robin Schreier Hohman
Network World, 6/29/98

Rochester, N.H. - It's been mighty busy at Cabletron Systems, Inc. of late.

Cabletron has been in high-level negotiations with Compaq Computer Corp. regarding the resale of $1 billion worth of Cabletron network gear.

At the same time, Cabletron last week wrapped up its long-expected purchase of switch maker NetVantage, Inc. and posted a modest profit for the first quarter.

And if all that isn't enough, in the wake of Nortel's blockbuster acquisition of Bay Networks, Inc. two weeks ago, speculation is growing that Cabletron will be the next big internetwork hardware company to get gulped down.

When Cabletron bought Digital's network business late last year, Digital agreed to buy $1 billion worth of Cabletron gear over the following 3 1/2 years. Now it's up to Compaq, which bought Digital earlier this year, to decide which products to resell, and whether it wants to modify any of the contract's terms.

The contract's details are currently being hashed out by Cabletron CEO Craig Benson and William Johnson, Compaq's vice president of network and access communications. The two met here two weeks ago at Cabletron's headquarters.

That meeting sparked talk that Compaq may be interested in buying Cabletron to fill out the Houston company's growing network product line. In fact, in the past few weeks, dozens of Compaq employees have been seen at Cabletron and former Digital plants in the U.S. and in Ireland, where Cabletron has manufacturing facilities.

Compaq's Johnson said his meeting with Benson had nothing to do with an acquisition. "I was talking to Benson about how we move this relationship forward now that it's Compaq and Cabletron, and not Digital and Cabletron," Johnson said.

Industry observers have been wondering whether Compaq would accept the terms of the Cabletron contract. "I'm expecting it to be a relationship that meets the spirit and letter of the contract," Johnson said.

The contract gives Compaq the chance to buy more from Cabletron at cost after the $1 billion in sales. Johnson declined to reveal exact numbers. The deal could also be expanded, Johnson said. Right now, the companies have to agree on what products Compaq will resell, and under what label.

Industry observers are curious about whether Compaq will go for a broad range of products, including older, more established gear, or home in on the newer stuff.

So far, Compaq has agreed to resell three of Cabletron's newest switches: the SmartSwitch 6000 will be sold as the MultiSwitch 700; the SmartSwitch Router will be sold as the GIGASwitch Router; and the SmartSwitch 9500 will be sold as the GIGASwitch 9500, according to Giulio Gianturco, president of worldwide channels for Cabletron.

Whatever devices Compaq decides to resell, the deal could result in Cabletron products carrying the Compaq name, an approach Johnson has advocated. Cabletron apparently agrees, but no decision has been made. The alternative would have the product branded as Digital.

Cabletron is also working with Compaq on reselling the workgroup Ethernet switches from NetVantage under an OEM agreement.

Compaq has not been the only rumored Cabletron suitor of late. An Ericsson, Inc. executive revealed that parent company Telefon Aktiebolaget Lm Ericsson, of Stockholm, Sweden, is shopping for network firms to give it IP switching technology, leading to speculation that Ericsson might be eyeing Cabletron or 3Com Corp.

But Gary Pinkham, vice president of business development and data network solutions for Ericsson, said he wasn't interested in acquiring large, established companies. He prefers "mid-tier and start-up companies - we can make them a global player overnight," he said.

However, Cabletron could be a bargain for any company looking for IP switching. Because the company's stock has hovered around $12 for months, its market cap is substantially lower than 3Com's and Cisco Systems, Inc.'s. An offer of $22 per share would buy Cabletron for about $3.6 billion.

As for all the speculation, a Cabletron spokesman said, "We don't comment on rumors." The spokesman said Benson was meeting with customers and was not available for comment.

While all this was going on, Cabletron last week agreed to swap $100 million in stock to acquire NetVantage, an Ethernet workgroup switch maker that sells its gear under OEM agreement only. On the same day, Cabletron announced revenue of $365.7 million for the first quarter of fiscal 1999. Before $163.6 million in one-time charges related to the acquisition of Yago Systems, Inc., Cabletron reported a profit of $6 million.