Cabletron to Sell Digital, NetVantage Operations

ROCHESTER, N.H. (03/31/2000) - In an effort to further streamline operations and focus on high-growth markets, Cabletron Systems Inc. plans to divest itself of the Digital Equipment Corp. network operations it acquired two years ago.

Cabletron this week said it will sell its Digital Networks Product Group (DNPG) and NetVantage operations within 90 days. NetVantage was a maker of low-end stackable LAN switches that Cabletron acquired in 1998.

"Last month, we hired an investment banker to do a sale of those groups and we've made very good progress," says Piyush Patel, Cabletron CEO. "I feel comfortable that we'll be able to announce the transactions in the next 90 days, or probably sooner."

Users of these products will soon have new suppliers or will have to find suppliers of similar equipment. Also, Cabletron customers - or customers of its four operating companies - may be impacted if the product divestiture proves to be a distraction for Cabletron.

The Digital/NetVantage developments follow Cabletron's announced plans to split itself into four separate companies in order to better address high-growth markets and increase shareholder value.

Patel says Cabletron is courting both "financial" and "strategic" buyers for the Digital and NetVantage operations. Financial buyers milk the business for cash and profit, and are not committed to investing in it. Strategic buyers purchase operations to make them part of their product portfolio and retain strong brand recognition.

Cabletron will also reduce its workforce by 600 to 800 employees in the first quarter of fiscal 2001 as it jettisons these operations and discontinues other product lines that are not core to the business, says David Kirkpatrick, Cabletron's chief financial officer. Those lines include low-density switching equipment and remote access products.

The company expects to report a first-quarter 2001 loss of $25 million to $45 million due to charges associated with the restructuring, Kirkpatrick says.

Cabletron acquired DNPG for $430 million in February 1998 for its channel distribution, and service provider and international product exposure.

Cabletron's Enterasys enterprise subsidiary is actively marketing the Digital RoamAbout wireless equipment, and is using DNPG's routing and VPN technology, Patel says.

DNPG's GigaSwitch and DEChub products, which at one time were key offerings for Digital, are being retired, Patel says.

Cabletron acquired NetVantage for $100 million in September 1998 as an entree into low-end stackable switches, a market dominated by 3Com. Cabletron's SmartStack offerings never became a serious threat to 3Com and never became a serious player at the low end.

"I'm not really sure who would want to buy either of those two turkeys, but at any price there will be a buyer," says Craig Johnson, principal at The Pita Group in Portland, Ore. "Both technologies are very old. As for return on investment, I'm sure Cabletron will spin the sales as a positive return on investment, though how they will measure that will be suspect from my perspective."

Cabletron stock dropped more than 21 points last Thursday, losing some 42 percent of its value, after Goldman Sachs downgraded the company from a "market outperform" to a "market perform." The downgrade came a day after Cabletron disclosed the Digital/NetVantage divestiture and posted a fourth-quarter 2000 profit increase of 650 percent from the year-earlier period.

Sales, however, increased only 10.6 percent from the first quarter of 1999.

Ajay Diwan, the Goldman Sachs analyst who downgraded Cabletron could not be reached for comment last Thursday. But Bloomberg reported that Diwan believes Cabletron's restructuring will take longer and be more disruptive than anticipated, and that the company will fall short of revenue and earnings expectations for several quarters.

Patel says Cabletron's breakup is ahead of schedule.

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