Cabletron Systems Inc.

Big
is no more beautiful. The strategy from Cabletron Systems seems
to be moving in that direction. To create subsidiaries, leverage
on the emerging market opportunities, and take them to the
markets. The company has announced its strategy of growth to the
next level by creating four independent operating companies–Riverstone
Networks, Enterasys Networks, Global Network Technology
Services, and Aprisma Management Technologies. These four will
focus on the key high-growth areas of the communications
marketplace–service provider, enterprise e-business,
professional services, and infrastructure management,
respectively. Piyush Patel, CEO and president, Cabletron Systems
Inc., in his teleconference to select media people in Bangalore
explained the rational behind the transformation. "We
believe we will have accelerated growth in these key markets.
Our action has a single purpose to give us the focus and agility
to seize these market opportunities and better serve our
customers. Each of these companies will speak with
clarity of purpose to its shareholders, customers, partners, and
employees and have the start-up mentality," he said.

The rational is well
intended, if one considers today’s market scenario. With
market cap playing a significant role in today’s business, the
way to respond to that is to be in focused markets and dominate
the space, while increasing the shareholders’ value. Analysts
say that can be achieved by being nimble footed. It gives the
time-to-market advantage, increases operational efficiency,
customer support, and puts the costs down. Probably, that is the
reason why young start-ups like Foundry or Extreme are very high
on market capitalization. For that matter, the Yago experience,
which Cabletron acquired in April 1999, is in itself a
sufficient proof.

These developments could
be traced to Cabletron’s own tryst with experiments of
success. The company, traditionally strong in corporate
networking, had slipped behind others like Cisco Systems and
Extreme Networks in terms of market share. But after Patel
joined as the CEO of Cabletron, he brought in not only the
strength of Yago’s Layer 3 routing switch technology, but also
his experience in driving Yago to a leadership position to the
stables of Cabletron. The company has already been named as the
#1player in low-blocking, high performance Layer 3 switching
sector market for the third consecutive quarter by Gartner Group
Dataquest. The third quarter results put Cabletron’s share at
28.5 percent of the total world-wide revenues. This development
assumes significance as Layer 3 switching is seen as a sector
critical to next-generation ISPs content hosting companies, and
e-business reliant enterprises. And proves the point that the
aggressiveness shown by Piyush after he took charge and altering
the strategy to focus on ISPs, CLECs, and other related
companies worked out positively for Cabletron. Also the Aprisma
initiative in December 1999 before the current development–spinning
of its network management solution Spectrum as an separate
company–has seen it rising to the seat of the leading
independent software vendor for network fault management.

What Would the
Transition Mean?

Fundamentally, transformation increases ability to respond to
evolving market needs. That is understandable, but what does all
that mean? Says Patel, "The companies will initially be
subsidiaries of Cabletron. However, the eventual goal is to have
four separate, publicly traded companies. This will be achieved
by spinning out these companies to its shareholders, preceded
where appropriate by subsidiary IPOs." It is anticipated
that it will go for a two-stage sub-IPO. In about four months,
20 percent of the company will be spun off in the open market,
and after that in about six-nine months, the remaining 80
percent would be distributed among the shareholders.In the process of becoming
a specialist in the merging areas, will the Cabletron brand die
or the role of Cabletron would end as a networking vendor?
"We will protect the Cabletron brand and are committed to
continue for several years. We will sell Cabletron branded
products. But if it makes sense to transition it, it will be
done at the right time. Further, our customer function will
remain the same, i.e., the customer’s experience will be the
same, rather it will only be improved farther," reiterates
Patel. Substantiating the point further, Romulus Pereira, COO,
Cabletron and the person designated to head Riverstone Networks,
explains, "All customer-facing functions will remain
unchanged and each of the businesses will be using the existing
infrastructure and processes. The new operating model will have
Cabletron ecosystem under which the newly defined companies will
transfer business agreements amongst themselves. This ensures a
smooth transition in each business and also allows them to
leverage each others strengths in markets, technology, and
customer support and also the resources of parent company."

According to Patel, the
role of Cabletron after the transition will be to act as a
catalyst of providing the investment and infrastructure support.
"We will be like CMGI, investing in start-up companies and
helping them to grow. The company worth is about $2 billion and
we are investing in about 15-20 companies on top of these four
too." On the flip side one may feel it as its strategy to
have better valuation for getting acquired. Patel disapproves
the logic. Each of the companies would be a standalone company
and would have the freedom for its own destiny.India
Dimensions

Since the customer-facing functions will remain unchanged, India
will not be effected. It will be the single interface. There
will be separate sales teams if necessary and Profit & Loss
(P&L) accounts. But Cabletron is treating India as an
important destination for investment. The company has plans to
invest to a tune of $50-100 million in strategic partnerships
and acquisitions. "This is the right time to invest in
India, especially with the Internet and e-commerce ready to take
off. We are talking to four-five large companies not in the IT
field to invest in order to help them to diversify into new
areas. These could be the groups like Tatas and Birlas. Our role
will be to give the brand name, resources, money, equipment,
etc. Besides we are very close to acquiring two three companies
in systems integration."

The company is clearly
looking at strategic partnerships with companies focussing in IT
and telecom world, which are providing infrastructure or turnkey
solutions, Infosys-type of companies, which are providing
management and support services, and looking at ISP or ASPs, web
hosting service providers, and multi-dwelling providers.

The Cabletron team in
India is completely upbeat and believes that the transformation
will give it more teeth to go all out with its businesses. The
Aprisma, which has already come into existence, today has a
full-fledged office with about 60 employees. Besides, as a
result of the altering of its strategy to address the service
providers’ market, the company has already won some of the
major networking deals in the country. These include Histrack–a
subsidiary of ISRO–for WAN project, Reliance order for
5,000-node network, IOCL and MBT projects for WAN connectivity.
These major orders put together are close to Rs 10 crore. The
biggest of its achievements, feels Uday Birje, country manager,
Cabletron India, is the ARM Ltd’s order worth Rs 1 crore for
its ISP project in Andhra Pradesh. The excitement is not so much
due to the size of the order, but due to the fact that it has
opened its account with an ISP. With the current orders already
in hand and the active market, Cabletron expects to touch
revenues of Rs 120-130 crore in this fiscal. And the new
dimension will only add more strength to its hopes.

A Position of
Strength

With the Wall Street expectation exceeding in each of the last
four quarters, improved key financials and operating metrics,
and its success in enabling the leading positions in key markets
like Layer 2 and 3 switching and network management, the company
has moved into the next lane of accelerated growth with the new
strategy. And the road ahead for the company is to be a
specialist, enhance customer experience, increase
competitiveness, and unlock shareholder value. With Patel
leading the team by example, it is only a question of how early
can Cabletron, through the realignment according to vertical
segments and not by products, have a market cap close to $15
billion from the current $4.1 billion.