Cabletron has dragged itself into the top tier of vendors with its late bid for Digital Equipment's networking business, which it believes will give it the scale to compete with Cisco, 3Com and Bay.
As revealed in PC Dealer (26 November), Cabletron has paid $430 million for Digital networking business. Digital's network division has been for sale for more than a year, with Lucent most recently being the favourite to take it. However, Digital has turned down a number of bids over the past year, according to one source, because they would have involved a straight sell-off. This would have left Digital without a range of own-brand products to sell through its systems and services divisions.
The Cabletron bid, by offering a combination of complicated financing and reseller agreements, convinced Digital, even though negotiations only began six weeks ago. The agreement gets Digital out of a business that had clearly lost its edge and profitability. But it does allow the vendor to retain a brand for the networking products that have always formed a cornerstone of its distributed computing strategy.
Lee Knoch, director of marketing at Digital's network division, said: 'At $500 million we are a small company in the networking business compared to Cisco, Bay and 3Com. Systems wanted to provide only the best products across the whole networking range, but that would have taken too long and would have cost too much for Digital.'
Knoch admitted Digital had missed its chance to retain a lead with Ethernet, but it now had excellent FDDI and Gigabit Ethernet products that were among the market leaders. With the Cabletron acquisition, it gains the scale to drive them aggressively into the market. He added that an industry leading switch for internet access would be announced in the next three months.
For Cabletron, scale was the only way ahead, bigger truly is better in this sector of giants and, with Digital's huge direct salesforce as an almost guaranteed channel for products, it increases its revenue from channel sales by as much as 100 per cent according to the company.
The Digital network product business will become a Cabletron company, keeping its brand under the title Digital Networks Product Group: A Cabletron Systems Company. Cabletron paid a total of $430 million, including about $150 million in stock and cash and $280 million in product credits.
'(The acquisition) will provide Cabletron with a much needed boost in international activity, an expanded product portfolio, a greatly expanded sales and service channel, access to service provider networks, and partnership with a major systems supplier,' said an analyst at research firm IDC.
Cabletron does not seem to have overpaid - $430 million is less than one time the revenue of the networks unit, which Digital described as a $500 million business. With part of the deal being based on product credits, there is a certain element of risk protection for both sides as well as a reseller and services contract that requires Digital to buy a minimum volume of product from Cabletron.
'The challenge will be to carry the momentum of this acquisition forward by properly aligning its now much larger development, sales and service activities,' concluded IDC.
According to IDC figures for the 1996 European Lan market - hubs, switches, routers and network cards - Cisco leads with 26.5 per cent of user revenue.
Close behind is 3Com with 21 per cent and Bay with 8.9 per cent.
However, IDC showed that the combined Cabletron and Digital Networks would push Bay into third place with 10.6 per cent. This is particularly significant for Cabletron as it is smaller in Europe, than the US.
Digital Networks brings with it a strong indirect channel setup, something Cabletron needs. Richard Prior-Jones, marketing director at Digital networking distributor Azlan, said he saw benefits for both parties and was pleased the deal had put an end to rumours.
'Both needed to get bigger quickly to remain a major networking vendor, but they face the same sort of challenge as Wellfleet and Synoptics did to make Bay. At least they have that experience to learn from,' he said.
Prior-Jones said it was a good move for the channel, but Cabletron would have to improve the way it has dealt with the channel in the past, demonstrating how it plans to integrate the two product lines, and educate the channel partners on the combined operation.
Digital will continue to provide service and support to the branded network products as well as some of Cabletron's.
Questions remain over what product lines could be dropped.
If efficiency is to increase, savings must come from somewhere, although representatives from the merging units are keen to assure customers they will not cast them adrift on product lines.
While Digital CEO Robert Palmer has said this is the last sell-off for his company, Cabletron continues to look for suitable acquisitions. The Digital purchase does little to further Cabletron's ambitions to increase its presence in the telecoms service provider area, for example.
Analysts predicted that much of the success in this deal lies not in the finances but in how it is presented to customers and the channel. Much still needs explaining about future product strategy, but the greater scale at least gives Cabletron an opportunity to finally compete with the big boys.
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