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Cabletron In A Tangle

News: Analysis & Commentary: COMMUNICATIONS


A credibility gap adds to the woes of the data networker

Donald B. Reed likes to think of himself as a doer, not a talker. "Watch my feet, not my mouth," is a favorite saying of the new president and CEO of Cabletron Systems Inc. But three months after taking charge at the feisty kid brother of the networking industry, Reed seems to have his shoelaces tied together. On Dec. 2, Cabletron announced that profits for its quarter ended Nov. 30 would fall short of estimates--the second time in six months that Cabletron has missed its numbers. Reed will take a charge against pretax earnings of up to $30 million in Cabletron's fiscal fourth quarter, the company says. Cabletron stock is down more than 50% since Reed took over Sept. 1. Welcome to the corner office.

He's not the only exec in networking who's stumbling. The same day that Reed unloaded Cabletron's bad news, 3Com CEO Eric Benhamou said his company also would fall short of quarterly estimates. Bay Networks Inc. is also struggling with management issues, and price pressure remains ferocious, making it harder for challengers to take on industry heavyweight Cisco Systems.

Indeed, Cabletron may be the most exposed of the four major networking players. With only 7% of the industry's profits and 8% of its revenues, "it's hard to see whom [Cabletron] can take market share from," says Paul Johnson, an analyst with Robertson Stephens & Co. Adds Richard D. Wallman of Dreyfus Corp.: "Cabletron will have to innovate or be acquired."

"NO PANIC HERE." Reed is far from throwing in the stock options just yet. The former Nynex executive says his $430 million deal to acquire Digital Equipment Corp.'s networking division remains on track as does his strategy of targeting phone companies and Internet service providers for sales of networking gear. "There's no panic here, no withdrawal," he says. "It would be wrong to hunker down and do short-term activities that might fix a quarter. We've got to stay the course."

That course, however, is tricky to navigate. Cabletron is stuck in a maturing market for corporate networking gear. Lately, it hasn't been able to move its newer switching products fast enough to make up for slowing sales of its older hub technology. Meanwhile, rivals have merged their way to massive size and pushed into new markets.

Cabletron's Digital deal will add about $500 million to its $1.4 billion in sales, and Reed says he's shopping for more deals. "When people see the next few acquisitions, everyone will feel more confident we're on the right track," he says. "Watch how we execute in the next few months." No doubt his footwork will be closely observed.By Paul C. Judge in Boston

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