Cabletron blunders continue
Cabletron Systems Inc.'s announcement Tuesday that it would lay off more than 600 employees and take a $30 million charge in the process is just the latest miscue for a company that has seen its stock price fall by more than 70 percent since May.
The Rochester, N.H., networking company said the layoffs are part of a strategy designed to "streamline" its distribution system as well as to better integrate its recent partnerships and acquisitions. But to many analysts, Tuesday's pink slips are a signal that Cabletron management is struggling with the firm's direction and how best to allocate resources.
On Dec. 4, Cabletron agreed to acquire Digital Equipment Corp.'s networking product line, which includes an extensive family of switches and routers, for $430 million in cash, stock, and product credits.
Getting Digital's networking unit was supposed to improve the network equipment maker's distribution channel rather than its product portfolio, according to analysts, but Cabletron hasn't been able to dent the substantial market-share advantage owned by competitors Cisco Systems Inc. and 3Com Corp.
"Anytime you spend $400 million, it's going to sting a bit," said Paul Johnson, an analyst at BancAmerica Robertson Stephens. "Those two companies are about as different as night and day in terms of their culture and operations. It takes time to make a transition of this magnitude."
On Tuesday, Cabletron shares closed unchanged at $14 per share. The stock has been in a dramatic descent since peaking at near $46.50 per share in May.
"A lot of people weren't sure about the timing of the Digital deal," Johnson said. "Even before it was official, any rumors about the deal had a negative impact on the stock."
Company officials said the restructuring will be implemented during the next few months, and should bring about $55 million a year in savings.
Earlier this month, blaming longer sales cycles and increasing costs, the company said it expected to post lower-than-expected earnings and a revenue shortfall from the year before.
First Call consensus originally anticipated earnings of 39 cents per share for the quarter, but after the profit warning and Tuesday's restructuring announcement, the new estimate is closer to 11 cents per share.
Several institutional brokers lowered their ratings on Cabletron stock including Donaldson Lufkin and Jenrette, which removed it from its recommended list because it "missed a number of windows of opportunity and won't be able to build momentum for the next six months, minimum."
As if things weren't bad enough, Cabletron last week was named in a class action lawsuit by Kaufman, Malchman, Kirby & Squire, LLP, alleging company officials misrepresented the company's business prospects, inflating the stock price from March through Dec. 2.