The Day Ahead: Cabletron's IPO kids are all right

Cabletron finally gave Wall Street what it wanted -- clear IPO and revenue projections for its four baby Cabletrons
Written by Larry Dignan, Contributor

Cabletron which has been busy transforming itself into a holding company, finally gave Wall Street what it wanted -- clear IPO and revenue projections for its four baby Cabletrons.

Way back in February, Cabletron announced plans to transform itself, sell lagging businesses and focus four subsidiaries on going public. Investors cheered as they began dreaming of spinoffs and initial public offerings. And why not? By owning Cabletron shares you could have shares of four fast-growing companies.

Shares began to soar after the initial announcement, but quickly went south. Part of the problem was a market downturn, but a lot of it was Cabletron's silence about its IPO plans.

The silence is over, and you can expect Cabletron shares to begin heading higher into the fall. Here's a cynical view of why Cabletron shares will fly. For starters, analysts will bump up targets and reiterate "buy" ratings. Analysts gushed after Cabletron's first quarter earnings in an obvious attempt to bring home some IPO underwriting work.

In addition, Cabletron is planning IPOs for two of its subsidiaries this year, with the remaining two going public in 2001 if the market cooperates. Cabletron officials said they plan IPOs to be followed by share distributions to shareholders. "Each shareholder will get shares of each company," said CEO Piyush Patel. "All four are ready to go now."

Of course, you may not want shares of all four spinoffs, but Cabletron, which also holds shares of Efficient Networks could have at least one IPO home run. Not bad for a $22 (£14.4) stock.

Here's the a look at the units in line to be spun off:

  • Riverstone, the company's best IPO hope, is focused on the hot metropolitan optical networking market. The company landed more than 40 customers, and projects sales growth of 21 percent per quarter and more than 100 percent annually.
  • Riverstone reported a 2000 loss of $11.5m to $12.5m and will continue to lose money. Losses will narrow in 2001, and the company will break even in mid-2002, officials said.

    In the first quarter, Riverstone reported sales of $15.8 million, up 24 percent sequentially.

    Bottom line: Riverstone could be a no-brainer IPO if Cabletron gets it on the market in time. Riverstone is selecting underwriters now and plans to begin the IPO process within 30 days. Expect an IPO in the fourth calendar quarter. Looking at the optical networking IPOs of New Focus and ONI Systems, Riverstone should be a hit. Ciena and Sycamore aren't exactly laggards either.

    Craig Johnson, an independent analyst with the PITA Group, said Riverstone is a bit of a stretch as a metropolitan networking play. It won't matter -- many IPO investors think holding a stock three months is long term.

  • Aprisma Management Technologies posted first-quarter sales of $15.1m, up 13 percent from the fourth quarter. Officials said on a conference call that Aprisma, which provides network management software, will post year-over-year revenue growth of 40 percent in 2001. The company expects to break even in the first half of 2001. Ahead of the Cabletron earnings conference call, analysts had expected Aprisma to be the first to go public. Officials said nothing was wrong with Aprisma, but the market seems better suited to a Riverstone IPO.
  • Bottom line: Aprisma is probably a lock to be the second IPO filed from the Cabletron stable. Cabletron may be waiting for better sequential growth figures. Aprisma is also rounding out its management team. Could be a good buyout target.

  • GlobalNetwork Technology Services had first quarter sales of $10.4m, up 29 percent from the fourth quarter. GlobalNetwork, a network consulting company, said it's confident it can post revenue growth in "excess of 80 percent" year-over-year. Profitability is projected in the first quarter of 2002.
  • Bottom line: With strong growth and robust demand, GlobalNetwork could go public before Aprisma depending on market conditions. It's in a hot sector.

  • Enterasys Networks posted sales of $177.1m, up 5 percent from last quarter. Officials said the sales growth was at the top end of their range. Going forward, Enterasys sees year-over-year growth in the 20 percent range. The company, which sells enterprise routers and switches, will break even in the second quarter.
  • Bottom line: It's hard to get excited about Enterasys because the competition is tough. Cisco Systems owns this space, and the rest of the industry is essentially road kill. Just ask the retooled 3Com and a host of others.

    And now for the dreaded caveat about Cabletron and its future IPO darlings. Three of the four IPO candidates also have small revenue totals. Cisco's daily sales easily top the revenue totals for Cabletron's kids.

    Johnson also notes, quite correctly, that there are still a few missing details. How many shares will be floated with these IPOs? How will shares be distributed? And how will these companies fare three years from now?

    Johnson, who is usually ahead of the curve, will be one of the few analysts actually wondering about these questions. Most analysts will play nice as Cabletron picks its IPO underwriters. "I have no doubts that there will be successful IPOs," said Johnson, referring to Cabletron's kids. "How will these do as stand-alone businesses? The jury is still out."

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