Digital Equipment Corp made a further move away from its manufacturing roots on Tuesday when it off-loaded its network products division to Cabletron Systems Inc (CI No 3,298). While DEC will still sell networking products to its customer base, it will no longer be manufacturing them. Instead it will sell its own, and some of Cabletron’s products under its own name, direct to its customers without the expense of designing and building them. According to analysts at Merrill Lynch, DEC has committed to sell up to $1bn worth of products over the next three years, as part of a deal where it received around $90m in cash, $50m in stock and $290m in product credits from Cabletron. Cabletron gets 250 patents, 900 employees, half of them engineers, the reseller business worldwide and just about everything else needed to run the unit as a separate entity. Around 200 employees will remain at DEC to handle its side of the business. DEC’s networking unit made between $450m and $500m revenues in fiscal 1997, but Merrill Lynch isn’t convinced it made a profit. So how do the two businesses fit together? Not at all, it seems, at least to start with. The Digital Networks Product Group will retain its name, at least initially, and will remain distinct from Cabletron itself. Eventually, company officials admit, they will look at area where products overlap. But to start with, each division will be able to offer products from the other to fill in product gaps.
Ahead of Bay
Digital Networks has a thriving high-end switch business in the shape of the Gigaswitch and Multiswitch ranges, the latter supporting Ethernet, Fast Ethernet, FDDI fiber and asynchronous transfer mode technology. On the Cabletron side, there is the SmartSwitch range, aimed at connecting up smaller workgroups, and above all, the highly regarded Spectrum network management software. Despite the seeming reluctance to discuss the integration of the two units, Cabletron is keen to point out that the combination shoots it ahead of Bay Networks Inc in the European local area networking hardware market, taking it to number three behind Cisco Systems Inc and 3Com Corp. Meanwhile, Cabletron says it will also reap the benefit of ongoing research at DEC, which promises a new breed of secure access intranet products that are not simply switches or routers. The company says it should be ready to make its first announcements within the next few months. Merrill Lynch says that DEC will take a gain of over $100m in the March quarter to reflect the value of the product credits. Ceasing to sell networking products through the reseller channel is likely to reduce its revenues by around $250m annually – but declining operating expenses should cancel that out, resulting in a fairly neutral impact on operating expenses. And with $3bn cash in the bank, DEC, after years of divestiture, may at last begin acquiring again. If so, it’s likely to be in the internet software arena, believes Merrill Lynch.
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