DEC to shed networking business - DEC to sell its networking hardware business to Cabletron Systems - Company Business and Marketing

LAS VEGAS--At least some speculation ripping across the Fall Comdex 97 show floor is true: Digital Equipment and Cabletron Systems are about to announce a business partnership involving the sale of Digital's networking hardware business to Cabletron, according to sources close to the deal.

Unfortunately for battleweary Digital executives, this fact fueled "baseless," "ridiculous" rumors among the riffraff that "(CEO Robert) Palmer's going to break up the whole company except services to get the most for his shares." EN heard this perception over and over last week, and had before then.

The tongue-wagging went as far as Digital selling its systems unit, consolidated last spring into a Products group (EN, April 7), to Compaq. Eckhard Pfeiffer, that company's CEO, beefed up this speculation with a keynote centering on computer supplier consolidation and a list, projected for the SRO crowd, of 1998/1999 suppliers that did not include DEC.

"Eckhard does that every year," Pat Foye, Digital's commercial desktop VP, said rolling her eyes in sheer exasperation, as did every other DEC representative in Las Vegas to whom the Compaq merger question was posed. NETWORKING TO CABLETRON

Digital Equipment and Cabletron Systems are finalizing an agreement to form "a strategic relationship that would include the sale of Digital's hardware products business" but also entails Cabletron making Digital-branded network hardware.

The two companies had been reluctant to talk about the deal. A Digital Networking spokeswoman argued: "We can't comment on things going on behind the scenes." Cabletron would not comment on whether the deal would go through, but couched that answer in a policy statement that did not cast any doubt. "I can say that we are looking to acquire businesses to round out our product line and increase our presence internationally, especially in regard to the internet service provider (ISP) market," a spokesman said.

The data communications hardware business is whitehot, with units growing exponentially and price competition fierce. Chip suppliers are scrambling to build devices for modern banks, computer fax/modems, and LAN cards, to name a few of the end products involved.

With the Digital deal, Cabletron is coming back from a short acquisition hiatus. 1996 saw the company acquire five companies: ZeitNet, Network Express, Netlink, The OASys Group, and the Enterprise Networks business unit of Standard Microsystems. Most of this year was digestion of these; the charges related to them negated the companies 1997 net income of $230 million.

Senior management changes came this summer, two of which involved former Digital executives. Allan L. Jennings, formerly of DEC's Advanced Technology group, became the head of CSI Netlink, Cabletron's frame relay business unit. Steven Gray, a former DEC director of corporate marketing also became a Cabletron executive this summer.

And most importantly for the company's direction, Nynex senior officer Don Reed became CEO on Sept. 1, replacing co-founder S. Robert Levine who retires officially on Dec. 1. Cabletron's spokesman actually termed the goal of gaining a broader product line and greater international presence as "Don Reed's" intention.

THE CASE FOR COMPAQ TO BUY

Coincidentally, Compaq's Mr. Pfeiffer in his Comdex keynote last Monday morning, gave the same acquisition rationale: broadening the product line and grabbing international channels. DEC is long on both product breadth and international presence.

Mr. Pfeiffer stated that consolidation in the computer business "is not only going to continue, it's going to accelerate." Where 70 percent of the world's computer systems are supplied by the top ten suppliers today, by the year 2000 that 70 percent will come from just four companies.

One ex-Digital manager said that the results of the most recent Digital shareholder votes would lend themselves to a break-up of the company for maximum share value. Over a third of DEC's shareholders wanted an investment banker hired. Over a third wanted Mr. Palmer's chairman, president and CEO positions split between he and a new executive. A majority passed the proposal to rescind the company's "poison pill" clause, and a similar majority approved changing the company's bylaws to say that board members must be elected every year.

Digital's response on the corporate level was a policied "no comment," but a company spokesman said that the shareholder actions were strictly "advisory" and have not been enacted. Any hostile takeover of Digital now would still be met by the effects of the poison pill clause still in place, it was said.