Investment firms bid to take Enterasys private

Enterasys Networks — the major spinoff from the former Cabletron Systems — announced Monday its intention to sell all of its stock to two private investment firms , a move that would end the firm’s short but troubled history as a public company.

The decision to go private also represents a major loss for those who decided to hang on to their shares since the company’s founding four years ago.

If the deal is approved by shareholders and regulatory officials, a wholly owned subsidiary of Gores Group and Tennenbaum Capital Partners LLC will pay $386 million for Enterasys — or $13.96 a share, 32 cents over the company’s Monday closing price.

The company’s board of directors has approved the deal based on the unanimous recommendation of a special committee of independent directors. Signed Nov. 11, the agreement was the result of months of confidential negotiations, company officials said in a conference call Monday afternoon.

If all goes well, the company hopes to complete the deal by March 15, with an extra month’s window, if it is stalled by regulatory concerns.

While the deal will position the company for “future networking industry consolidation,” said Mark Aslett, president and chief executive officer of Enterasys at a conference call Monday afternoon, for the present it will be “business as usual.”

“Employees feel good … that the hard work over the last few years … will create a brighter future,” Aslett said.

The company will keep its current management and headquarters, the company said. Amendments to the agreement appeared to be designed to protect executive bonuses and stock options. Workers were insured at an earlier internal conference call that deal did not anticipate any layoffs.

But former Cabletron stockholders who hung on to Enterasys stock face major losses.

The $13.96 per-share price translates into $1.74 per share before Enterasys’ recent 8-to-1 reverse split. Enterasys shares sold for $14 apiece when the company initially went public in August 2001.

However, for a company that once faced delisting from the New York Stock Exchange because it had trouble maintaining the price of $1 a share, the sell-off reflects someone of a turnaround.

“This prices reflects success in repositioning Enterasys and returning it to a solid operational and financial position, as demonstrated by our strong Q3 results,” said Aslett.

The company, which last year completed its move from Rochester, N.H., to Andover, Mass., turned a profit last quarter, thanks to a large tax refund due to overstated past revenue. Without the refund it nearly broke even.

Those early revenue overstatements were at the root of a scandal that led to several former executives – including the an ex-CEO – pleading guilty to investment fraud. Trials for others involved in the case are scheduled for next year.

The company’s last quarterly statement reflects that the company was still reimbursing former executives for their criminal defense.

Cabletron, once the state’s largest employer, was co-founded by former New Hampshire Gov. Craig Benson in 1983. Benson resigned as CEO in 1999, before he ran for Governor, anointing as his successor Piyush Patel who engineered – with Benson’s blessing – the four-way split of the company, in order to enhance what he called “shareholder value.”

One of the four spinoff companies never got off the ground. Gore Group, one of the current Enterasys buyers, purchased Aprisma, which seems to be doing well.

Patel followed Riverstone Networks to California (he has since resigned), where it has faced similar securities fraud scandal relating to revenue overstatements and has been delisted by the Nasdaq because it has not produced an audited financial statement in years. The company recently announced it was moving much of its operation to India. – BOB SANDERS

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