Taking Enterasys private: ‘brighter future’ or ‘pathetic’?

Riverstone still in the red

Two private investment firms have offered to buy Enterasys Networks Inc., a move that would end the company’s short but troubled history as a publicly held company.

If the company is transformed into a privately held company, it will mean a major loss for those who decided to hang on to their shares since the company’s founding four years ago as the major spinoff of Cabletron Systems, once New Hampshire’s largest employer.

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 closing price on Nov. 14, the day the deal was announced.

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.

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, 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 assured 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 something of a turnaround.

“This price 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 would have nearly broken even.

Those early revenue overstatements were at the root of a scandal that led to several former executives – including 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 firm was still reimbursing former executives for their criminal defense.

Troubled past

Cabletron 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. The move was designed 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, at one time owned Aprisma, another Cabletron spinoff, which seems to be faring well.

Patel followed another spinoff, Riverstone Networks, to California (he has since resigned), where it has faced a 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.

At the time of the split, Benson joined the board of Enterasys, which took the bulk of the company’s assets, as the head of the audit committee. At the time, he was the company’s largest shareholder. He touted the company’s track record in his race for governor, and he appointed a number of former Cabletron executives to his administration, even importing his Cabletron custom of holding meetings standing up.

However Enterasys has been foundering almost since it began and encountered a series of public relations missteps.

It was the target of a federal Securities and Exchange Commission investigation and a number of lawsuits (all of which have since been settled). It has been forced to announce several layoffs over the years — the company now employs fewer than 1,000 people. And its move out of New Hampshire was not greeted kindly in the Granite State and became an embarrassment to its co-founder, Benson, who eventually sold off his shares.

Benson has not been named or charged either civilly or criminally in the accounting scandal.

Disgruntled shareholders

Reaction to the sale from longtime stockholders were mixed on the Yahoo Enterasys message board.

Some said they were planning to vote against the move, hoping for a higher bidder. Others were considering selling below the sell-off price because they didn’t trust the management to successfully close out the deal. But if Enterasys tried to back out of the deal, it could cost it as much as $15 million, according to an SEC filing.

Many other shareholders were bitter and resentful.

“Should I agree as a shareholder to sell the company for a mere $13.95 a share,” wrote one investor identified as dell_stk. “The buyer is going to make tons of money out of this deal. If they (ETS) had not sold the company, at least there was a possibility of getting back my money. Now I have to take a big loss. Pathetic!”

“With the current bunch of incompetent idiots in charge it is a bargain,” replied ccpayoff2005. “Once they get the company private and clean house the value will double over night.”

Gore, based in Boulder, Colo., specializes in turning around communications companies and had sold off Aprisma at a considerable profit. Tennenbaum, based in Santa Monica, Calif., where Riverstone Networks is now headquartered, specializes in equity and debt financing vehicles for mid-sized companies.