Shares of highly regarded Cabletron Systems Inc. cratered Thursday after company CEO Piyush Patel filled in details about a planned corporate restructuring. The stock fell about 42%, to $28.75, after Patel said the restructuring would draw focus away from the firm's profitable legacy-system infrastructure business.
The company said late last year that it was going to morph into a holding company over four business units. Goldman Sachs started the slide after Patel's remarks Wednesday afternoon by downgrading Cabletron stock from "market outperform" to "market perform."
"Analysts were not expecting him to get rid of revenue streams" such as the legacy-systems business, says Matt Robison, an analyst at Ferris, Baker, Watts. "They knew some change would be announced, it just didn't line up with what they had expected."
Other analysts, however, blamed the drop on overall market losses. "The restructuring is old news, and some analysts are simply overreacting to the size and scope of the spin-offs," AG Edwards analyst Peter Andrews says. "Cabletron will be cleaning house, dropping old product lines. Though we'll be seeing a step-down in revenue for the immediate future, it will help the bottom line in the long run."
Cabletron ended fiscal 2000 on Feb. 29 with increases in net sales and net income. It also reported its fifth consecutive quarter of meeting or exceeding Wall Street expectations. Net sales for the quarter were $381.8 million, compared with $371.7 million a year ago. Net income for the quarter was $28 million, or 15 cents per diluted share, up 650% from net income of $3.8 million, or 2 cents per diluted share, a year ago.