The Underdog Fights Back

1 March 2007




Can a company pull itself back from the brink after hitting rock bottom in a market dominated by one major player? Enterasys Networks CEO Mike Fabiaschi tells Nigel Ash how he is fighting his way out of a corner.


There was a time when Enterasys Networks was set fair to be the market leader in the networking and security products segment now dominated by Cisco. However, a series of strategic errors resulted in the closure of one US plant, resulting in 300 redundancies and culminating in a boardroom scandal and a run-in with the US Securities and Exchange Commission which left the Nasdaq-listed company in serious trouble.

Then, in March 2006, venture capitalists Gores Group and Tennenbaum Capital bought out shareholders for $386m and privatised the company. The following month, Mike Fabiaschi was appointed president and CEO and charged with turning the business around. He arrived with a mission to take out or acquire some of the other players trying to catch up to Cisco, which holds over 70% of the market.

The market for network access control systems is crowded with businesses fighting for second place. Analyst Gartner notes that the introduction of wireless networks is only likely to add to the competition.

TALKING THE TALK

Mike Fabiaschi, with 25 years in high-tech sales, marketing and management, came to Enterasys from CA (formerly Computer Associates), but had previous links with Enterasys, Gores and Tennenbaum. Before joining CA, he was president and CEO of Aprisma, a fault and performance management company that was spun off from Enterasys in 2002 and bought by the Gores Group.

One of Fabiaschi's first tasks at Enterasys was to tell the staff the good news and the bad news. The good news, says Fabiaschi, was that he was there to fix the company: "I told them that this was what I did. I take over troubled companies and I make them perform and grow. I said that I could not change the past, only the future. I asked them to give me a chance. We were rolling out new products and we had a great future."

This was not like other venture capitalist exercises, he said. He was not there to pick the low-hanging fruit, load the company with debt and make the balance sheet look good enough for resale to the public.

The bad news was that there would be no bonus for 2006. "I explained that the company was in a mess and the goals that had been set were unachievable because they had been unrealistic," he says. "Losing the bonus certainly affected morale, but I said I fully expected that bonuses would happen again in 2007, based on the new customer commitments that we were already beginning to get."

"We want to acquire other companies and represent a real challenge to Cisco."

On the management side, Fabiaschi admitted that Enterasys had already suffered another blow with the departure of chief technology officer John Roese, who moved to Nortel before Enterasys was acquired by Gores and Tennenbaum.

Fabiaschi says: "It was not really a big technical problem to lose him because we still have a lot of skilled staff, and we now have 80 people on engineering and support. The biggest issue was that Roese had been the spokesman for the company and knew all our clients."

WALKING THE WALK

Fabiaschi did not spend very long getting used to his new office at Enterasys's US headquarters in Andover, Massachusetts. He took to the road on a 30-city world tour to spell out the company's new plans and drum up business.

"This company never had a sales and marketing CEO before," he says. "I have changed that." Nor had Enterasys devoted sufficient investment to advertising and marketing.

Fabiaschi adds: "I couldn't do much about this because there is no way that we could outspend the likes of Cisco or Hewlett Packard. However, I could talk to our customers and potential customers, inviting them to seminars where we demonstrated our products and addressed their questions and concerns directly."

Fabiaschi admits that while a proportion of the attendees were chief technical officers and boardroom directors, the majority were vice-presidential or middle management level. If they were not already Enterasys users, he had to equip them with the arguments to give to top management against playing safe and buying Cisco.

"In October 2006 the company announced its first back-to-back quarterly revenue growth since 2001."

There was also another frank question he had to answer for both existing and prospective customers. "These people had come to see buying Enterasys systems as a risky solution because they were not sure that we would be there for them in the future in such a competitive market," recalls Fabiaschi. "After the initial presentation and the demonstrations online, the first question I always got was: 'We have heard you. But why should we believe what you are saying?'

"We had to tell them that there was no way that we were going to cease to exist. The worst-case scenario for any technology company is that it stops investing, but the installed systems would still be supported. We show our technology doing the job; when people see it working, the light bulbs go on and a lot of the risk goes away. They can see the difference between us and the opposition."

Fabiaschi's message was that far from going out of business, Enterasys was in the market with a new range of products and, through its new owners, had a $700m war chest to grow the business through acquisition, either by buying start-ups or removing some of the competition.

"We want to acquire other companies and represent a real challenge to Cisco," he says. He believes that the time has come for the sector to undergo consolidation and Enterasys is in a position to be a consolidator, not one of the consolidated.

In this respect, the company benefits from its private ownership, which means longer-term planning can be undertaken without the need to report heartening news to analysts and shareholders every quarter.

He points out that Enterasys has 500 global patents, has invested over $1bn in R&D and has active customers in more than 70 countries.

PLAYING HARDBALL

Instead of a multimillion-dollar media campaign, Fabiaschi is building on his opening 30-city campaign by continuing his relatively punishing schedule, jetting off to meet his market.

"It is all about relationships," he insists. "We want to keep a personal approach to the customer. I am personally involved."

"The market for network access control systems is crowded with businesses fighting for second place."

Another early strategic decision Fabiaschi made was to keep product support within the company. "Our main support team is at our head office in Andover and we also have our own people in Frankfurt and Singapore supporting clients."

He admits that outsourcing to an offshore location would cut costs but, in his view, at the expense of efficiency and customer satisfaction. He points out that there is also local support from Enterasys's partners. In November 2006, the company also decided to cover its Asian customers by establishing a subsidiary with support staff in Thailand.

WINNING STRATEGY

According to Fabiaschi, the new strategy is paying off. In October 2006 the company announced its first back-to-back quarterly revenue growth since 2001. Being a private firm, no financials have been published, but Enterasys did announce that in the third quarter 150 new customers had been added, many of which appear to have been wooed during Fabiaschi's promotional tour.

Though he clearly knows his technology, Fabiaschi is more interested in strategy and marketing. He confesses that glad-handing is a skill a lecturer recognised when he was still studying accountancy: "When I was a senior, one of my professors asked me, on behalf of the accountancy profession, not to go into accounting. He said that I was more of a people person, and he was right." Fortunately, Enterasys's future revenues and profits will depend more on his sales techniques than his accountancy skills.