Madge Networks N.V.

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Madge Networks N.V.

Wexham Springs
Framewood Road
Wexham, Slough
SL3 6PJ
England
(44) 1753 661000
Fax: (44) 1753 661011 Web site: http://www.madge.com

Public Company
Incorporated: 1986

Employees: 600
Sales: US$482.1 million (1996)
Stock Exchanges: NASDAQ
Ticker Symbol: MADGF
SICs: 3577 Computer Peripheral Equipment, Not Elsewhere Classified; 2661 Telephone & Telegraph Apparatus; 7372 Prepackaged Software

Madge Networks N.V. is one of the world’s leading suppliers of networking hardware. Headquartered in England (the company’s tax home is in The Netherlands), Madge Networks has developed an array of Token Ring, Ethernet, ATM, ISDN, and other products providing extensive solutions for the corporate LAN (local area network), WAN (wide-area network), intranet, internet, and video conferencing markets. The company’s products range from ISA- and PCI-bus adapter cards for personal computers to work group switching hubs, routers, and ISDN backbone carriers, with an emphasis on providing convergence solutions among Ethernet, Token Ring, ISDN, and the emerging ATM networking technologies. In addition to its Wexham, England headquarters, Madge operates main offices in Eatontown, New Jersey, and San Jose, California, as well as offices in more than 25 countries throughout the world.

Founded in 1986, Madge Networks has helped pioneer the networking market, the emergence of which has come to define internal and external communications among corporations in every industry. Madge Networks is one of the world’s leading proponents of Token Ring technology, producing the ISA, PCI, and PC Card adapters, switches, stacks, and other devices required for its implementation. In the late 1990s Madge Networks also has taken a leading role in developing the standards and first implementations of emerging High Speed Token Ring (HSTR) technology. This new protocol provides for a dramatic increase in data transmission bandwidth, while remaining backward compatible with first-generation Token Ring technology.

Sale of the company’s Lannet subsidiary to Lucent Technologies in July 1998 has reduced Madge Networks’ presence in the Ethernet market, a rival networking technology to the Token Ring standard. Instead, Madge has tightened its focus to emerging video conferencing technology and ISDN carrier applications, producing switching, routing, WAN-LAN interfacing equipment to facilitate both intracorporate and intercorporate video conferencing. In the ISDN market—using digital telephone lines to increase data, voice, and video transmission bandwidth—Madge Networks has developed a line of Edge Switching Nodes (ESNs) and other carrier equipment.

Madge Networks continues to be led by founder Robert Madge. The company has been traded on the NASDAQ stock exchange since 1993. In 1997 the company posted more than US$482 million in revenues.

A Token Ring Pioneer in the 1980s

One-time horseback riding instructor Robert Madge entered the computer industry with Britain’s Intelligent Software Ltd., designing computer-driven chess games. In 1986 Madge sought to set up his own business, opening shop on his family’s Buckinghamshire, England farm. Unlike many computer industry start-ups, Madge brought no new technology to the market; instead, the company concentrated on exploiting a technology then being developed by IBM and dubbed the Token Ring networking protocol. Token Ring presented an alternative to the more widely implemented Ethernet technology. Whereas Ethernet broadcasted data to every endpoint on a network, Token Ring’s data could be deposited at specific user terminals; the technology often would be compared with the action of a train as it picks up and drops off passengers. Token Ring would become established as a more efficient, and more stable, networking protocol, despite the dominance of Ethernet in the early period of the networking industry.

The Ethernet field was already crowded with competitors by the mid-1980s. Madge’s choice of Token Ring proved a shrewd one. Loath to take on the IBM powerhouse, other companies avoided the Token Ring market. Meanwhile, Madge could develop a profitable business operating in IBM’s shadow. Madge Networks introduced its first Token Ring products by 1987. The company quickly opened up a second headquarters in San Jose, California, placing the company closer to the heart of the worldwide computer industry, a move that provided additional benefits: the company’s U.S. customers believed Madge to be a large British company; Madge’s U.K. customers, on the other hand, saw Madge as a successful U.S. company. Indeed, Madge’s early decision to establish a U.S. presence later would be credited as essential to the company’s survival and success.

Not content with simply selling Token Ring products, Madge led his company to extending the technology, introducing new products, such as the Smart Ringnode in 1989 and the company’s Fastmac technology in 1990, that would bring it to the forefront of Token Ring research and development. By the early 1990s the company had outpaced even IBM’s development efforts—and the larger company would begin recommending Madge’s products to its own customers. An early boost came from the licensing of Madge’s Fastmac technology to Cisco Systems in 1990.

Madge made a name for itself in the early 1990s as well by taking on Olof Soderblom, inventor of Token Ring technology and holder of the so-called Soderblom patent. Until 1990, Token Ring developers had been paying license fees to Soderblom’s company. Madge, however, had refused from the start to make license payments, reasoning that the Token Ring products developed by his company, which, adhering to the IEEE 802.5 standard, featured a peer-to-peer local network technology, bore no resemblance to the Soderblom patents, which described remotely connected networks over telephone wires. In July 1990 Madge Networks won its legal battle with Soderblom and established the Madge name in the Token Ring industry.

The company’s revenues for 1990 reached $18 million. One year later, Madge’s revenues nearly doubled, to $34 million. The rise of computer networking, however, had only just begun to be seen. By the following year Madge’s revenues would near $100 million. At the end of 1992 the company had managed to increase its share of the Token Ring market to seven percent— still minor compared with IBM’s 76 percent share. Yet Madge continued to build momentum, as IBM struggled to keep up with advancing technology. Until the early 1990s, Madge had been focusing on producing adapter cards, which were fitted to individual computers to connect them to the network; the company’s expanding product line soon included the hubs and switching components needed to route data and allow the adapter cards to communicate.

Market Momentum in the 1990s

Madge Networks would rise rapidly through the 1990s, boosted by the boom in computer networking and by its own leading Token Ring technology. Madge successfully chipped away at IBM’s Token Ring market lead, building Madge’s share to more than 16 percent by mid-decade. Overall, IBM’s market share quickly dropped below 50 percent—a movement aided in part by licensing agreements between Madge and networking specialist Cisco Systems.

In the 1990s Madge continued to expand its international presence, opening new offices in Germany, Hong Kong, Japan, and France and building its San Jose office into a second headquarters. To fuel the company’s growth, Madge Networks went public in 1993, offering more than six million shares on the NASDAQ stock exchange. By 1994 Madge Networks’ revenues had topped $213 million—an impressive growth, but still minor in comparison with its main market competitors, Cisco Systems, 3Com Corp., Bay Networks, and Cabletron Systems. In addition, many Fortune 1000 companies sought a broader range of networking products than Madge could offer. Although Madge had performed well in the Token Ring arena, its Ethernet capacity was lacking—even as Ethernet became the networking technology of choice in the mid-1990s.

In 1995 Madge Networks and Lannet Data Communications, an Israel-based networking specialist with a focus on LAN switches for Ethernet-based networks, agreed to merge operations in a stock swap valued at some $300 million. Lannet’s operations were merged into Madge Networks, creating Madge’s Ethernet division. With combined revenues of $283 million, Madge and Lannet were the smallest of the top five networking market leaders, but the combined company’s product line offered a complete array of Token Ring and Ethernet products.

Company Perspectives:

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The merger gave Madge the ability to combine the rival networking technologies into hybrid systems—and the capacity to bridge the company’s products into the latest networking technology, ATM, or asynchronous transfer mode. By the mid-1990s companies were straining the limits of the existing networking technologies. As corporations joined more and more of their work force to the company network, their networks quickly ran short of bandwidth for transmitting data. The arrival of new networking applications—in particular, video conferencing and video data transfers—not only pushed bandwidth needs to the extreme, but threatened to cripple networks entirely. ATM’s more efficient use of packet technology offered the prospective of dramatic bandwidth gains. Adoption of the technology would require corporations to rebuild their networking infrastructure, and Madge Networks readied not only its own ATM products, but also the hubs and switches needed to bridge existing Token Ring and Ethernet equipment to the new technology. The Lannet merger enhanced Madge’s portfolio of LAN switches, needed to connect Ethernet and Token Ring stations to corporate ATM installations.

Aiding Madge’s growth was the 1995 agreement with Cisco Systems, by then global networking leader, to incorporate Madge’s Token Ring switches into Cisco’s products and to license other parts of Madge’s Token Ring technology for future Cisco designs. At the same time, Madge gained access to Cisco-developed LAN and WAN switching software. Following on the Cisco agreement, Madge also prepared to step up its manufacturing capacity, with a new facility in Ireland.

The Madge-Lannet combination seemed to be the right match: by the end of 1995 the company, now with some 1,400 employees, achieved revenues of more than $400 million, all but 15 percent coming from outside its U.K. base. The company entry into 1996 continued its expansion efforts, including adding to its Israeli manufacturing capacity with a new $10 million plant in Jerusalem. In February 1996 Madge moved to plug another hole in its product line with the acquisition of Teleos Communications Inc., bringing that company’s ISDN and WAN access products. Based in Eatontown, New Jersey, Teleos, which posted revenues of $24 million in 1995, cost Madge $165 million in a pooling of interests transactions. At the same time, Madge again deepened its relationship with Cisco Systems, broadening the company’s licensing agreements to include Cisco’s IOS software.

At the end of 1996 Madge rolled out a new line of products to enhance its portfolio and bring the company into a new and increasingly important market: video conferencing. Madge’s products placed the company in position to offer bridge solutions between the formerly independent data and video transmission technologies. Although the video conferencing market had yet to mature, Madge’s move appeared to place it firmly near the lead to compete for what analysts considered a future boom market.

Yet, for the short term, Madge’s growth was slowing. After years of strong expansion, the company’s revenues for 1996 reached only $482 million. In 1997 the company began posting losses; analysts suggested that the company, in attempting to broaden its product line, had lost its product focus. By August 1997 the company was forced to restructure, laying off some 650 employees. During the mid-1990s, Madge had attempted to transfer the bulk of its headquarters operations to the United States, building up employee capacity around its San Jose offices. The conflict of time zones, however, proved difficult for the company to overcome; the choice was made to concentrate the company’s activities in the similar England-Israel times zones, and the company’s U.S. offices were scaled back.

Madge’s restructuring continued to occupy the company into 1998. In late 1997 the company spun off its Ethernet division into a separate subsidiary, once again named Lannet. After denying early reports that it was looking to divest its Ethernet business, Madge agreed to sell Lannet to Lucent Technologies for $117 million in July 1998. During this period, Madge also moved to exit the manufacturing business, selling its Ireland plant to Celestica, an electronics contract manufacturer. The total cost of Madge’s restructuring passed $50 million, but the company’s renewed commitment to Token Ring technology appeared to have stabilized the company’s balance sheet. By mid-1998 Madge had once again returned to profitability.

In the late 1990s Madge’s attention focused on developing the next-generation Token Ring technology, High Speed Token Ring, offering scalable bandwidth from 16 Mbps (megabit per second) to 100 Mbps, with future speeds reaching into the gigabit ranges. Abandoning the Ethernet market appeared to be somewhat risky, given that technology’s popularity, but Madge could continue to build on its strengths—and renewed focus—in Token Ring technology.