1. Madge Networks acquired Lannet Data Communications in 1995 in an effort to expand globally but the merger ultimately failed. 2. Both companies foresaw difficulties in integrating their different corporate cultures, business practices, and distribution networks. Madge warned of risks like not realizing efficiencies and coordination problems. 3. After the merger, Lannet's sales and distributors declined as Madge imposed its own practices. The merged company struggled with losses, layoffs, and reorganization expenses over the next few years before partially reverting some changes.

1. 1
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Madge & Lannet:
ATaleofan
InternationalMerger
GoneSour
Dr. YaacovWeber
The College of Management, Rishon Lezion, ISRAEL
Prof. Ehud Menipaz
Ben Gurion University, Beer Sheva, ISRAEL

2. 2
The handful of reporters covering the class action suit against
Madge Networks NV, known as Madge, slipped into the back
seats of the crowded room, hoping to hear more details of the
alleged federal securities violations.
The breakneck pace of international M&A in the computer
network industry caused one more casualty. An officer and
director of Madge were charged with violations of federal
securities laws. While Madge, which manufactures and sells
data and communication networking products, was in the
process of acquiring Lannet Data Communications Ltd. (Lannet)
and Teleos Communications Inc. (Teleos), in exchange for
millions of shares of Madge stock, the defendants allegedly
participated in inflating the price of Madge’s stock from $28-7/8
on October 12 1995 to a high of $48-5/8 on June 16,1996.
Robert Madge, founder and chairman, had envisioned a global
network of acquired corporations in North America, Europe, the
Far East, and the Middle East, and now his dream was tainted
with the sour taste of failure. His dream came up against the
harsh realities and complexity of international mergers. Was the
high flying, risk taking Robert “Bobby” Madge considering only
strategic and financial fit? Was he oblivious to the impact of
corporate and national cultural fit on the success of an
international merger?
Madge and Lannet Prior to the Merger
Madge
Madge Networks, NV a Dutch company, is a supplier of
computer network solutions based on the Token Ring Smart
Ringswitch standard. The Token Ring was developed and
marketed in the early 1980s by IBM. Founded in 1986, Madge
functioned as a British corporation named Madge Networks
Limited.
In June 1993, all of its shares were bought by Madge Networks
NV and was listed on NASDAQ with a market valuation of
$300M. On the eve of the merger, towards the end of 1995, the
company had 1,500 employees worldwide. In 1987, the

3. 3
company launched its Token Ring line of products. The product
line was expanded to include a complete mix of adapter cards,
which are hardware components installed in the computer that
enable it to connect to a network; switchboards called Stackable
Hubs, which control and manage the network; general software;
and network management software. Just before the merger,
Madge had developed a Token Ring switch and announced its
plan to offer new products that allow Token Ring network users
to integrate ATM architecture. ATM technology, the upcoming
computer networking standard, is suitable for Local Area
Networks and Wide Area Networks and is used for data, voice
and video transmissions.
Most of the company’s revenues are generated through the sale
of products and a smaller portion of sales are generated through
licensing technology. The products are used mainly by large
organizations that have replaced central, main frame computer
systems with distributed networks using client/server
configurations. In the main, the company’s customers include
large corporations and government organizations with critical,
centralized applications that operate in an IBM environment.
Madge’s centers of marketing, after-sale service and technical
support are located in 40 sites in 20 countries. Generally, the
company markets its products directly to end customers.
However, a significant number of its worldwide sales are
generated by a network of distributors, retailers, large systems
installers and OEM’s (Original Equipment Manufacturers).
Madge has incorporated subsidiaries in countries where there is
a need for local representation of marketing and sales
departments and also when local financing and production
confers a business advantage. Overall, the Madge group
includes approximately 16 subsidiaries with various operational
and legal relationships. The R&D centers of the company are
located in England and the USA. The company has invested
approximately 9% of revenues in R&D.
The product strategy of the company is to help its customers
gain a competitive advantage through the development of a
wide selection of products and services for use in computer
networks. Since Madge works closely with its customers on
current communication and network installations, it gains insight
into the communication needs of its customers, which it
incorporates into its next generation of products. The R&D
programs include further development of Token Ring technology
in order to maintain market presence, while also investing in a
new line of products for ATM networks. Subcontractors carry out
production according to Madge’s specifications and design. The
company is presently constructing a plant in Ireland and plans to
employ a production strategy based on integrating its own
production with production outsourcing in order to maximize
flexibility, reduce time to market and facilitate quick response to
customer requirements.

4. 4
Madge Sales Prior to Merger
Year Sales
($M)
Profit
($)
1990 19.6
1991 33.4
1992 78.8 7.4
1993 145.4 25.6
1994 213.3 37.5
1995 (3rd
.
quarter)
209.6 25.5
Madge’s major competitors are IBM, OLICOM, 3Com, and Bay
Networks. Madge is expected to compete with these companies
in the ATM market, which also attracts new entrants.
Madge’s success is highly dependent on the contribution and
leadership of its principal founder and CEO, Mr. Robert H.
Madge. Without his expertise, the company’s operations and
competitive advantage would be materially affected. The
success of Madge is also dependent on a small number of key
employees and senior managers. Madge is confident of its
future market prospects and believes that its success is directly
related to its ability to attract and employ highly skilled technical,
managerial and marketing personnel. The competition for this
kind of personnel is very intense and there is no guarantee of
success.

5. 5
Lannet
Lannet was founded in Israel in 1985. It is a wholly owned
subsidiary of the Rad Binat group of companies. Lannet
develops, produces and markets the following:
- Local Area Network (LAN) solutions for
business systems
- Ethernet Switching
- Internet products for ATM technology
Ethernet technology is a tested technology and is more
widespread than the Token Ring technology. It is suited to large
organizations with relatively low network loads. Lannet
switchboards are world-renowned for their technologically
superior performance
The founders of Lannet hold approximately 30% of its
outstanding shares and are actively involved in the company’s
day to day management. R&D and production are based in
Israel, a country well known for its highly educated, highly skilled
employees. Lannet invests about 10% of revenues in R&D. The
company employs 320 workers.
Marketing and after-sale service and support are executed
through subsidiaries in the US, Far East and South America.
These subsidiaries support Lannet’s distributors and customers.
Lannet is dependent on an international network of distributors
and agents that frequently install, service and maintain customer
networks. Among the large customers that have acquired
Lannet switchboards are Airbus, BMW, and Swiss Bank.
Lannet has international cooperation agreements with AT&T and
Olivetti. Lannet was listed on NASDAQ in 1991 with a valuation
of $54M. Lannet was granted tax-exempt status in Israel and
continued growing while maintaining its position among the top
three companies in its field. While the first two years showed
poor financial results, the 1993 results indicate growth and
expansion.
The company did not reinvest the funds accrued through the
NASDAQ listing. Following the lack of investment in 1993, sales
plummeted and the stock price took a beating. In 1995 sales
topped $100M, 95% of it overseas, with $15M profit. The
company has 350 employees and utilizes subcontractors based
in rural Israel.
Lannet, which focuses on Ethernet technology, shares with
Madge its main competitors: Cisco, 3Com, and Bay Networks.

6. 6
Lannet Sales Prior to the Merger
Year Sales ($M) Profit ($M)
1993 100 15
1994 70.2 5.6
1995 (3rd
Quarter)
74 9.2
Lannet: The Quest for a Strategic Partner
During the period in question, Lannet competed against Cisco,
the American giant, in bidding on a major contract with the
Republic Bank. Prior to this bid, Lannet had sold its products to
one of the Republic Bank’s Brazilian branches as well as to
several Swiss banks. At the time, it seemed that Lannet’s
competitive advantage was as follows:
• Lannet had a proven record in the banking industry
• The Republic Bank requested an existing, proven,
product which was not custom designed. Lannet was
the only company offering such a proven product.
• Lannet asked a lower price for the product than Cisco.
• Lannet had a $10M deposit with the Republic Bank.
However, there were also some apparent weaknesses:
• Lannet had a poor geographic distribution of technical
support staff
• To compensate for Lannet’s distance from its
customer, it was suggested that an employee of
Lannet would work for one year at the Republic Bank.
After due consideration, Lannet lost the bid on the basis of
“…Lack of viability...”
Lannet’s executives identified the need for a major shakeup
including operational turnaround, a new management
philosophy, such as TQM, and strategic cooperation, or a
possible merger.
A preliminary benchmark study indicated that Lannet was
lagging behind the industry. The Cumulative Average Growth
Rate (CAGR) of Lannet was less than 100%, while American
companies with comparable products were reaching sales of
over a billion dollars. This did not bode well in an industry which
believes that, “growth rate and size is essential for survival.” The

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company applied a Total Quality Management (TQM) process
and found it to be irrelevant. The company tried a detailed
costing and focused on efficiencies from the bottom up and
found the process to be of no help.
Lannet’s Board of Directors considered, but rejected, the idea of
a merger with a large corporation. It considered acquiring a
smaller company, using the $40M cash in its coffers. However,
preliminary screening for acquisition candidates showed that the
smaller firms would not strengthen Lannet substantially. It
became apparent that Lannet’s best choice was to be acquired
by a large international corporation and risk losing identity and
control. At this point Lannet turned discreetly to an investment
bank, worrying about the impact of a possible sale of the
company on customers and suppliers alike, and wondering
about competitors taking advantage of the situation. Only the
board and senior managers, who are shareholders, were briefed
on the merger options.
At this point several opportunities presented themselves. One of
the customers offered to buy 20% of the outstanding shares
(legally, a holder of more than 20% of a company’s shares is
required to submit consolidated statements.) Lannet rejected
this offer. Lannet was pursuing actively an American OEM,
however the pursued company was hesitant about Lannet’s
potential, share value and negative impact of acquisition on the
value of its own shares. (It is interesting to note that the same
OEM which was offered Lannet shares for a mere $200M,
ended up buying an inferior company for $700M.Six months
after the merger1
it was declared a failure. Many workers have
left and those that remained were dealt with unfairly.)
The Merger Process
The Madge’s team arrived in Israel for an initial audit of Lannet.
Robert Madge, the founder and CEO of Madge landed shortly
thereafter, on the way from Australia to England. He offered to
buy Lannet for $330M, at $27.5 per share, higher than the price
suggested by the Madge team ($24 per share). Lannet’s value,
according to this offer, was higher than the $200M offered by the
American OEM.
Even though the Lannet managers were concerned about the
incompatibility of Madge and Lannet distribution channels, they
sealed the deal, conditional upon due diligence and a visit to
Madge’s facilities in England. In August 1995, the merger was
consummated. Lannet’s shareholders received shares of Madge
at $27.5 (based on a valuation of $330M), in return for Lannet’s
shares, valued at $19. This represented an immediate profit of
45%.

8. 8
Although this was an outright acquisition, the announcement
described the deal as a merger, to make the Lannet people feel
good. The name “Lannet” was eliminated from all documents
and products and was replaced with “Madge-Israel.”
A feeling of a strong financial backing caused an immediate
increase of inventory, despite a reduction of cash reserves. The
number of employees increased from 1,200 to 1,700, and in two
years reached 2,400. Sales commenced through the sales
force, and Lannet’s network of local distributors ceased to exist.
The image of Lannet as a small, flexible and dynamic firm had
been lost.
Employees at Madge-Israel got a brief workshop on bridging the
national and corporate cultural gap between the two
organizations. While the general impression was that it was
easier to work with the British than with the Americans, there
were differences that were obvious. Lannet management
worked on an informal basis. All employees could approach the
senior management at any time in order to present problems
and suggest possible solutions. Decisions were made quickly
and informally. On the other hand, Robert Madge was always
referred to in a formal manner, the hierarchy was always
respected and decision making was centralized.
Foreseeing Difficulties: Madge’s Concerns
about the Merger
The shareholders’ prospectus directed by Madge to Lannet
shareholders prior to the merger, lists the following risk factors:
• Operating efficiencies not realized
• Coordination difficulties due to geographic distance
• Integrating efficient production lines
• Integrating different reporting systems
• Integrating employees with different business
background
• Integrating processes and business cultures
• Interruptions due to the integration of activities
• Difficulties due to the sudden increase of
employees, managers, geographic coverage,
operating and financial systems
• Higher than expected expenses related to the

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merger (Layoffs, reassignment of workers,
elimination of duplication and distribution channels)
• Negative impact on operating efficiencies and
bottom line results due to the merger
• Negative impact of Madge’s practice of selling
Lannet’s products directly and not through Lannets’
agents
• A complete shutdown of all Lannet’s activity in Israel.
Merger Results
During 1996, many difficulties presented themselves. Sales
stagnated. Disagreements with headquarters were developed.
Lannet, now called Madge-Israel, was required to adopt the
marketing and distribution practices of Madge International. As a
result, Lannet’s best distributors started to work with the
competition. Former Lannet founder and CEO, Ben Hanigal, left
Madge-Israel. Arik Ben-Hamou, CEO of 3Com, a competitor,
said ”Despite the merger, Madge did not achieve the size
required to invest in R&D of new products as well as increasing
market share and sales.” In 1997, the merged company let 400
employees go and started a major reorganization. For the first
nine months of the year, the company reported losses of $74M,
a sales reduction of 18%, and $48.7M of reorganization
expenses.
In July 1997, the company announced “…organizational changes
that help the company to focus on its technological skills in order
to return to solid profitability.” The changes included return to the
pre-merger distribution and sales network. However, the fourth
quarter ended with a significant loss and further reduction in
share values.
The third quarter of 1997 shows a loss of $62.7M on revenues
of $83.2M compared to a loss of $67M during the comparable
quarter in 1996. Revenues were down by 26% compared to
1996. The gross profit margin was 46.6%. After allowing for
reduced sales and administration expenses and excluding the
non-recurrent reorganization costs, the company reported a loss
of $9.4M. Madge shares traded at $5.75, significantly below
their value at the time of the merger.

10. 10
Madge’s Stock Prices for the Period 1994 – 1999
In order to get the cash required for continuity, the company
raised, through a private offering, deferred convertible bonds in
the amount of $30M. The declared use of the funds was for
“...helping in the implementation of a customer focused strategy
and developing communication solutions for data, video and
voice…”
Typical comments by the acquired Israeli firm employees were:
• “… We were required to fill in forms and get authorization for
every action…”
• “… We have lost our autonomy, every new recruit had to be
approved by head office in England…”
• “… The British disregarded many reports that were
generated in Israel…”
• “… The project presentations were always made by the
British manager, and little credit was given to the Israeli
teams…”
• “… The reports went only one way…”
• “… We were required to work Fridays, which are considered
to be part of the Israeli weekend…”
• “… Joint R&D teams did not manage to bridge the gap
between former Lannet and Madge employees…”
• “… Excessive bureaucracy contributed to the incapacity of
the Israeli management team to make decisions…”
• “… Senior management consisted of only Madge personnel
except for Lannet’s founder and CEO, Benny Hanigal…”
• “… Madge forced its methods and business practices on
former Lannet employees…”
• “…The corporate cultures of the two corporations were very
different. The head office in England requested a certain
focus on R&D, while we were busy doing exactly the
opposite in order to show that our ideas were correct and not
theirs…”

11. 11
• “…The general feeling was that there is no leadership and
no short or long term plans...”
• “…The right hand did not know what the left hand was doing,
no coordination, no focus, no sense of direction...”
The VP for Finance of Madge-Israel left for ”personal reasons”
and was replaced by Dennis Palmary, a member of the
management team. Most board members of Lannet left and sold
their shares, causing the employees a great degree of concern
and disappointment.
The Merger Break-up
Madge management concluded that it was best to allow Madge-
Israel to become independent in all its decisions. This included
R&D, production, marketing and sales. The CEO got complete
authority to make his own decisions. In addition, a company
called “Lannet-Israel” would be registered in the Netherlands
just like Madge.
The sales and distribution network would be based on
distributors and they would market Lannet’s products
independently. Lannet is now operating under its original name
and is recognizable for its Ethernet solutions for computer
networking.
The CEO of Lannet, Mr. Levy, says that the break-up of the two
corporate entities would allow customers to identify Lannet’s
products with the reliability and technological breakthroughs
commanded by Lannet. He mentioned a joint venture with the
Japanese communication giant NEC. The joint venture includes:
• Integration of both companies’ production of organizational
computer communication
• Lannet will represent NEC
• NEC America will sell Lannet’s Ethernet products in the
USA.
The above should serve to boost current revenues of $100M.
This is the same level of sales as on the eve of the merger, but
with lower profitability. Furthermore, a new manufacturing facility
with 300 employees has just started operations at a
technological park in Jerusalem with a $3M investment.
Expected production volume is $100M, of which 95% is
earmarked for overseas sales.

12. 12
EXHIBIT
Madge Networks N.V.
Condensed Consolidated Statements of Operations
(in $ 000’s, except per share amounts)
Twelve
months ended
Dec. 31,1998 Dec. 31,1997 Dec. 31,
1996
Dec. 31,
1995
Dec. 31,
1994
Net sales 301,372 384,059 482,101 427,350 283,517
Cost of sales 147,103 201,729 243,133 197,268 131,334
Gross profit 154,269 182,330 238,968 230,082 152,183
Operating
Expenses
Sales &
marketing
81,667 116,204 142,227 102,282 68,286
Research &
development
48,021 67,906 67,326 47,617 27,077
General &
administrative
18,556 27,542 28,386 20,961 16,545
Special
charges
-------- 48,733 27,846 39,111 -------
Total operating
expenses
148,244 260,385 265,785 209,971 111,908
Income (loss)
from
operations
6,025 (78,055) (26,817) 20,111 40,275
Net interest
income
(expense)
3,272 31 2,266 5,105 3,087
Exceptional
income
29,611 ---- ---- ---- ----
Income (loss)
before tax
38,908 (78,024) (24,551) 25,216 43,362
Income tax
provision
(benefit)
3,085 (2,052) (4,054) 27,201 14,010
Net income
(loss)
35,823 (75,972) (20,497) (1,985) 29,352
EPS (basic) 0.81 (1.69) (0.47) (0.05) 0.74
EPS (diluted) 0.80 (1.69)
Weighted
Average
Shares
Outstanding
(basic)
44,404 45,085 43,976 42,777 39,932
Weighted
Average
shares
Outstanding
44,624 45,085

13. 13
(diluted)
Madge Networks N.V.
Condensed Consolidated Balance Sheet
(in $ 000’s)
ASSETS
Dec. 31,1998 Dec. 31,1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
Current assets
Cash, cash
equivalents,
short term
investments
130,494 62,106 38,020 114,006 101,465
Accounts
receivables,
net
38,966 70,900 95,725 85,194 50,422
Other
receivables
8,997 14,731 11,472 10,835 9,647
Inventories 11,474 35,287 53,374 51,501 30,707
Prepaid
expenses
4,656 8,769 19,872 15,987 8,633
Total current
assets
194,587 191,793 218,463 277,523 200,874
Investment,
property,
equipment, net
30,405 59,956 75,992 46,755 29,911
Total assets 224,992 251,749 294,455 324,278 230,785
LIABILITIES & SHAREHOLDERS’ EQUITY
Current
liabilities
Dec. 31,1998 Dec. 31,1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
Accounts
payable
90,661 102,759 104,455 117,772 54,041
Income taxes
payable
13,228 7,766 14,364 26,136 12,046
Short term
loans
3,811 3,553 3,050
Total current
liabilities
107,700 114,078 121,869 143,908 66,087
Long term
obligations
899 38,075 4,409 4,507 4,287
Total liabilities 108,599 152,153 126,278 148,415 70,374
Shareholders’
equity
116,393 99,596 168,177 175,863 160,411
Total liabilities
and
shareholders’
equity
224,992 251,749 294,455 324,278 230,785