MERGER GROWING PAINS AT 3COM
Chicago Tribune - June 21, 1998
Last June, 3Com Corp. paid $8.6 billion in
stock to swallow U.S. Robotics Corp., in
what was then the biggest merger in Silicon
Valley history and the second-largest
high-tech union ever.
One year later, it's not even the biggest deal
of the month, as telecom and computer
connectivity companies frantically partner
and meld their networks to carry an
exploding volume of data, Internet traffic, fax
transmissions and voice.
Last week, in fact, 3Com found itself as the
rumored prey of Swedish telecom giant
Telefon AB L.M. Ericsson.
But in making its big buy of Skokie-based
Robotics, 3Com CEO Eric Benhamou sent
his company traveling in the other direction,
away from the growing competition to build
mammoth networks sought by phone service
providers and multinational corporations and
toward a consumer identity as the company
that connects desk-top computers to a
network and to the Internet.
Already entrenched as the leading supplier of
equipment for linking disparate collections of
computers within small and medium-size
businesses, 3Com saw in Robotics'
market-leading modems and other
connection equipment a chance to form a
direct bond with consumers.
As corporate takeovers go, however, 3Com's
digestion of Robotics has churned up a bit of
acid and gas and kept the shareholders
awake nights.
On the eve of its fiscal fourth-quarter report,
expected this week, 3Com stock is trading
more than 30 percent lower than its $39 per
share price at the time the deal was
announced in February 1997. 3Com shares
closed down 56 cents at $26.69 on Friday on
the Nasdaq stock market. The company has
missed earnings targets the last two quarters.
The Santa Clara, Calif.-based company also
has laid off 1,180 workers, including at least
380 at former Robotics facilities in suburban
Chicago. And the company is slowing down
development of its projected $257 million
Midwest headquarters campus in Rolling
Meadows, according to the city manager of
that suburb.
Benhamou concedes that integrating
Robotics into 3Com to create a $6 billion
company "is by far the biggest task that
we've ever accomplished," but he says it's
worth the effort.
"We're very, very happy about it,"
Benhamou, 42, an Algerian-born,
French-educated engineer, said in a
telephone interview last week. "We feel very
good about the strategic value that has
accrued to 3Com. We acquired the
consumer marketing and the retail channel
that we didn't have."
Benhamou, who declined as a matter of
policy to comment on the Ericsson rumor,
said Robotics, with its strong consumer
presence, furthers 3Com's goal of developing
a brand identity.
Other brand-building efforts include a new
advertising mantra "3Com more connected"
and perhaps the company's best-known ploy,
buying the rights to rename the San
Francisco Giants' Candlestick Park as 3Com
Park.
Through the Robotics acquisition, 3Com has
become the world's biggest seller of
modems, the paperback-sized devices that
link computers to the Internet via phone
lines.
But sluggish sales throughout the modem
industry have tarnished Robotics' promise.
The slowdown exacerbated a company-wide
problem with excess inventory that has been
blamed for 3Com's recent earnings woes. In
response, 3Com trimmed its equipment
stocks, reducing its supply of modems from
up to 12 weeks at the end of 1997 to seven
weeks in March.
The acquisition "hasn't gone too well so far,
with the modem business being soft," said
Martin Pyykkonen, who follows 3Com for
CIBC Oppenheimer in San Francisco.
"Nobody's dying to get into the modem
business."
That's because consumers are still confused
over technical standards for 56
kilobytes-per-second modems, the fastest
conventional devices. They're also uncertain
about whether to buy more expensive
modems to receive Internet transmissions
over specially tweaked phone lines or coaxial
cable.
For 3Com, there is another problem:
Modems tend to drop quickly in price,
meaning that the company will face a
constant struggle to maintain profit margins.
From U.S. Robotics shareholders' standpoint
at least, that pressure to keep up margins
made selling out a sensible option.
"U.S. Robotics was a modem company and
modems are a commodity industry. They
only get cheaper. It wasn't going to be all
glory for them either way. At least this way,
they have 3Com's money behind them," said
Maribel Lopez, a networking analyst for
Forrester Research, of Cambridge, Mass.
The initiator of the merger, Robotics founder
and CEO Casey Cowell became
vice-chairman of 3Com, but has no
operational duties. Cowell did not respond to
requests for an interview.
In its primary business of networking, 3Com
has labored for years with the image as
"2Com," a chronic second-place finisher to
Cisco Systems Inc., of San Jose, Calif., in
the overall data network market.
With the convergence of voice and data
networks into a single system, 3Com faces a
brace of new, much bigger competitors,
among them Lucent Technologies Inc. and
Northern Telecom Ltd.
Nortel, of Brampton, Ontario, last week
announced it was buying 3Com competitor,
Bay Networks Inc., for $9.1 billion. It was
just one of a series of mergers within the last
month between voice-oriented companies
and data networkers.
In other big deals, Tellabs Inc., of Lisle,
agreed to buy Ciena Corp., of Linthicum,
Md., for about $7 billion in stock and
Alcatel-Alsthom SA, of France, announced it
would purchase DSC Communications Corp.
in a stock deal valued at roughly $4 billion.
To put this single month of marriages in
perspective, until 1997, only AT&T Corp.'s
$7.4 billion acquisition of NCR Corp. in 1991
was a bigger technology merger than 3Com
and Robotics.
While not speaking directly to the question of
being acquired, Benhamou laid out a strategy
relying on partnership rather than merger to
allow 3Com to compete in the era of large
converged networks.
In the new environment of behemoth
networkers, Benhamou, who has led 3Com
since 1990, said the company will focus on
selling equipment on the outer edge of a
network and rely on an association with
Siemens AG, a German conglomerate with a
substantial presence in international telecom,
to provide central network equipment if
needed. "We start with the consumer and
provide the connection and then hand it off,"
Benhamou said.
"We think we have taken an approach which
is by far the best," he said. "We don't suffer
the large disruption of another large transition
(from being acquired) and we don't compete
in a space that's foreign to us."
"There's a logical view to that, to stay away
where others already dominate and play
where your strengths are," said CIBC
Oppenheimer's Pyykkonen.
The problem with the strategy, analysts say,
is that 3Com will be under constant pressure
to make its products cheaper, while the big
money gets spent in network building.
3Com's Rolling Meadows campus represents
one effort to position the company as leanly
as possible. Benhamou said consolidating
operations from facilities in Skokie and
Morton Grove in new digs should save
money and increase productivity.
The first of more than 1,500 employees
moved into a new building last week,
although it's unclear if or when other
buildings originally slated for the 40-acre site
will be built.
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