This guy downgraded COMS two days ago but said he still likes COMS - does he knows what's he is talking about ???
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Published Monday, November 10, 1997, in the San Jose Mercury News
"Polycom's bad dream ends as 3Com hangs up Polycom dived when U.S. Robotics tapped its market."
EVERY tech upstart's nightmare is an 800-pound gorilla entering its market.
Such an entry is guaranteed to cause a stir. Just consider the effect Microsoft Corp.'s (Nasdaq, MSFT) browser has had on Netscape Communications Corp. (Nasdaq, NSCP), whose value has been slashed roughly in half since late last year.
A similar fate befell a smaller company, Polycom Inc. (Nasdaq, PLCM) in San Jose, when U.S. Robotics Corp., now a part of 3Com Corp. (Nasdaq, COMS), decided to start from scratch a conference-phone product line to compete with Polycom, the market leader.
Polycom's stock, valued at $9 in its May 1996 initial public offering, rose above $10 and then plummeted to $3 earlier this year when U.S. Robotics started selling much less expensive conference phones, along with its high-volume dial-up modems.
Now Polycom's bad dream has ended. 3Com, a maker of networking products based in Santa Clara, never was enthusiastic about the conference phone it inherited with other U.S. Robotics products. It has killed the line, a spokeswoman confirms.
Shares in Polycom, already inching over $6, are likely to get a boost from 3Com's retreat.
''U.S. Robotics scared off some of the investment community because it was perceived as a big giant coming into (Polycom's) area,'' says NationsBanc Montgomery Securities Inc. analyst Bruce C. Carlsmith, who's turned bullish on Polycom. He maintains a ''buy'' recommendation on the stock with a price target of $8 during 1998.
According to Carlsmith, just 8 percent to 10 percent of U.S. corporate conference rooms have high-end speaker phones, a market in which Polycom has roughly a 75 percent share.
3Com's decision to abandon the conference phone also illustrates how whole businesses can be jettisoned when two companies merge, even as others with similar ventures thrive. Whereas 3Com Chairman, President and CEO Eric C. Benhamou has energetically supported U.S. Robotics' Palm Computing division, maker of the popular PalmPilot personal organizer, he was sour on the conference phone line from the beginning.
''We cannot focus on everything,'' Benhamou said in June. He added that if the line didn't fit with 3Com's networking products, ''then it has no business being in 3Com.''
Paradoxically, Polycom CEO Brian L. Hinman says he'll miss 3Com-U.S. Robotics.
''In a perverse sort of way, having (U.S. Robotics) enter the business was good for us,'' he says. The competition and promotion helped stimulate demand and make more customers aware of high-end speaker phones. Still, he adds, ''It means for sure our market share will be greater than what it was last year.''
3COM'S DISCONNECT: Conference phones are important to Polycom, but relatively insignificant to 3Com, whose stock has been falling steadily since early October.
BancAmerica Robertson Stephens analyst Paul Johnson did more damage to 3Com's stock Friday by downgrading it from ''buy'' to ''long-term attractive,'' Robertson Stephens' middle ranking.
The stock fell $2.81, or 7 percent, to $38.13, compared to $55.72 on Oct. 8.
Considering he zapped the stock, Johnson is surprisingly upbeat on 3Com, saying if it dropped a few more points it would be very attractive.
''This is not a valuation issue, it's a visibility issue,'' says Johnson, who follows networking stocks from New York.
By visibility -- analyst talk for how predictable a company's sales and earnings will be -- Johnson means he can't project 3Com's performance as well as he'd like. Given that 3Com continues to integrate the operations of U.S. Robotics, ''they have no idea what their numbers are going to be.'' That, in turn, means 3Com's stock will be more volatile, Johnson says, and he'd rather ''sit on the sidelines'' as the stock gyrates.
''3Com basically has a good business, and it's basically a business that creates value for shareholders,'' says Johnson.
Except, of course, for shareholders who've been holding the stock as it's dropped 32 percent in four weeks.
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Silicon Street appears Monday, Wednesday and Friday. Contact Adam Lashinsky by snail mail: 750 Ridder Park Drive, San Jose, Calif. 95190; by e-mail: siliconstreet@sjmercury.com; or by telephone: (408) 271-3782.
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