Network Rivals Talk
Mergers, But Not 3Com
Date: 6/29/98
Author: Michele Hostetler
Networking gear maker 3Com Corp. is trying to
round the corner after a bumpy year.
Sales growth has slowed for most of the industry,
excepting leader Cisco Systems Inc., while
acquisitions have risen. In the biggest merger
move, Canada's Northern Telecom Inc. plans to
buy Bay Networks Inc. for about $7 billion in
stock.
But Santa Clara, Calif.-based 3Com says it's not
eyeing any merger and is unique enough to
remain a strong independent. Networking's No.
2 player reported a fourth-quarter profit of $63.6
million, or 17 cents a share, on sales of $1.375
billion, up from a profit of $41.8 million, 12
cents, on sales of $1.372 billion in the year-ago
quarter. Excluding one-time charges this year and
last, net income for the year was $246.1 million,
or 67 cents, compared with $543.2 million, or
$1.54. Sales fell to $5.42 billion from $5.61
billion.
3Com CEO Eric Benhamou spoke with IBD
after the company released its fourth-quarter
numbers last week.
IBD:
When will the tumult be over in the networking
industry?
Benhamou:
I think it will take several quarters before the dust
settles. What's behind all the activity, of course, is
the realization that video and voice on data
(networks) is inevitable and will happen fast. This
is causing fundamental changes in the telecom
equipment sector.
All these companies that built a strong legacy
business on voice technologies for carriers really
have to change fundamentally what they do, at
least from a technology perspective. Different
companies will take different strategies. I think
most will come to the conclusion that they can't
get from here to there from internal
developments. They'll basically choose between
three strategies, one being substantial acquisition.
This is clearly what Nortel has done with Bay.
Smaller, focused-point acquisitions - this is so far
what Lucent has done. Or partneships with a
strong lineup at multiple levels - this is what
Siemens has done with us.
IBD:
How does 3Com's strategy differ from its
competitors?
Benhamou:
Cisco has chosen to be an integral part of the
public core network. They want to supply the big
switches that go into the public core network.
This has made any partnership between Cisco
and the large telecom vendors not only
improbable but impossible. Cisco is now on a
collision course with these large telecom vendors.
They are massing a lot of resources to engage in
an all-out war.
You've seen the (patent infringement) lawsuit that
Lucent has instigated (this month) against Cisco. I
think that is just a prelude. I think it's going to get
much more bloody in the next few quarters.
Bay and Ascend . . . are much closer to
pure-play companies: Bay being focused on the
enterprise market and Ascend on the carrier/ISP
markets. I don't think that they have the critical
mass to be alone. In fact, they have deliberately
chosen to be acquired. In the case of Bay, it's
almost a done deal. In the case of Ascend, I
think it's only a question of time.
IBD:
How do these changes affect 3Com? Could the
company be put up for sale?
Benhamou:
3Com is in a far different position. Our business
scope is about creating connections that start at
the very edge of the network, literally at the
desktop connection or the server connection or
the palm computer connection. It extends all the
way up to and including the first points of
switching inside the public networks uch as the
Internet) at the very edge. Beyond that, there's a
threshold that we don't cross. We don't go near
the backbone of the public network. We don't
infringe on the traditional business of the telecom
equipment vendors. As a result, we're very
complementary and much more suitable to
partner. This is a big difference from Cisco.
In addition to this, our business scope is much
broader than a Bay or an Ascend. We address
the needs of the consumer market and have a
strong retail presence. We sell modems and we
sell (hand-held) PalmPilots. We sell home-office
(networking) kits into the consumer markets.
We're the leader in the small-to-medium-size
business. We're the leader in the ISP business.
We're the second-largest supplier into the
enterprise market.
Across those markets, we clearly have critical
mass and a diversification that no one else has.
That's why we're not a good target acquisition for
anyone. Not only are we bigger and more
expensive, but it just doesn't fit a nice niche. In
fact, we're not seeking to be acquired. We're not
putting the company in play.
IBD:
How are 3Com's partnerships going?
Benhamou:
On the core side, it's clearly Siemens. Siemens
and Newbridge are closely aligned. We have a
shared vision of what's happening in the industry
with converged network trends. We have a
common architectural framework called CSI, or
carrier scale internetworking, which is jointly
offered by Siemens, 3Com and Newbridge.
(We have) many joint development activities on
common strategic platforms. One example is the
voice-over- (Internet) capability of our total
control platform, integrated inside the Siemens
carrier class switch. Another example would be
our (local- area-network) PBX offering
introduced in May. It's basically a LAN
telephony solution for the enterprise.
IBD:
What are 3Com's top challenges this quarter?
Benhamou:
The first (fiscal) quarter has always been our
slowest quarter. It happens every year, so this
year is no different. It's because the first-quarter
boundary that we picked 18 years ago puts all
three summer months in Q1. The seasonal
slowdown is most pronounced in Europe . . . and
we are relatively stronger than our competitors in
Europe. Therefore, there's more pronounced
seasonality than our competitors.
Having said that, we do have opportunities to
continue to improve . . . in terms of gross
margins, expenses, balance-sheet improvements.
We'll show bottom-line improvements in the first
quarter but we'll probably have much slower
growth at the top line.
It felt good to beat analysts' expectations (in the
fourth quarter). It always feels good to catch
analysts going left when you're going right. We
felt that as we closed the year, we really turned
the corner. We're bullish about the prospect for
the year.
(C) Copyright 1998 Investors Business Daily,
Inc.
Metadata: COMS CSCO NT BAY LU ASND NN I/3574
I/4890 E/IBD E/SN1 E/ |
