LATimes. A Loss of Focus May Be Cause of 3Com's Problems
Saturday, March 6, 1999
ANALYSIS
Technology: As networking gear firm's stock takes a beating, analysts
question its strategy and prospects to stay independent.
By ASHLEY DUNN, Times Staff Writer
s 3Com Corp. stock takes a pounding in the wake of a
disappointing earnings forecast, some analysts are
expressing doubts about the networking gear company's
strategy and long-term prospects for remaining independent.
Its popular Palm line of hand-held computers has done well
in the consumer market, but its other ventures--modems for
personal computers and high-end networking equipment for
businesses--have faced severe pricing pressure and increased
competition.
Santa Clara, Calif.-based 3Com says its sales volume
appears to be holding, but the prices of some of its key
products are dropping, particularly modems and network cards
for personal computers, which are quickly becoming cheap
commodities.
The central problem, said Joel Achramowicz, a senior
analyst with Preferred Capital Markets, is that 3Com seems to
have lost its focus, spreading itself among a variety of consumer
products with low margins and high-end networking gear that
must compete against the networking powerhouse Cisco
Systems Inc.
"At this point in time, I'm just puzzled by what 3Com is
trying to do," Achramowicz said. "Do they want to be a
consumer company or a networking company? They have to
make a decision."
Since January, shares of 3Com have fallen more than 50%--from $51.13 to its
closing price Friday on Nasdaq of $24.63. Its latest drop was prompted by
warnings from the company that its earnings per share for the fiscal third quarter will
probably be about 23 cents--a far cry from the consensus 36 cents per share that
analysts had expected.
Before 3Com issued its profit warning, company insiders sold as much as $178
million worth of 3Com stock in the fiscal third quarter.
Chairman and Chief Executive Eric A. Benhamou, Chief Financial Officer
Christopher Paisley and other executives sold at prices near a 52-week high of
$51.13 reached on Dec. 23, according to Washington Service, which tracks insider
buying and selling.
3Com Senior Vice President and General Counsel Mark Michael said all 3Com
employees have a limited time after a quarterly earnings report to exercise their
stock options. He declined to comment on any of the individual sales.
3Com plans to release its final third-quarter earnings report on March 23.
Farrokh Billimoria, an analyst with the San Francisco-based investment banking
firm of Hambrecht & Quist, said that at its current price, "it's clearly an acquisition
target."
Patrick Houghton, an analyst with the investment firm Sutro & Co., said that
3Com--the No. 2 maker of networking equipment--is a tempting morsel because of
its strong position in the quickly growing networking realm.
"At the right price, it would be an easy way to get a big share of the networking
market," he said.
On Thursday, the New York Times reported that Siemens, the giant
telecommunications equipment maker of Germany, was in preliminary discussions to
buy 3Com's telecommunications networking unit for $1.2 billion.
Neither company would comment on the report, although Siemens has scheduled
a news conference Monday to discuss a shift in its networking strategy. A source
within 3Com said the company will not participate in the news conference.
Achramowicz said a 3Com deal would be a boon for Siemens, but made no
sense at all for 3Com, which would be selling one of its best units with high growth
potential.
"I'm kind of laughing at this deal," he said. "If 3Com wants to sell, what is the
strategy? If they're not going to compete against Lucent, Alcatel and Nortel, then
they might as well sell the company."
Benhamou said the company has recognized its problems and begun a strategic
shift away from stagnated products, such as modems and network cards for
personal computers, to higher-growth ventures, such as hand-held computers,
high-speed cable modems, Internet telephony equipment and home networking.
3Com has traditionally suffered a seasonal drop in the third quarter, but
Benhamou conceded that this quarter went beyond the usual.
Billimoria said 3Com has been facing increasing pressure from Cisco--the No. 1
producer of networking equipment--in the market for small and mid-sized
companies.
Benhamou said the company wants to focus on the "edge" of networking--the
point of connection between personal computers and large network carriers.
But Achramowicz said it was defeatist strategy, conceding a lucrative chunk of
networking to its archrivals. "3Com just hasn't made the moves you'd expect from a
major player," he said.
3Com has ended up a powerful player in stagnated markets. Nearly half of its
business is in modems and network cards, yet there is little revenue growth
possibilities in those areas.
Even though the Palm Computing unit, which has become almost a required
accessory for the up-and-coming professional, has done well, it is in the end a minor
part of 3Com's business. "Even if the Palm Pilot did well, would it have made a
difference?" asked Billimoria. "No."
Houghton said that for all its problems, 3Com is still a strong company with a
well-known brand name that will serve it well as the cable modem, Internet
telephony and hand-held computer markets mature.
"3Com has had a tough time, but at least it makes money," Houghton said.
Bloomberg News was used in compiling this report.
Copyright 1999 Los Angeles Times. All Rights Reserved
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