Article this morning about COMS from Stockhouse.com....it's long but good info....
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April 27, 1999
StockHouse News Desk
Steve Stathos
3COM UPDATE
More Interviews: The Rumors Are Flying, but What is the Truth?
Miami, FL, April 27 /SHfn/ -- Ahead of the Hambrecht & Quist tech conference, on Tuesday, rumors are flying over who might buy 3Com and even what part that particular "who" will buy! 3Com management is to present at 3:30 p.m. (PDT), after Tuesday's market close (buy on rumor, sell on news) and Tuesday or Wednesday, or both, could be an especially brutal for 3Com shares. Virtually everyone has an opinion to share - except Ericsson and 3Com. Spokesmen from those companies refused to comment on takeover speculation, fueling the takeover mania and boosting both companies share price higher on Monday. Grinding out the correct explanation as to why 3Com shares moved higher might be about as futile as naming "who" killed JFK. If only both companies, or just one, had simply denied, anytime between Friday and Monday, that discussions between the two companies had taken place three weeks ago, as was reported by Michael Murphy in a featured StockHouse.com interview, last Wednesday after the markets closed, the rumors would have been vanished.
HOW IT ALL BEGAN
Yes, last Wednesday. The Michael Murphy interview was posted on the StockHouse front page on Thursday morning, April 22nd. The StockHouse news release to PR Newswire appeared at 9:47 a.m. that same day. 3Com shares fell more than one-half point following that news release and the shares closed flat on Thursday - trading about 3 million shares less that the stock's average daily trading volume. Michael Murphy's newsletter appeared on April 16th, and may have been widely disseminated around April 20th. That might account for rising 3Com shares and rising volume - about five million shares trading above the average daily volume and a $2.50/share gain on April 20th. But, according to Mr. Murphy, the rumor had been around Silicon Valley for a while and had already been reported in the San Jose Mercury News. StockHouse broke new ground when Mr. Murphy had told the StockHouse reporter that Ericsson had talked with 3Com "about three weeks ago" and that his source was "someone who should know." That was the same Wednesday, when Needham analyst Peter Lieu reiterated his Strong Buy recommendation on 3Com shares.
The strongest move in 3Com shares occurred in the first two and one-half hours of trading on Friday, April 23rd. Since then, 3Com shares surpassed the peak reached before Noon (EST) on that Friday, but have subsequently failed to close above that level. While StockHouse will not publicly reveal the number of visitors, who actually read the featured interview with Mr. Murphy, it is completely impossible that that less-than-spectacular number of visitors were responsible for more than 54 million shares changing hands in 3Com on this past Friday and Monday - over 32 million shares more than the daily average for those two days. Most media also failed to report on these rumors until after Noon on Friday, after the rally had peaked. There was a 23-hour "blank" period between Thursday morning, after the StockHouse interview and PR Newswire news release appeared, and the wild Friday morning that followed.
What may have happened - since everyone has an opinion - is that those who, indeed, have access to management of either or both companies may have confirmed that discussions had actually taken place and there was strong possibility 3Com was in play. Following this line of thought, perhaps Ericsson, Siemens or others named by Murphy took (or increased) their positions in 3Com shares, if indeed there were going to be a bidding war for 3Com. Common technical indicators, such as the anticipated crossover of the 9- and 18-day exponential moving averages by Monday, may have also helped thrust 3Com higher on Friday and Monday. Few analysts disagreed that 3Com shares had based at a four-year low and the stock was due for some sort of rally. After all, the stock had spiraled downward throughout most of the first quarter while the NASDAQ Composite traded higher.
Speaking of opinions, three more 3Com analysts that StockHouse interviewed on Monday had their own ideas about the rumors and takeover speculation, similar to many of the doctrines spread across various Internet message boards since Friday. Additional useful data was gathered in understanding this enigma.
THE ANALYST INTERVIEWS
Sanford Bernstein senior research analyst Paul Sagawa told Reuters, "I'm pretty confident Siemens had been talking with 3com about buying just the remote carrier business." Sagawa told StockHouse.com, "I still hold that none of the companies we're talking about really want to own ALL of the pieces of 3Com. Any acquisition, that requires the whole of 3Com, would almost necessitate a further selloff." He added, "Buying the remote access is very realistic - probably more likely than a full buyout of 3Com."
Sagawa also told StockHouse he would advise Eric Benhamou, CEO of 3COM, "I would be telling him he has four separate pieces of his business that are not drawing any synergies from one another and are actually pulling his management attention in diametrically opposing directions - that shareholders would be best served by breaking the company into four-piece parts." Asked if the Palm division were spun off as an IPO, Sagawa responded, "I think it would best for shareholders - there is no synergy between Palm and the rest of its businesses."
Questioned about Mr. Murphy's Ericsson takeover remarks, Sagawa responded, "I do not know how strong his information about the discussions with Ericsson are. I have heard from multiple sources that Siemens was inquiring as to the availability of the remote access business. That was about a month ago, around the time the (New York) Times reported that. That does appear to be confirmed by multiple directions that it did take place. It does appear that an agreeable price wasn't in the offing at the time."
Technology analyst at Giga Information Group, Jim Slaby, told the media, "The rumors are very credible." Mr. Slaby told StockHouse.com, "Most of the major suppliers of infrastructure to the telecom service provider market need a broad range of plays. If you look at the acquisitions that Lucent has made or Nortel or Cisco, they are all basically moving in a similar direction - which is to be able to provide end-to-end solutions to the service provider market. They are trying to build carrier core infrastructure - big voice switches, frame relay switches, ATM switches, devices that provide connections between the boundary of the enterprise network and the edge of the carrier network and enterprise premise technology. Lucent, Nortel and Cisco are the least likely to buy that technology (3Com). They already have it. Why would someone want a 3Com? It is one of the things that would help them compete more successfully against Cisco, Nortel and Lucent - people who already have a good enterprise IP play."
Asked about 3Com selling its division piecemeal, Slaby told StockHouse, "I have a feeling that 3Com's management would have a hard time selling off pieces of the business. Someone is going to have to step up and buy the whole company and then perhaps divest the bits they don't want. Questioned about which company would be capable of buying the entire company, Slaby responded, "Ericsson, Nokia, the Europeans. Siemens appeals to me as a buyer - they already have close ties to them (3Com). They (Siemens) have already made significant moves into establishing a U.S. base presence to go after the emerging carriers. They've got some interesting technology in hand. 3Com would bring them a very nice customer premise equipment play: routers, layer 2 and layer 3 switches, NIC cards and so forth. The bits they (Siemens) don't need are pretty attractive in their own right. Palm, for example, is a dominant player in that market with some pretty interesting prospects coming out of the chute. I don't think it would be hard to spin Palm off and the rest of the technology would be a good fit for Siemens."
When StockHouse.com asked about the validity of the rumors and the absence of forthcoming denials from both Ericsson and 3Com, Slaby said, "The rumors are obviously flying around, but this is a target that we have been writing about for, probably, six months and listing 3Com as the top two or three companies that are likely to be acquired by the big vendors to the service provider market. I talked about Xylan and they were snapped up by Alcatel. Cabletron is another obvious one, though they've got some other things that make them less attractive. Ascend is one that clearly we called a long time ago. There's only two left on the list - both with depressed stock prices and reported middling or very disappointing results in the past few quarters. For Siemens - if that is their intention (to takeover 3Com) - to be watching the stock price being pushed up on speculation rumors, it is something they are not welcoming."
A.G. Edwards analyst Peter Andrew told StockHouse, when asked about the takeover rumors, "Management has already stated publicly that they're not selling their remote access business and their Palm business. Management is focused on keeping the company independent." Mr. Andrew does not see a buyout of any part of 3Com's business. He added, "It would make sense. I believe it would, but when talking to management, they don't seem like they're looking to pursue that strategy." Andrew attributed the recent run to "rumors, rumors," but added, "you have to remember that 3Com has been absolutely been beaten down - some type of 'dead cat bounce' was probably overdue." However, cynical as that sounded, Mr. Andrew did not expect a retracement, believing "it's fairly valued up here." Asked if under $30/share was fair, he added, "until they start executing, then it will move up from there." He planned to change his "accumulate" rating on the stock, but not imminently, suggesting that he might wait until after the May quarter's numbers come out in June.
JUST SAY NO, IF IT AIN'T SO
The perfect opportunity to have crushed takeover talks occurred on Saturday, April 24th. Ericsson CEO Sven Christer-Nilsson had just addressed a shareholder's conference and was soon thereafter interviewed by Reuters. Instead of putting those rumors to bed in the wire service interview, Nilsson added fuel to the takeover debate by telling the Reuters reporter, "Our strategy is to buy companies that complement our own technology." What terrible timing! And, don't say he didn't notice 3Com's dramatic Friday rally and abnormal trading volume. About two-thirds of 3Com's volume traded by Noon on Friday and peaking in share price by then, of course.
Shame on 3Com management for not commenting on Friday's sensational trading and remaining silent again on Monday. All spokespeople, fed to the media, were lower level staff, who would have remained in the dark, anyway, during takeover talks. Rarely would investor relations employees or officials be briefed on negotiations for a takeover, if only to have management protect them from having to lie to the media. StockHouse.com repeatedly attempted to contact the CEO and COO of 3Com for a statement prior to publishing the Michael Murphy interview. Certainly, they were aware of the rumors and Mr. Murphy's newsletter recommendation reporting on the company's discussions with Ericsson.
Mr. Murphy should be innocent of forwarding his takeover comments, in his newsletter and in his feature interview with StockHouse.com. He is simply doing what reporters and letter writers are supposed to do - get news for the subscribers. Judging from his response to StockHouse about where he heard about Ericsson discussions with 3Com, one could easily be led to believe that it came from someone privy to those talks. If so, then 3Com may have just as easily used Ericsson as bait to provoke the ire of Siemens. By forcing Siemens to react to a potential Ericsson takeover, perhaps 3Com hoped Siemens would increase their alleged bid for 3Com, which as Mr. Sagawa of Sanford Bernstein pointed out, was not a price to which 3Com would agree.
The "surprise" acquisition of Fore Systems by GEC, announced Monday morning was actually posted on at least one Internet message board the night before trading opened in FORE. The posting openly boasted that both FORE and COMS would be hot this coming week. FORE traded for about 10 minutes, jumping in share price and volume, before it was halted. After FORE was halted, 3Com shares sank to the mid-point of the Friday rally - until investors realized that Ericsson (or Siemens) did not spoil the party by acquiring FORE. 3Com shares rallied to their Monday high within 40 minutes of the bottom. No one stepped forward to squash the 3Com takeover speculation. The FORE leak to an Internet message board, on the eve of a takeover, is about as blatant as one could get. Mentioning 3COM in the same sentence lent ever more credibility to the wildfire rumors.
By perpetuating this bidding war, as the initial StockHouse.com interview was entitled ("Is 3Com Trying to Create a Bidding War Between Ericsson and Siemens?"), 3Com might suffer even more serious shareholder backlash than it has since the February earnings pre-announcement. 3Com management had better have a good backup story up their corporate sleeves, because if 3Com was really just trying to play Ericsson against Siemens, using everyone in close reach or influence as part of their cheerleading squad, and this takeover doesn't actually materialize….
Well, takeover speculation, such as this, can get extremely ugly. Don't think the securities regulators aren't watching.
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