Have you seen this:
Investors Business Daily, Thursday, March 06, 1997 at 14:39
There's an old adage that everything there is to know about a
company is reflected in its stock price. The premise behind it is
simple: The market factors in all the good and bad news about a
company and settles on the right value.
But what does it mean when the market can't seem to decide on a
stock's proper price?
For a case in point, take a look at the mega-merger unveiled last
week by 3Com Corp. and U.S. Robotics Corp.
I N V E S T O R ' S C O R N E R
When 3Com announced its plan to buy U.S. Robotics on Feb. 26, it
pegged the modem maker's value at $6.6 billion.
Within minutes, the market pushed up U.S. Robotics' shares,
swelling the price tag to $6.9 billion. Apparently, big investors
thought the deal would be a blockbuster for both companies.
But on second thought, maybe they didn't. By the next day,
investors had yanked the shares down as much as 22%, slashing the
value of the deal a whopping $1.5 billion.
The episode points up more than the fact that it's tough for
professional investors to size up an unexpected merger. It also
shows that individual investors can't take their cue from the
immediate reaction of institutions.
In fact, when unexpected news hits, the initial move in a stock
may tell you little about where it'll end up a day or two later.
You're better off studying a stock's fundamentals and its trend over
time rather than its price at any given moment.
That advice seems to hold up for 3Com and U.S. Robotics.
At first, investors were excited by the idea of the pairing. But
on reflection, they realized both stocks had collapsed over the past
several months and worried that a merger wouiuldn't solve their
underlying problems.
"I think people were reacting because they were uncertain why
these companies are willing to merge when their stocks are at such
depressed levels," said Therese Murphy, a Smith Barney Inc. analyst,
who's bullish on the deal.
The companies released their news after the market closed.
Several analysts quickly hailed the deal. They said it would give
3Com, the No. 2 networking company behind leader Cisco Systems Inc.,
entree to key market segments. 3Com, largely focused in what is known
as local- area networking, would have access to U.S. Robotics'
expertise in wide-area networking. Local-area products hook
computers into networks, while wide-area products hook those networks
together.
The merger would be sure to put pressure on Cisco, analysts said.
It also would put the screws to Ascend Communications Inc., which has
enjoyed spectacular growth. Ascend has strung together 11 straight
quarters of triple-digit profit increases, largely by helping to
build the backbone of the Internet. But U.S. Robotics has a strong
presence in that market, which 3Com could build on.
Though the market was officially closed, institutions traded in
after-hours markets like Instinet. Within minutes of the news, U.S.
Robotics shares shot up 10 1/2 points to 71 1/2.
By Thursday morning, the initial burst of euphoria had evaporated.
U.S. Robotics fell back to 59 and kept sinking. The stock ended the
day at 55 3/4. It's since recovered to about 59.
Investors saw that both stocks are in serious slumps. 3Com,
trading at a 21-month low, is 56% off its high. And U.S. Robotics,
near a six-month low, is 43% off its top.
Companies with vibrant prospects normally don't sell at depressed
levels. So the deal begged two questions. Why would 3Com be willing
to give up equity for less than half the value it would have garnered
two years earlier? And if U.S. Robotics is hot, why is it selling
out now?
In a nutshell, the deal gives 3Com a full arsenal of networking
products that it lacks now to take on Cisco. For U.S. Robotics,
which has only been in networking a few years, the deal suddenly
makes it part of the No. 2 networking company.
"This isn't about optimal timing in the stock market but in the
product market," Murphy said.
The Internet-access market is burgeoning worldwide. The infant
small office/home office market is going to have explosive growth.
And the ability to hook into a network while away from the office is
becoming a necessity. Not only would the combined company offer a
full line of needed products, but a well-developed distribution
system.
Noel Lindsay, an analyst at Deutsche Morgan Grenfell, sees another
benefit. The new company would be able to sell companies added value
that would build on their joint local and wide-area network
offerings.
U.S. Robotics' fortunes are closely tied to its latest product,
the x2 modem. It doubles the top data-transmission speeds to 56
kilobits per second.
The technology, introduced last month, is expected to be very
popular because it doubles the speed at which you can access the
Internet. America Online Inc. already is offering the technology to
its customers.
So, if U.S. Robotics' modem is so hot, why is the stock so low?
The reason, analysts say, is fear that rival Rockwell International
Corp. may have developed a better modem chip that will torpedo U.S.
Robotics. But analysts say those worries are overdone. |
