Ben,
The article below is from Briefing.com.
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U.S. Robotics and 3Com
Daily commentary updated March 12, 1997
U.S. Robotics (USRX) stock is trading below the acquisition price of the 3Com (COMS) deal. This may create an investment opportunity.
The Deal
The deal with 3Com says that U.S. Robotics shareholders will receive 1.75 shares of 3Com for each share of USRX they own. In after hours trading the day the deal was announced late February 26, USRX stock surged to 71 1/2, above the implied deal price based on that day's closing level of 39 on COMS (39 x 1.75 = 68 1/4). This may have been due to speculation that COMS shares would go up the following day on the announcement or on hopes that a higher bid would develop.
The Reaction
However, the very next day, 3Com closed down 4 points to close at 35. At 1.75 times 35, USRX stock should in theory have been worth 61 1/4. Yet, USRX closed that day at 59 1/8, down sharply from the 71 1/2 from the after hours trading the day before and $2 below the implied deal value. Yesterday, March 11, USRX closed at 59 1/2 and COMS closed at 35 1/4. USRX is therefore still trading at a discount of about $2 to the deal price (35 1/4 times 1.75 = 61 5/8).
Why the discount? We have talked to numerous people and haven't heard any arguments which strike us as strong. USRX shares now carry a risk that COMS shares will go down, but so do COMS shares themselves. Instead, most analysts still think that COMS is getting USRX cheap. Many brokerages have buy ratings on both COMS and USRX. What if the deal doesn't go through? Well, USRX was at 61 before the deal was announced, and there hasn't been much news since then other some good news (see below), so trading at 59 now it still seems cheap to us.
So, if the deal does go through, USRX is way to get COMS at a discount right now (the future direction is uncertain, but we like the stock on its own at this price) and to retain a good technology via USRX in a growth industry. If the deal doesn't go through, although we have no reason to expect that, then USRX still seems to us to be a good value with excellent prospects.
Other Factors
There is also the chance the USRX knows something negative that we don't about its prospects, and hence is more willing to sell out now. However, it is worth noting that when the deal was announced, with COMS at 39, the deal price gave USRX a 12% premium over the price it was then at. So, USRX probably thought it was doing its shareholders a favor, and that by joining with COMS, it would also provide synergies and upside to its shareholders through COMS stock.
Furthermore, on March 6, Packard Bell NEC announced that it will work with Texas Instruments to use USRX X2 technology in its PC's. Yes, there is competition, but USRX seems to us to be strengthening its position with X2 and gaining ground. There was also an announcement on March 7 that IBM and USRX are being sued by General Patent Corp International, a privately held company, for patent infringement. This doesn't help matters any, and the matter won't be resolved quickly, but probably won't be a significant ongoing factor.
Conclusion
In sum, we still like USRX. It is only worth buying now if one is comfortable with the outlook for COMS, and the stock prices will closely track each other. The ability to in effect buy COMS at a discount, however, doesn't bother us, because we have COMS on our "Favorites" list on our Tech Stock page. And owning COMS after a deal means that investors will continue to benefit from the favorable prospects for USRX. |
