To: KyrosL who wrote (34540 ) 9/26/1999 2:55:00 PM From: KyrosL Read Replies (4) | Respond to
Why the chances for a 3Com takeover soon have increased considerably3Com earnings . The pleasant earnings surprise of last quarter (pro-forma earnings almost 40% above expectations) have lowered the current p/e ratio of 3Com to close to 20. Almost all potential acquirers have p/e ratios twice or more than that. Therefore, a 3Com acquisition even at twice its current stock price (i.e. $54/share) will result in an increase to the acquirers' earnings per share -- I am assuming the acquisition will be for stock . 3Com's cost and inventory reduction in the last two quarters also means that 3Com has "cleaned-up" house, and an acquirer will have to do very little restructuring work.3Com balance sheet . Last quarter's balance sheet revealed almost a half million increase in the "investments" item under current assets. I am assuming that this reflects 3Com's share of Juniper and Extreme Networks. Moreover, the cash position increased again to more than $1.7 billion, even as the company repurchased almost $400 million of its own stock. Thus, a 3Com acquirer will end up with a stronger balance sheet after the acquisition. 3Com's cash and investment position is unique in the tech world. Just as an example, Cisco, with a market capitalization of 22 times that of 3Com has about the same amount of liquid assets as 3Com. Even Microsoft has considerably less cash than 3Com, adjusted for its market capitalization.The Palm spinoff . 3Com appears to have done most of the work needed to separate Palm from the rest of the company in preparation of the IPO. An acquirer will have the flexibility of either keeping Palm or proceeding with the spinoff. Therefore, Palm is now an asset rather than a potential complication to any acquirer.Low current 3Com stock price . In spite of the spinoff and upside earnings surprise, 3Com stock has hardly moved. This must be a source of considerable frustration to 3Com management and BOD. It must also be a source of delight to any potential acquirer who has seen 3Com become more and more attractive (because of 1, 2, and 3 above), while its price remains the same. This state of affairs increases the chances that 3Com mgmt and BOD may throw in the towel, and a potential acquirer may increase his offer to a respectable level.Potential of a rapid increase in 3Com stock price soon . The next few months will see the nationwide launch of PalmVII and palm.net, accompanied by a high visibility ad campaign. Early indications of success could propel 3Com stock rapidly higher. A potential acquirer may need to act before such news has a chance to affect 3Com stock considerably. Also, the next quarter promises to be another barn-burner and there could be a considerable 3Com stock increase in anticipation of the news.Perceived high tech stock overvaluation . The stocks of most potential 3Com acquirers are very high, and many believe are highly overvalued. Any market correction may result in these stocks dropping much more rapidly than 3Com's stock, which is already very undervalued relatively to the market. Potential acquirers have an incentive to act quickly before the relative valuation between their stock and 3Com stock changes to their disadvantage.3Com insiders have a lot to gain from an acquisition . 3Com insiders control close to 5% of 3Com stock -- a relatively high percentage among high tech companies. For example, EB owns directly almost 2 million shares in addition to considerable options. An acquisition at close to $50 will make him a centimillionaire. Other CEOs that sold their companies for lots of money seem to be having a lot of fun on Silicon Valley lending their money and expertise to high tech startups. Slogging it out with Cisco, without the Palm, and with most of their wealth tied in 3Com stock may not be as much fun.An acquisition must be done before the Palm IPO . I understand that otherwise pooling of interests cannot be used and the acquirer will be penalized in accounting for the acquisition.
