3COM TO RESTRUCTURE AFTER SUCCESSFUL PALM SPINOFF>>>>>>
news.cnet.com.
3Com to restructure after
successful Palm spin-off
By Dawn Kawamoto and Wylie Wong
Staff Writers, CNET News.com
March 16, 2000, 1:20 p.m. PT
Network equipment maker 3Com plans to restructure its business
and may make an announcement as early as Monday, when the
networking company releases its quarterly earnings results.
The struggling networking company is seeking ways to bolster its
business and stock, following the spin-off of its popular and
fast-growing handheld Palm unit. That move helped propel 3Com's
lagging stock price to record highs, as investors snapped up its shares
as a way to participate in the Palm IPO.
3Com's shares have since reversed course
in the aftermath of Palm's debut earlier this
month, losing about 25 percent of their
value.
The company's woes are indicative of a
networking industry that is rapidly
morphing. Sales of equipment for corporate
networks, once the lifeblood of the
industry, have slowed, with the niche
entering a mature phase. In its place, many
of the fastest-growing networking
companies have targeted their technology at
Internet service providers (ISPs) and
telecommunications companies, taking
advantage of the growth of the Internet.
But 3Com was slow to shift its strategy to
account for this change in the networking
business.
The networking company is making the rounds to brief industry
analysts this week on its major plans, said industry sources. In the past,
it has used analyst meetings--like the one scheduled for next week in
conjunction with earnings--to disclose major news, such as the
company's acquisition of US Robotics in 1997.
But according to one source familiar with the board's thinking, 3Com
has yet to get down to the nitty-gritty in determining which lines of
business to spin off or sell.
"There are too many moving parts right now, and no decision has been
made," a source said.
3Com representatives declined to comment.
The company's restructuring efforts are the latest in a string of moves
the company has attempted over the past few years. Over the past year,
for example, the company decided to focus on its higher-growth
businesses such as Internet telephony, home and wireless networking
and digital subscriber line (DSL) modems, and move away from its
slower-growing network adapter cards and analog modems--an area
that had been its bread-and-butter business.
In this latest restructuring, 3Com will likely split its corporate
business--consisting of network switches--from its
telecommunications-oriented business which consists of telephony
equipment and related network access gear, according to sources.
The company's plans could also include a new role for chief Eric
Benhamou, the company's longtime leader who has
come under criticism in light of the firm's strategic
missteps, sources say.
Analysts speculate that 3Com may follow a strategy
taken by competitors Lucent Technologies and
Cabletron Systems and spin off its stagnant corporate networking
business to concentrate on the faster-growing, more profitable service
provider market.
"The writing is on the wall. They have to follow suit with what Lucent
and Cabletron have done," said Cahners In-Stat Group analyst Laurie
Gooding.
If 3Com spins off its slower-growing businesses, the move may help
the networking company's financial picture, but it raises questions of
who would invest or buy such businesses.
Analysts say 3Com needs to reorganize after spinning off its prized
Palm Computing division and could break the company up into two or
three pieces. For the past year, 3Com's quarterly revenue has stagnated
in the $1.4 billion to $1.5 billion range. Palm, which was 3Com's fastest
growing division, made up 17 percent of the company's overall revenue.
The company has often been linked to German giant Siemens in the
past, a close partner of 3Com.
Dataquest analyst John Armstrong believes 3Com needs to turn its
corporate networking business into a wholly owned subsidiary, leaving
3Com with its carrier business, aimed at telecommunications carriers
and Internet service providers.
3Com executives have said the carrier business makes up more than 10
percent of the company's overall revenue and its highest growth
business now that Palm is gone. But its sales of network equipment to
large businesses fell 12 percent sequentially last quarter to $593.2
million.
The move would give the carrier division separate earnings--and allow
3Com to show Wall Street analysts and investors stronger growth.
3Com is pursuing a strategy of selling Internet-based equipment to
service providers which will allow them to offer more services to its
customers, such as the ability to send faxes over the Internet, Web
conferencing and call routing--a service that can redirect a call made to
a work phone to a cell phone or voice mailbox.
While the corporate networking business has slowed down, analyst
Jeremy Duke of Synergy Research Group said the corporate business
does have some growing areas, including Internet-based phone
systems. The new corporate business could include wireless and home
networking technologies, two markets that are expected to take off in
the coming years.
Burton Group analyst Dave Passmore believes the company can split
into three: carrier, large corporate networking, and small business and
home networking.
"They have to do something," Passmore said. "One of the advantages of
these spin-offs is to offer employees lots of stock options and make
them feel like they're working for a start-up, and give them a reason to
get out of bed in the morning."
A 3Com reorganization would end speculation concerning the
company's future. 3Com is the lone remaining large struggling
networking firm rumored to be an acquisition candidate. Newbridge
Networks was recently acquired for $7.1 billion by telecommunications
equipment firm Alcatel, while Cabletron chose to break into four
companies.
"This is just another example of the deconstruction of the networking
industry, where the companies are trying to focus their resources on
the area of greatest opportunity and growth," Armstrong said.
News.com's Ben Heskett contributed to this report.
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