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To: Eric who wrote (16988)	9/14/1998 1:32:00 PM
From: The Phoenix	Respond to of 77400

Interesting reading re: INTC and COMS. fnews.yahoo.com SAN FRANCISCO -- Just imagine how frustrating it must be for Intel (Nasdaq:INTC - news) CEO Craig Barrett these days. His company makes the fastest PC chips in the world, but is hampered by slow modems and clogged-up phone lines -- there aren't enough data flowing fast enough to justify such costly chips. Intel's bandwidth pinch is so keen that it's hunting around for a networking company. Or so goes the market talk this week. As reported in his column yesterday, TSC's own Herb Greenberg named 3Com (Nasdaq:COMS - news) as Most Likely to Get Sucked Into the Intel Empire. Herb suggested that Intel executives were spending an inordinate amount of time over at the networking equipment supplier. The result? Shares of 3Com jumped by as much as 11% to 28 1/8 before settling the day 7.6% higher at 27 5/16. The stock's upward move, on a day when the stock market nose-dived, won the attention of Dow Jones and CNBC. But does it make sense? This is not the first time that Intel's name has been associated with an acquisition. Other possible targets include: network equipment makers Cabletron (NYSE:CS - news) and Ascend (Nasdaq:ASND - news) and analog chip maker Analog Devices (NYSE:ADI - news) . For Intel, these are big fish that could cause it indigestion: 3Com boasts a $10 billion market capitalization; Ascend comes with a $8.3 billion price tag, Analog Devices has a $2.4 billion market cap; and Cabletron $1.3 billion. Intel's largest purchase to date, Chips & Technologies, cost it a mere $400 million. Sure, Intel desperately needs to speed up development of data networks for its core buisness. "If you had not a 56k modem but a 1-megabit link to the Internet, people would say 'This 266 mhz Pentium II is jus-s-st too slow,' and that would be magic to Craig Barrett's ears," said Dataquest semiconductor analyst Nathan Brookwood. Up till now, Intel has been trying to propel bandwidth development by making small investments in networking companies. In the past year it bought small stakes in half a dozen networking software companies such as Network Computing Devices and Corollary. Yet, acquiring 3Com would be far more difficult. Intel is already under scrutiny by the Justice Department for possible antitrust violations, and the acquisition of graphics chip maker Chips & Technologies last year spurred a broad-based investigation by the Federal Trade Commission. A purchase of 3Com could have federal antitrust investigators salivating, said Donaldson Lufkin & Jenrette analyst Charles Boucher. (DLJ does not have an underwriting relationship with Intel.) Why? 3Com has a very strong market in adapter cards, also known as network interface cards or NICs. An Intel/3Com merger would mean that the combined outfit would control as much as 70% of the market for these devices. Such an acquisition would also goes against the Intel culture: Historically, the Santa Clara, Calif., company has captured market share through aggressive pricing rather than mergers and takeovers. Besides, Intel's buying 3Com wouldn't offer a seamless fit. 3Com sells to corporate customers rather than pipeline suppliers, and it is the pipeline that Intel needs to speed up. "The issue is how would a 3Com-Intel combo be more effective than 3Com and Intel acting independent?" Brookwood said. Cabletron or Ascend would make more sense, Brookwood said, because those companies cut to the heart of the issue: how to get more digital subscriber lines to the market faster. Analog Devices, meanwhile, is in the analog business, which is also integral to network communications. But why buy a giant like Analog Devices when there are at least half a dozen other analog players like Burr Brown (Nasdaq:BBRC - news) and Semtech (Nasdaq:SMTC - news) , for example, that would come with a much lower price tag? What's clear is that Intel cannot afford to stand back and let the network companies set the pace. Inexpensive chips have plagued Intel's earnings this year. For the second quarter that ended in June, the company reported income of $1.2 billion on flat revenues of $5.9 billion -- down from $1.6 billion in income a year earlier. Concerns over falling PC-chip prices has left Intel's stock sluggish, closing at 79 1/16 yesterday, down from a 12-month high of 99 1/4. After the market closed yesterday, Intel offered up some good news to investors. It said strong PC sales would bring its third-quarter revenues in 8%-10% higher than the previous quarter, contrary to previous forecasts that sales growth would be flat. But Intel's revenue growth doesn't necessarily translate into income growth. For income to soar, Intel needs bandwidth to generate PC sales. "If the rate of bandwidth growth remains sluggish and the bottleneck becomes the network itself and not the PC," said DLJ's Boucher, "Intel can't put more higher-performance chips in the marketplace."