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Technology Stocks : 3Com Corporation (COMS) -- Ignore unavailable to you. Want to Upgrade?

To: Scrapps who wrote (29122)	3/22/1999 8:27:00 PM
From: pat mudge	Read Replies (1) \| Respond to of 45548

From the Financial , March 23, 1999: 3COM: Group struggles to reverse decline The group faces some tough decisions to effect a turnround, reports Roger Taylor One of the best-known names in the networking industry, is in a bind. After a profits warning earlier this month and a share price that has fallen about 70 per cent over the past two years, 3Com is under pressure to restructure - but there are no obvious solutions for the sprawling group with its diverse product range. The company has a lot of good businesses under its control, ranging from the popular Palm handheld computing division to successful operations in the new and fast-growing cable modem market. But these are dwarfed by its activities in lower-growth, lower-margin businesses. 3Com's biggest markets are analog modems, network interface cards - which connect PCs to corporate networks - and hubs, relatively simple devices for linking PCs. These are the areas where 3Com is market leader, but they are also the slowest growing parts of the networking equipment market. Merrill Lynch, for example, forecasts the market for network interface cards to rise 5 per cent this year, while revenues from hubs are expected to fall 20 per cent. That compares with growth rates of between 20 per cent and 50 per cent for most of the rest of the networking industry. At the start of this month 3Com reported that a slowdown in enterprise sales in the US and Latin America would cut earnings per share for the second quarter to about 23 cents, compared with the 36 cents that analysts had been expecting. That news helped end a brief revival in 3Com's share price, which has been on a downward trend for more than two years. From a high of almost $80 at the end of 1997, the shares are now languishing at $24, having almost halved since the start of this year. The company has long been rumoured as a takeover target, but its diverse range of operations make it an awkward business for anyone else to buy. There is a growing consensus among analysts that the company needs to reform itself. A first step would be to pull out of the market for networking equipment sold to telephone companies and internet service providers. 3Com has failed to make much headway in this sector, where it faces larger, better funded rivals such as Cisco Systems, Lucent Technologies and Nortel Networks. Luke Szymczak, analyst with Prudential Securities, regards this move as essential: "There's no choice - it is a very competitive market, the business requires deep pockets, it would be better off in other hands." He says this is now clearly on the agenda, although it has taken 3Com a long time to come to that conclusion. There are plenty of likely buyers, with European telecoms equipment makers such as Siemens of Germany, Ericsson of Sweden and the UK's GEC all looking to expand their data networking capabilities. Siemens, that has a number of alliances with 3Com, is seen by some as the natural buyer. Hans Schwarz, the newly appointed head of the 3Com-Siemens joint venture, said last week that the two companies were still discussing how they could further their relationship. Some would like to see 3Com merge its telecoms-related business into Siemens's new Unisphere division, which is focusing on the same market. Other analysts believe 3Com should go even further and pare operations back to its areas of greatest strength - hand-held computing and networking for the home and small office. Maribel Lopez, an analyst with Forrester, the industry research group, believes this might be the best long-term strategy. She suggests 3Com should consider moving out of the market for large business customers and instead focus on personal, home and small business customers. "It would make a very nice stepped down Palms-to-home networking business," she says. But the risk in that strategy is that the market could come to view 3Com as more of a consumer products group than a technology leader - and that would probably do little to boost its share price. To date, however, 3Com shows little sign of such radical thinking. Its proposed remedies are to cut investment in its lower margin, lower growth operations and focus investment on its higher growth areas. But with the high-growth areas accounting for only about 10 per cent of revenues, it could take too long for this policy to have an impact on the overall growth rate of the company. It will need a more drastic approach to bring about any quick reversal in the decline of 3Com's share price.