3COM article.......Is Ericsson Planning to Acquire 3Com?
Maimi, FL, April 22nd /SHfn/ -- Don't bet on who's going to "take the [pretty girl at the dance] home" says Peter Lieu, a
Boston-based Needham & Co analyst, who closely follows 3Com Corp. Lieu reiterated a Strong Buy recommendation on
Wednesday and told StockHouse.com that 3Com shares could double by next year. California Technology Stock Letter
analyst Michael Murphy is "absolutely" convinced that 3Com will be taken over, if the company reports weak Q4 earnings in
June. Lieu disagrees, having increased his Q4 earnings expectations to $0.36/share. Lehman Brothers analyst Tim Luke told
StockHouse, "They [Ericsson] are definitely looking at a larger acquisition in the equipment base and are specifically interested
in 3Com's remote access business." Luke reached this conclusion after an Ericsson conference call for analysts.
Takeover speculation concerning 3Com is nothing new. Rumors flew in early March that Siemens would acquire a portion of
3Com's assets. Where does this leave the poor investor, stuck on the 3Com story, despite two straight disappointing quarters?
Lieu argues that this may be the bottom in 3Com shares, having previously picked three major bottoms over the past few years.
The analyst told StockHouse.com, "… at the bottom, when nobody has any faith in Eric Benhamou [CEO of 3COM] - this is
the time to buy. That's why I put it on the Buy." Michael Murphy agrees, telling StockHouse.com, ". If the tech market falls
apart, we may have a $3 risk in here, but that's not a lot. That was another reason we made the call. We thought that the bulk
of the price-risk of it taken out." Oddly, Murphy appears on two radio shows today, warning about just that, "Internet stocks
could be vulnerable to a sell-off. Technology stocks would likely join in the fall." Because of a Hambrecht & Quist tech
conference in San Francisco, next Tuesday, Murphy also suggests that 3Com "should see a move up."
Takeover rumors were denied by investor relations staff from Ericsson and 3Com. Ericsson spokesman Per Bengtsson told
StockHouse.com, "I don't know of any, but I'm not informed about what discussions we may have." 3Com spokesman Peter
Ruzicka told StockHouse.com, "We don't comment on rumors or speculation as a matter of policy." When asked about Lieu's
remarks about the company, Ruzicka hinted at a possibly stronger Q4 earnings report, saying, "… we said during the quarterly
earnings for Q3 was that we had made some strategic investments, that would be generating revenue benefits in subsequent
quarters, including broadband, LAN telephony…"
The biggest problem with a takeover may not be the acquisition partner, but 3Com's CEO Eric Benhamou. Says Murphy, "I
think the problem, at this point, more is the other way around, which is 3Com's really not willing to sell the company for $30. I
doubt they're willing to sell it for $30. So somebody has to swallow hard, because they have to pay a pretty big fat premium to
the current price." The Internet chat forum piñata, Benhamou, appears to be defended by a minority. Lieu comes to
Benhamou's defense, saying, "When this guy became President of 3Com, the revenues were $400,000. Through 1997, the
company grew from $400,000 to $2.9 billion. How many executives do you know over a ten-year period can do that to a
company?"
Perhaps, there is reason to appear sanguine over the countdown to either a positive Q4 or a takeover of 3Com. When
interviewed by StockHouse.com, Lieu claimed, "We put multiples on the sale of the different divisions and we came up with a
number that was about $11 billion - rounding it out. But again, what we said was if the company started to develop some
momentum, the value could be 30% higher." Lieu is looking for a double in 3Com shares. Murphy is just as optimistic, saying,
"If they could give people a plausible scenario on just one of those two [competing with Cisco and modems], you'd probably
see the stock move up. If they could do it on both, I think you'd see the stock back at $30 in a hurry."
And, according to the analysts StockHouse.com interviewed, the breakup value is at a premium to the share price. Murphy's
analysis pointed to "probably in the $40 to 50 area." He justified that calculation based upon 3Com's "name and the retail
channels." His favorite suitors include Ericsson or Alcatel, adding, "somebody who's not in the U.S. market and needs to get
in." One of the stronger arguments for a takeover comes from Lieu, who said, "They also have incredible cash flow generation.
They're going to generate this year - $750 million of net-free cash. How many companies do you know that can generate that
much net-free cash? This is not cash flow including depreciation. This is the cash balance increasing from the beginning of the
year to the end of the year."
With a company, such as 3Com, an enigma is not easily solved. Aside from the blunder that most perceive in the acquisition of
U.S. Robotics and 3Com's strategic error in pursuing the end-to-end user, while Wall Street fell in love with the Cisco business
model, 3Com remains, in the mind's of both analysts, a value stock. Something momentum traders dread. Where is Warren
Buffet when you need him? |
