Rumored bid for 3Com is considered unlikely
Parts of the company could attract suitors, many analysts believe
BY MONUA JANAH Mercury News Staff Writer
Takeover rumors continue to swirl about the fate of 3Com Corp., the Santa Clara-based maker of devices that connect computer networks, but analysts and people close to the company don't believe a sale is imminent.
However, there are pieces of the company that would be a good fit for a wide range of companies -- including Ericsson of Sweden, the giant European telecommunications-equipment vendor, and chip maker Intel Corp. -- analysts believe.
Although 3Com's sales grew 13 percent in its latest fiscal quarter, when compared to a year ago, and profits climbed to $89 million, the profits were lower than Wall Street estimates. And 3Com is facing increasing competition in almost all its major markets, while prices -- and therefore profit margins -- are declining. The company also lost time and energy trying -- unsuccessfully, according to insiders and industry analysts -- to digest its $6 billion acquisition of U.S. Robotics.
As a result of this, 3Com's stock went into a freefall early this year, before picking up recently as speculators profited from the takeover rumors. It closed Monday at $28.50, down six cents. 3Com said its executives are not in talks with other companies, adding that the company is not for sale. But there are sweeping changes under way in the computer-networking market. About 18 months ago, that market was comfortably dominated by the so-called Big Four: Cisco Systems Inc., 3Com, Bay Networks Inc. and Cabletron Systems Inc. Now, a slew of giant telecommunications-equipment companies -- each far bigger than the Big Four -- have pushed aggressively into this market. One of them, Northern Telecom, snapped up Bay Networks from Nortel Networks Corp. Cisco also is chasing the market for combined voice-and-data networks. Both 3Com and Cabletron are struggling. Lucent Technologies Inc., the $26 billion company that recently acquired Ascend Communications Inc. for $21 billion in stock, is one company often mentioned as a 3Com suitor. But it is an unlikely contender, industry analysts and others said. Lucent still has to complete the Ascend deal, pending regulatory approval. And it has already bought a string of smaller companies to flesh out its lineup of data-networking equipment. A Lucent spokeswoman declined comment.
A more likely suitor, analysts said, is Ericsson which -- like all the other major European telecommunications-equipment vendors -- is seeking an entry into the U.S. computer-networking market. ''Ericsson almost has to (make a major acquisition) in the U.S. soon,'' said Tom Nolle, president of CIMI Corp., a Voorhees, N.J., network consulting firm. ''They have a lot to gain if they play their cards right, and a lot to lose if they play their cards wrong,'' Nolle said. Ericsson did not return calls seeking comment.
Most analysts believe 3Com is unlikely to be sold in its current form, because no single buyer would want all the pieces of the company. ''What will have to happen is a complete corporate restructuring,'' said a financial analyst who asked not to be identified. ''If anybody comes in, it would be the express intent of doing such a restructuring.'' He added that a hostile takeover is unlikely, because such a bidder wouldn't get management's cooperation, or information about the revenues of each of the company's units. The analyst said that 3Com chief executive Eric Benhamou does not want to see the company broken up, and has been resisting any proposals that would result in the sale of pieces of 3Com. But Benhamou's resolve may be softening, he said, as it is becoming clearer that 3Com will find it almost impossible to compete with much bigger players.
Another scenario would be that Intel, which is trying to boost its fledgling networking business, would buy 3Com's enterprise networks business. Paul Sagawa, an analyst at Sanford Bernstein & Co., a New York investment firm, said that because Intel and 3Com together dominate the market for Ethernet adapters, Intel would probably face regulatory opposition if it tries to buy that business. But Intel could snap up part of 3Com's switch, hub and access router lines, he said. Intel declined to comment. Also in the picture is a possible combination between 3Com and Cabletron, which do have some complementary businesses. Cabletron, for example, has good relationships -- cultivated by a direct sales force -- with large companies that use Cabletron's high-end switches. Meanwhile, 3Com has a good relationship with distributors and resellers. |
