3Com's
Spectacle
by Randy Befumo
(TMF Templr)
ALEXANDRIA, VA, (May 23, 1997)/FoolWire/ -- Three months ago, the
consensus wisdom held that INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> was going to
obliterate 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>. On February 6th, Intel cut as much as 40%
off of prices for network interface cards (NICs). Intel slashed prices on
its Fast Ethernet 10/100 megabit NICs to $99 from $159, dropping the price
on those units to the point where they were as cheap as much slower 10 megabit
NICs. Widely viewed as auguring disastrous price cuts for 3Com, suddenly
the Street was abuzz with the notion that Intel was going to destroy 3Com
in the NIC market, a product that makes up more than 40% of 3Com's total
revenues. Needless to say, the smart money began selling 3Com shares and
within days they were below $40 after having traded as high as $73 1/2 on
January 23rd.
Negative sentiment about 3Com had already been amassing after 3Com Chief
Executive Eric Benhamou made comments to analysts in December about slowing
growth in the corporate networking market. The price cuts that 3Com announced
on February 10th to
maintain pricing parity with Intel only exacerbated that slowdown's affect
on the company's earnings, causing 3Com to warn that third quarter net would
be "in the mid-$0.40s to low $0.50s" on a per share basis. Analysts had been
looking for $0.60 EPS, 42.8% growth compared to the $0.42 EPS that the company
made in the prior year. Knowing the quarter was going to be viewed as a disaster
anyway, 3Com actually undercut Intel on 10/100 megabit NIC pricing, quoting
their product at $94 each in lots of 100. 3Com also announced price reductions
on low-end hubs and some switches. 3Com ended up earning $0.47 per share
in the quarter, towards the low end of expectations.
Further complicating an already complicated picture, on
February 27th 3Com announced
that it was merging with U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>. The deal valued
each share of U.S. Robotics at 1.75 shares of 3Com, or $63 1/2 on the first
day of trading after the merger. Skeptical analysts viewed the deal as the
weak marrying the weaker, with 3Com under assault in the NIC arena buying
up a U.S. Robotics that was bound to lose the standards war for 56 kilobit
per second modems. Although U.S. Robotics had launched its own "X2" technology
roughly a month before the ROCKWELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> consortium began shipping
their own version, Rockwell had managed to erode some of U.S. Robotics
substantial lead time and still had the majority of the original equipment
manufacturer (OEM) market. With more and more modems shipping in PCs and
not bought on store shelves, many believed that the handwriting on the wall
was plainly visible.
Needless to say, amidst all of the hysteria, 3Com and U.S. Robotics shares
promptly fell below the level they were at when the merger was announced.
In fact, 3Com fell to levels it had not seen since the end of 1994, hitting
a low of $24. Unhappy U.S. Robotics shareholders saw their company valued
at $42 a share, as their stock slipped back to October 1995 levels. Panicked
e-mails from otherwise reasonable sources called for the sale of all 3Com
shares. As 3Com shares plunged to the lowest valuation relative to trailing
sales and earnings that had been seen since the company exited the software
business in 1993 and was crushed by 40% in a few days, most observers were
advising that the shares be sold... perhaps even sold short.
If it was not bad enough that analysts were painting NICs and modems as future
growth areas for Intel and consequently major future disaster for the "new
3Com," analysts also began to question whether or not the combined company's
crown jewel, its remote access gear, could cut the mustard against ASCEND
COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> and CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>.
As for corporate switches, forget it. Cisco owned that business, so 3Com
did not have a chance there either. The ChipCom acquisition two years before
had yet to yield any benefits and 3Com's market share in that area was marginal
at best. How the company ever managed to get to $73 1/2 a share in January
could not be explained, as everyone under the sun was uniform in their
denunciation of the company's technology. One of the lead articles in
Upside Magazine ridiculed the merger, painting it as the merger of
two commodity electronics business doomed to extinction by Intel. For a few
moments, all the smart people on Wall Street hated 3Com more than they hated
AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>.
Three months later, the doomsaying has cooled. 3Com shares stand at $43 1/4,
up 57.2% in the last 30 days. U.S. Robotics has risen 59%, getting the extra
2.8% as the discount to the implied merger price has narrowed. Over the same
period, Cisco Systems is up 38.6% and Ascend Communications has managed a
29.6% return that seems almost paltry by comparison. What has happened to
the grand thesis that held the "new 3Com" was a commodity electronics company
bound to be crushed by an Intel that had third-generation switch and remote
access technology? Reality, apparently.
In the past week, "third-rate" enterprise networking technology actually
won an award. The Transcend Enterprise Manager software received "Top Honors"
from Network Computing magazine, beating out Cisco and
CABLETRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>. More importantly, Dell'Oro Group reported on
May 15th that 3Com had gained "substantial" market share relative to Intel
in the first quarter. 3Com sold 1.3 million units, almost double Intel's
730,000 units. Finally, X2's comfortable lead over the competing 56KFLEX
technology from Rockwell has been magnified as a number of OEMs have had
problems getting the technology out to market. At 17.5 times forward earnings
estimates, 3Com has regained a multiple on forward earnings more in line
with a 20% annual grower, commodity product or not. Those who for a few months
turned the investment issue from a question of relative return on capital
to a battle between good and evil technologies have hopefully covered their
shorts and moved on with their lives, as their thesis is apparently not going
to pan out.
At any rate, it has been quite a show.
RELEVANT MESSAGE BOARDS:
3Com
Corp. (COMS) *
Ascend
Comm. (ASND) *
Cabletron
Systems (CS) *
Cascade
Comm. (CSCC) *
Cisco
Systems (CSCO) *
US
Robotics (USRX) |