How 3Com, Became 1Com

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Event Summary

[20 March 2000 - CNet] Struggling network equipment maker 3Com (NASDAQ:COMS) today announced a broad restructuring plan to resuscitate a networking business that's been plagued by more than a year of stagnant revenue growth.

3Com said it will exit the slow-growing portions of its networking business and focus on emerging technologies, such as wireless networking, Internet telephony, and high-speed Internet access through cable and digital subscriber line (DSL) modems, as previously reported.

In a concession to its bigger rivals Cisco Systems (NASDAQ:CSCO) and Nortel Networks (NYSE:NT), among others, 3Com will bow out of the high-end networking business. The beleaguered networking firm will sell some high-end equipment to Motorola (NYSE:MOT) and kill off its family of CoreBuilder high-end switching products, turning to former competitor Extreme Networks (NASDAQ:EXTR) for that type of technology, as previously reported.

3Com also plans to shed its slow-growing analog modem business. The company will create a joint venture with networking firm Accton Technology and manufacturing company NatSteel Electronics, which will build and sell analog modems that use the U.S. Robotics name. 3Com will own a minority share of the joint venture, company executives said.

The firm will retain its networking gear to consumers and small and medium-sized businesses, as well as much of its Internet-based networking equipment and software aimed at Internet service providers (ISP) and telecommunications carriers.

In after-hours trading, 3Com's shares inched up $1.38 to $69.94. However, investors drove 3Com's share price down to $62.50 by 0945 EST in early trading on 21 March.

Market Impact

First 3Com spun off Palm, Inc. Now it's walking away from 45% of its revenue stream and 23% of its workforce. What will be left?

Cash. 3Com CEO Eric Benhamou noted that 3Com's cash account exceeded US$3 Billion during the analyst briefing on 20 March. It's going to use that to fund its restructuring.

3Com will be left with investments in high-potential sectors such DSL, a still-profitable SOHO (small office home office) and midrange networking business, and relatively high brand awareness. Core competencies - NICs, hubs - remain at the forefront of their business. It can afford to await a payoff from its new technology investments. But as football great Bill Parcells once noted, high potential means you haven't done anything yet.

3Com lacked focus after its 1997 acquisition of U.S. Robotics. That risk continues. After this "restructuring", 3Com will also be involved in:

  • Unified messaging, thanks to its US$ 90 Million acquisition of Call Technologies

  • High speed Internet service for the hospitality industry (CAIS Internet)

  • Internet appliances integrating technologies from SonicWall (NASDAQ:SNWL), Inktomi (NASDAQ:INKT), and F5 Networks (NASDAQ:FFIV)

  • A DSL/Software partnership with Copper Mountain Networks (NASDAQ:CMTN)

  • A partnership in the once and future U.S. Robotics modem company

  • A new startup, Atrica, focused on metropolitan area networks

The potential for corporate distraction remains high.

3Com's COO Bruce Claflin spent some time reviewing the results of 39 focus groups. Consumers believe that 3Com does a good job at shielding them from network complexity, and helping them get connected. How about purchasing? 3Com should use its capital base to enhance and extend its direct sales channels, and look for some preferred placement on collaborative direct sales PC sites, such as Dell. (At press time, Dell was featuring networking products from Intel, Proxim, D-Link, and Netgear. Where was 3Com?)

Who wins? In a word, Cisco. 3Com is ceding the high-end networking business and shedding businesses (Palm, U.S. Robotics) that hold little appeal to Cisco Systems. We continue to project a 40% likelihood that 3Com and Cisco consummate some sort of joint venture or other collaboration.

The upside is also huge for L3 switch vendor Extreme Networks, which has already had sales growth of 230% in the last year. (Incidentally, even Palm's growth was "only" 116% for the last quarter.)

User Recommendations

If you were a NetBuilder, CoreBuilder, or PathBuilder customer, you're not anymore. Users should transition to competing products, such as Cisco's Catalyst 6500, if they don't have a comfort level with Extreme Networks or Motorola's future support of those products.

However, 3Com's not going away in its bread and butter markets. They remain a preferred vendor for SOHO/midmarket hubs and NICs.

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