3Com seeks Chipcom for $775M

Electronic News, July 31, 1995 by Crista Hardie

SANTA CLARA, CALIF.--In the networking industry's latest merger, 3Com last week moved to acquire Chipcom Corp. for $775 million, boosting 3Com to the No. 2 spot behind Cisco in networking system revenue.

However, Chipcom late Friday said that Cabletron Systems has made a filing with the Federal Trade Commission, under the Hart-Scott-Rodino Antitrust Act, to acquire up to 50 percent of Chipcom. Initially, Cabletron is seeking to invest about $15 million in Chipcom, however.

3Com's surprise move to acquire Chipcom, a leader in multi-function intelligent switching systems, is the latest in a series of major mergers by networking companies. 3Com has made a string of acquisitions, Synernetics among the most recent. Chipcom, too, recently acquired hub vendor David Systems. Cisco in December purchased Kalpana, beating IBM to the punch. And Bay Networks, now in the industry's No. 3 spot, is itself the product of a Synoptics-Wellfleet merger.

Referring to the shrinking number of major networking companies, In-Stat analyst Jeremy Duke said "The trend is where the big players are becoming much, much bigger, and the small players are becoming much, much smaller," he said. The larger companies, he said, are so successful that they have the ability to acquire companies as they see fit, to broaden their technology bases.

"Cisco went out and bought Kalpana for $200 million and instantly had an Ethernet switch," he said. The 3Com-Chipcom deal could have interesting market repercussions as well.

Beside changing the top tier of the hub market, Mr. Duke said "It's a strong chip in 3Com's product mix." He noted that the new merger will allow 3Com to make the push away from adapter cards--which have accounted for more than half of total sales--and more toward systems.

Still to be seen is the effect of Cabletron's move last week to invest $15 million and perhaps more in Chipcom. Rob Held, Chipcom president and CEO, said, "We do not know what Cabletron's intentions are, and we remain fully committed to our previously announced merger with 3Com Corporation."

3Com last week also announced a formal agreement with the Networking Hardware Division of IBM Corp. to extend existing strategic agreements between IBM and Chipcom following the acquisition. The agreement also expands IBM's recent OEM agreement to resell 3Com products for the IBM PowerPC Series products, and will allow 3Com to expand the range of IBM products it currently carries under an OEM agreement.

Currently, Chipcom supplies IBM with the ONcore/IBM 8250 hub product and the ONline/IBM 8260 chassis which contains advanced IBM ATM and Token Ring technology. According to the new 3Com-IBM pact, the two companies will continue competitive development of that technology.

Following the proposed 3Com/Chipcom merger, the two companies' combined share of the worldwide hub market will be roughly 19 percent, based on 1994 hub port shipments. Already the largest vendor of stackable systems, 3Com will become the No. 2 vendor in the overall intelligent hub market, including both stackables and chassis-based systems. Chipcom had been the No. 6 vendor of hub ports.

Chipcom's engineering, marketing and manufacturing activities will continue to operate from its Southborough, Mass. headquarters under Bob Finocchio, 3Com's executive VP, Network Systems Operation. Chipcom's sales force will join 3Com's field organization, reporting to Bill Marr, 3Com's executive VP of worldwide sales.

A 0.53-to-1 stock swap sets the 3Com/Chipcom deal at an approximate value of $775 million, based on the closing price of 3Com common stock on July 26.