3Com, USR tie under scrutiny

Electronic News, March 3, 1997 by Jim DeTar

Santa Clara, Calif.--The proposed $7.3 billion merger of 3Com and Skokie, Ill.-based U.S. Robotics (USR) was met with a less than enthusiastic response by Wall Street, even though the combined company would constitute one of the most potent forces in the networking and communications markets with about $5 billion combined annual revenues and more than 12,000 employees in 132 countries.

The offer was made, 3Com executives said, to counter recent downward pricing moves by Intel in the Ethernet card business that have put pressure on 3Com, as well as to extend 3Com's presence in the networking market where it has lagged behind such competitors as market leader Cisco Systems, and to give it entry to the consumer markets through U.S. Robotics retail channels.

The combined company would be headed by 3Com chairman and CEO Eric Benhamou. Casey Cowell, CEO of USR, would join 3Com's board as vice chairman. Additionally, John McCartney, U.S. Robotics president and COO, will join Mr. Benhamou's executive staff and Mr. McCartney's management team will join 3Com's senior management as members of the company's operating committee. Chris Paisley will continue as 3Com's senior VP and CFO.

"The combination of 3Com and U.S. Robotics dramatically alters the networking landscape with the industry's broadest set of innovative, feature-rich network access solutions," Mr. Benhamou said in a prepared statement. "Together, with an installed base of over 100 million network connections, we can offer network users the fastest access to their local and wide area networks. The leadership and momentum we have will continue to define the next dimension of networking."

One aspect of the announcement that raised questions is the fact that different executives at the companies were giving out different information regarding the proposed merger.

For example, statements by Mr. Benhamou in media reports saying he doesn't expect any layoffs as a result of the merger, and he does not see any significant overlap in product lines, were apparently contradicted by 3Com senior VP of business development and marketing Janice Roberts, who discussed the merger agreement at the Robertson Stephens Technology Conference, which was taking place in San Francisco on the day the agreement was announced.

Who's the Boss

Ms. Roberts made it clear that 3Com would take over USR, rather than positioning it as a merger between equals. Analysts said this may be an attempt to head off the situation SynOptics Communications faced with its acquisition of Wellfleet Communications to create Bay Networks. There was confusion after that merger as to who was running the company that led to market stumbles for Bay Networks, analysts said.

Ms. Roberts also said there was definite overlap in the "LAN switching and remote switching" segments of 3Com and USR that would be offset by synergies in "broader distribution channels, stronger geographic coverage, focusing and consolidation of product plans technologies and businesses and economies of scale in manufacturing, purchase, sales and administration."

When asked at the conference about the possibility of layoffs, Ms. Roberts said, "You may see some reduction in force. We haven't identified the areas yet." She added, however, that "Both companies have aggressive hiring policies" and may take up much of the slack internally.

In an interview with Electronic News, Ms. Roberts discussed the motivations for the move. When asked what part Intel's recent downward price moves in the network interface card (NIC) market played in 3Com's decision, she responded, "Obviously, they (U.S. Robotics) have strong card technology. In terms of Intel, this changes the playing field. We offer products they don't. We provide entire systems to large customers, such as Wells Fargo and Adobe, where we do tens of millions of dollars of business.

"It's a push-and-pull strategy with NICs becoming more of a part of 3Com's business."

3Com and USR made the surprising announcement mid-week, saying that they have been in discussion for several months and were in serious negotiations for several weeks before concluding the definitive agreement, which calls for each share of USR stock to be exchanged for 1.75 shares of 3Com stock, which amounted to approximately $7.3 billion on the date of the announcement.

The extended length of the discussions may explain why 3Com made the takeover offer for U.S. Robotics at the end of February, when its stock had slid to around 39 points, versus a high of about 80 points at the first of the year, when 3Com would have apparently been in a better position financially to make the bid.

Question On Timing

The unusual fiscal timing prompted Alex Mendez, VP of enterprise marketing at competitor Cisco Systems--the market leader in enterprise networking systems--to comment in an interview: "One question I have is, why do this now with 50 cents versus a dollar? Why not do this at 80 (points) where 3Com's stock was a month ago, rather than at 39? It almost smacks of desperation."