3Com's Financial Quandary

3Com Corp. may be rounding the corner in terms of its restructuring program, but its low stock price and market value will continue to pose a problem for the company, some observers say.

While 3Com beat analyst expectations in its first fiscal quarter of 2001, reporting a 12-cent-per-share loss instead of 34 cents, the company still posted $41.4 million in losses.

Excluding $127.5 million in revenue from the high end LAN/WAN switch business the company exited, 3Com reported a 20% increase in sales from the previous quarter, with $806.3 million in revenue from ongoing operations.

"Q1 was a strong bounce-back quarter," said 3Com CEO Eric Benhamou during a teleconference recently. "We are obviously encouraged by these results, but at the same time, highly aware that good execution must continue in order to create shareholder value."

Benhamou, who announced that he will cede the CEO position to 3Com President Bruce Claflin at year-end, acknowledged the company's low market value could pose a problem as the company tries to grow again.

"Our stock is trading at a discount compared to our peer [competitors], making stock-based acquisitions less affordable than other companies whose stock is trading at a premium," he said.

During the past six months, 3Com announced its plans to pull out of the core enterprise switch business and has since spun off Palm Inc. Over that time, the company's stock has fallen from a high of around $80 per share in March to a low of $19 per share as of last week. Currently the company's market valuation of $6.7 billion is less than one-quarter of the value of Palm, which is worth $28.9 billion.

The huge gap in market value between the two companies represents the different stages the two businesses are at, according Peter Andrew, a financial analyst and vice president at A.G. Edwards in St. Louis.

"The main reason for the big differential in valuations is that Palm is a company that's running full-blast ahead vs. 3Com, which is a company that is still somewhat in transition," Andrew says. "The question is: What is it going to look like afterwards? And when are they going to start executing?"

Whether 3Com's low market value makes it a tempting acquisition target for a competitor remains to be seen, Andrew says, but he thinks it's unlikely.

What is more likely, he says, is that 3Com could continue to spin off parts of its company that conflict with its new focus on small and midsize corporations and the consumer market as an attempt to boost its value.

"The carrier business is one business that the company has been doing very well in," Andrew says, referring to 3Com's remote access concentrator and software business for carriers. 3Com's Carrier Networking Business has increased its sales by 29% from last year's first quarter, taking in $167.2 million in Q1.

"If they start spinning that off . . . that could be beneficial. It's really run differently from its commercial and consumer business. It's just like Palm, which was a very different operation," he says.

Still, analysts in the technology industry don't see 3Com as being on the block.

"I think 3Com could be bought," says Tere' Bracco, director of enterprise infrastructure research at Current Analysis Inc., a Sterling, Va., research firm. "But they're not in any way looking to be bought.

"They do seem a bit undervalued so they are out there, but who can you name with enough capital that needs them right now? There aren't any potential suitors that really need 3Com to fill in any product marketing gaps," Bracco adds.

The company would also be a drag financially if it were to be bought, says Frank Dzubeck, president of Communications Network Architects, an industry analysis firm in Washington, D.C.

"At the moment, [3Com] would have to stabilize its losses" before it could consider selling itself off, Dzubeck says.

"If they were to sell the company right now, it would be a frustrating experience," he says. "They would have a really depressed price, and someone would have to absorb all those losses. It's not ripe yet to be acquired. It has to be cleaned up a little first."

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