In a surprise move that reflects intensifying competition and consolidation in the rapidly growing $24-billion computer networking business, Santa Clara, Calif.-based 3Com Corp. said Wednesday that it will acquire modem giant U.S. Robotics Corp. for about $7.33 billion in stock.
With the purchase, 3Com would have 12,000 employees and annual sales of about $5 billion, putting it on par with networking leader Cisco Systems Inc.
The merger “dramatically alters the networking landscape,” said 3Com Chief Executive Eric Benhamou. “We are excited at the opportunity to bring a wealth of technologies and brands under a single umbrella.”
Computer networks are used to route information between computers within a single location or scattered locations.
Benhamou said the merger with Skokie, Ill.-based U.S. Robotics will enable the company to offer “end-to-end” networking solutions and create synergies in new technology development and distribution.
But analysts questioned Benhamou’s use of stock to make the purchase at a time when 3Com’s stock price is down sharply. 3Com shares have plunged from a 52-week high of $81.375 to $39 on Wednesday. U.S. Robotics shares have sunk from a 52-week high of $105.50 to $61 on Wednesday.
“It’s not clear to me that the combination of 3Com and U.S. Robotics provides significant competitive force against Cisco,” said Bill Rabin, an analyst with J.P. Morgan Securities. “This is not one that will make Cisco break into a sweat.”
U.S. Robotics’ primary strength is in modems--a product that has increasingly become a commodity subject to cutthroat pricing. Analysts say the modem business will do little to strengthen 3Com’s core network offering.
“The real question is whether the combination is greater than the sum of the parts,” said Rakish Sood, senior technology analyst at Hambrecht & Quist, a San Francisco investment bank. At the same time, Sood said, both companies may have had little choice but to merge, given the increasingly tough competitive environment.
Indeed, 3Com’s shares plunged recently after the company warned of slower sales growth in key areas. 3Com’s problems stem partly from computer chip giant Intel’s recent sharp price cuts, as it pushes into 3Com’s business of providing networking components for personal computers.
“The handwriting was on the wall that these two companies were going to be traversing a tough road by remaining independent,” Sood said. “As networking becomes more complex, customers want to do one-stop shopping.”
While 3Com’s strength is in local-area networks, which join computers at a single location, U.S. Robotics’ modem technology gives 3Com strength in building wide-area networks, which can use modems to tie together corporate networks in disparate locations.
Analysts said the merger could accelerate an already hot trend toward consolidation in the networking business. While networking companies have already been major buyers--Cisco grew to its current size by swallowing 13 companies in the last three years--some non-networking companies, such as Lucent Technologies, are taking advantage of lower share prices to buy into the business. The Goldman Sachs multimedia networking stock index has fallen 15% over the last month.
In the merger--which Benhamou predicts will be completed by summer, subject to regulatory review--3Com will exchange 1.75 of its shares for each share of U.S. Robotics, including employee options yet to be exercised. The deal values U.S. Robotics at $68.25 a share based on Wednesday’s closing price of $39 for 3Com--only a 12% premium to U.S. Robotics’ closing price of $61.
The deal was announced after markets closed. U.S. Robotics was trading at $71.50 in after-hours trading, while 3Com rose to $41.
U.S. Robotics, whose name came from a company that appears in a novel by science fiction writer Isaac Asimov, has experienced tremendous growth in recent years, seeing revenue climb to $2 billion last year--up tenfold from sales in 1992.
The low premium that 3Com is offering for U.S. Robotics may reflect Wall Street expectations that the modem company is about to announce disappointing results for the quarter ending March 31.
While U.S. Robotics has recently come out with a new generation 2X modem, it is locked in a standards battle with a group of 300 companies led by Rockwell International. That fight is likely to result in further price cutting as the two camps battle for market share. On Wednesday, 28 companies announced the creation of a coalition that is expected to back the Lucent and Rockwell standard.
“Cisco is the target,” said Carl Russo, chief operating officer at Xircom Inc., a Thousand Oaks-based networker. “Although 3Com has been a credible competitor to Cisco and was in the No. 2 position, as 3Com has grown Cisco has grown even faster.”
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Computer networking giant 3Com’s decision to buy modem maker U.S. Robotics follows a dive in both of their stocks, after 3Com warned of slowing sales growth.
U.S. Robotics Corp. (Wednesday’s close): $61
3Com Corp. (Wednesday’s close): $39