News that 3Com may be an acquisition target is not surprising, given the company’s depressed stock price and investor impatience, analysts say.
On Tuesday, the Wall Street Journal‘s Deal Journal blog reported that 3Com is being approached by private equity firms and Nortel. 3Com declined to comment on the reports.
Private equity firms have been particularly active of late in the high-tech sector. Silver Lake Partners, mentioned along with Bain Capital by the WSJ as a possible suitor for 3Com, recently teamed with TPG to take Avaya private in an US$8.2 billion deal.
Such activity, coupled with anxious activist investors — Citadel, for example, owns a 10 per cent stake in 3Com — and management’s slow progress in generating growth from its traditional Ethernet switching business could put some pressure on 3Com to make a move, according to UBS Warburg. Warburg notes that 3Com’s plan to takes its TippingPoint subsidiary public “is a step in the right direction” but not the final straw.
“We think 3Com will need to significantly step up restructuring efforts for the traditional business and/or monetize its assets,” writes Long Jiang, communications equipment analyst at Warburg, in an investor bulletin.
“3Com’s market cap of $1.7 billion is even smaller than the sum of several assets it acquired, including Huawei-3Com (valued at $1.8 billion) and TippingPoint (acquired for $430 million),” Jiang writes. “Yet the company’s earnings power is hurt by management’s slow progress to turn around the deeply money-losing traditional 3Com business.”
Jiang states in his report that 3Com’s traditional Ethernet business has a negative-10 per cent operating margin. 3Com also acquired Huawei’s share of the H3C Huawei-3Com joint product development venture for just under $900 million.
3Com did not immediately respond to a request for comment on the Warburg report.
Separately, Jiang notes that if Silver Lake acquires 3Com it could try to team it up with Avaya, which could impact sales of Extreme Networks gear. Avaya is “an important resale channel” for Extreme, accounting for about 10 per cent of sales, Jiang states.
