3Com to acquire U.S. Robotics Deal would create No. 2 networking firm

February 27, 1997|By NEW YORK TIMES NEWS SERVICE

SAN FRANCISCO -- 3Com Corp. said yesterday that it would acquire U.S. Robotics Corp. in a $6.6 billion stock swap that would create the second largest computer networking company.

The acquisition would strengthen 3Com's hand against competitors, particularly Cisco Systems Inc., the leader in computer networking, by broadening its product line.

While 3Com, based in Santa Clara, Calif., is a market leader in local area network equipment. It is best known for its Ethernet adaptor cards, which connect personal computers to local area networks, but has lagged in the wide-area-network devices that connect over much longer distances.

U.S. Robotics is a major maker of remote access servers, which handle incoming calls at services such as America Online Inc.

Indeed, 3Com Chairman and Chief Executive Eric Benhamou said U.S. Robotics' business supplying Internet service providers and online services was one 3Com has long coveted.

"What this gives 3Com that they didn't have before is a full end-to-end solution for networks," said Peter Stoneberg, a managing director with Montgomery Securities, referring to the ability to offer local networking and remote networking devices. "Cisco changed the landscape of this industry. The others have to catch up."

The deal was announced after the market closed yesterday, but shares of U.S. Robotics surged in after-hours trading. The stock was up $10.50, or 17 percent, to $71.50, and 3Com shares were up $2, or 5 percent, to $41, before the Nasdaq market halted trading of both stocks.

In the deal, each share of U.S. Robotics' stock will be exchanged for 1.75 shares of 3Com stock, which values each U.S. Robotics share at $68.25 based on yesterday's closing price of $39 for 3Com.

The relatively small premium being paid for U.S. Robotics reflected the fact that the deal was essentially a merger of equals, analysts said. But they added that the deal made good strategic sense for both companies. Ever since Cisco went from being a router company to a company that offered a full line of networking devices -- mostly by acquiring a string of companies -- competitors have struggled to keep up.

The combined company would have $5 billion in revenues and more than 12,000 employees. Benhamou of 3Com will continue in his positions, while Casey Cowell, U.S. Robotics chairman and chief executive, will become vice chairman of 3Com's board.

John McCartney, U.S. Robotics president and chief operating officer, will join 3Com's executive staff. U.S. Robotics' Chicago headquarters will become a division of 3Com.

U.S. Robotics, based in Skokie, Ill., is primarily known for consumer modems, which link personal computers to telephone lines.

But Benhamou said: "We don't view U.S. Robotics as a modem company, although that is a valuable technology they own. In fact, they are a leader in the remote access space."

Analysts said the deal could pose a threat to Ascend Communications Inc., the market leader in remote access devices, because 3Com's ownership will add credibility to U.S. Robotics.

The deal also will put additional pressure on Cabletron Systems Inc. and Bay Networks Inc. to broaden their product offerings.

Benhamou said both 3Com and U.S. Robotics excelled at producing devices that contained a large amount of their own technology but that could be sold at very competitive prices.

"We know exactly what it takes in a high-volume competitive market to grow share and maintain margins," Benhamou said.

"We've done this for 15 years and so has U.S. Robotics. We each have, relative to competitors, a very strong and deep focus on technology. We design the product at a deeper level than the competition, so we're in a good position to hang on to more of that value."

But the networking market is brutally competitive, and 3Com announced earlier this month that it would not meet analysts' estimates for its current quarter, which ends tomorrow.

3Com attributed the shortfall to slowing sales in December and price cuts by the networking division of Intel Corp.

3Com said revenues would range from $770 million to $810 million, up from $606 million in the comparable quarter a year earlier.

Pub Date: 2/27/97

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