3Com Goes Private

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The Marlborough MA LAN switching (and a little enterprise VoIP) company agreed to be acquired by Bain Capital and Huawei, the Chinese telecom equipment company for $2.2 billion.

 It is not entirely surprising that 3Com would go private after Enterasys went private equity in 2006 and more recently Avaya went private. What is surprising to some industry analysts is that the $2.2 billion offers only a slight premium for the non-Chinese assets of the corporation. Since the company's closing of the H3C acquisition of 49% of the 3Com-Huawei joint venture not already owned in March 2007 for $882 million, (which valued the subsidiary at ($882 million / 0.49 = $1,800 million) the Asian juggernaut that is H3C continued to drive growth for 3Com.

Sadly, investors did not appreciate the growth in that market, realizing that the weaker 3Com outside China did not have the moxi to be able to export that growth (export the technology, yes but growth, no) to other parts of the world. That's because enterprise applications of LAN switching technology in China is a new, large and growing market and 3Com China technology and sales are market leading, whereas in the USA and Europe the more mature and in fact original markets for the technology are way more mature, in their 3rd or 4th generation deployments and fundamentally dominated by Cisco, the enterprise brand that did not have the scars that 3Com brand does.

3Com still lacks the market discipline to avoid the coupons of the small business market, and suffers from substantial promotional spending which continues to shore up the weak revenue, but does nothing for reducing their cost basis. Even in the just ended 1st Quarter 2008, 3Com lost $18 million, although the company may be at bottom, since they also made an extraordinary payment of $59 million to H3C management.

3Com will continue to take steps to IPO the TippingPoint division.

See my valuation note.