Updated from 3:37 p.m. EST
Investors awaiting the full spinoff of the
may see the network system maker splinter more businesses from its core.
3Com plans to make a major announcement at an analysts' conference in New York on Monday, and there is speculation that slowing growth rates in computer-networking products are changing how 3Com views its own business plan. Sales of network system products slowed to a crawl, increasing just 4% for the first half of 1999 over the comparable period in 1998, when the sales of handheld devices from Palm are excluded.
3Com had no comment on its plans.
"They have hired consultants
McKenzie & Co.
to pursue strategic positioning for the company," said Paul Sagawa, an analyst at
who rates the stock a strong buy. His firm has done no underwriting for 3Com.
The first likely candidate for sale or spinoff, he said, would be 3Com's computer networking segment, which deals with Fortune 500 clients.
"They run smack dab into the 800-pound gorillas like
," he said. "They might be better served by focusing on the small- and medium-sized businesses."
In fact, the rate of growth of network products has practically been cut in half in two years. Sagawa forecasts the growth rate in the low teens for 2000 but runs his own model assuming a more conservative 10% growth rate. In 1998, the industry growth rate was 20%.
Nevertheless, 3Com's stock had run up to new highs on March 1 ahead of Palm's initial public offering, but has since fallen sharply as investors ponder the value of the remaining pieces and management's intentions.
On Thursday, 3Com's shares gained 3 7/16, or 5.6%, to close at 64 1/2, still well off its 52-week high of 119 3/4. Palm slipped 3/16, or 0.3%, to close at 55 9/16, well below its first-day high of 165.
The difference in the stock market value of the two companies has narrowed substantially since Palm began trading on March 2. But Palm, with a market capitalization of about $31 billion, is still bigger than 3Com, with a market cap of about $22 billion, even though 3Com still owns 94% of Palm. That stake is expected to be spun off within six months.
One criticism of 3Com is that there are no synergies between its business segments and it draws management in several directions. Its large portfolio of networking products includes switches, hubs, remote access systems, routers, network management software, network interface cards, modems and handheld connected organizers.
Sagawa said he suggested to Chris Paisley, 3Com's chief financial officer, that the company's communications carrier business was too small to compete against the larger companies. "He agreed and said that it would have to either expand or be sold to someone who could make it work," the analyst said.
The bigger problem is that networking prices are falling and there is nowhere 3Com can hide from colossal Cisco, which has also found higher growth rates in its small- and medium-sized businesses, along with gross lower margins.
"We expect that gross margins will continue to decrease in the future, because we believe that the market for lower-margin remote access and switching products for small to medium-sized businesses will continue to increase at a faster rate than the market for our higher-margin router and high-performance switching products," Cisco said in its quarterly report with the
Securities and Exchange Commission
As a result, Cisco may look to spin off or sell some of its networking assets to focus on higher margin optical networks.
, of the same mind, announced two weeks ago plans to spin off its
networking businesses to shareowners, forming a separate company that will focus directly and independently on the enterprise networking market.
Richard McGinn, Lucent's chairman and chief executive officer, said in a statement that the company would concentrate greater resources on fast-growing areas like optical networking, Internet infrastructure and wireless networks.
Lucent noted in its last quarterly report that networking contracts are fewer and larger. These pressures had set off frenetic consolidation among rivals like Lucent and Cisco, each trying to become the single source for networking equipment of all kinds. But companies are reconsidering those acquisitions and searching for ways to lighten up and focus on higher growth markets.
Analysts expect that Monday's announcement from 3Com will enhance that trend.