Big is bad and small is good, at least for investors in computer networking stocks in the wake of
agreement to acquire
in a $6.6 billion stock swap.
Stocks of the bigger players in this field, such as
, were down on fears that the combined 3Com/U.S. Robotics could prove too big a competitor, says Amar Senan, an analyst with
Volpe Welty & Co.
in San Francisco. Such competition would, at the least, mean lower profit margins.
"It's probably the most serious challenge these companies have faced in a long time," says Senan.
"The strategic rationale driving the deal is to create a more balanced company to compete with Cisco," Peter Swartz, an analyst with
, adds in a report today. "However, there is no change in the competitive dynamics over the next six to nine months. In fact, the potential disruptions within the new 3Com could actually work to Cisco's advantage."
Swartz also notes that Ascend could gain from potential disruptions at the new 3Com. "However, given Ascend's lofty P/E multiple
about 66 times trailing earnings and the close proximity
of the new 3Com to ASND in terms of competitive positioning, this could cause some pressure on the stock."
Meanwhile, at least one smaller company in the field,
, climbed on the news because of speculation that the 3Com/U.S. Robotics combination will spur other mergers and acquisitions among competitors.
"There was a rumor that Ascend was going to buy Shiva," says Senan at Volpe Welty. "Perhaps now there will be more pressure to act more aggressively."
While a recent selloff trimmed the price-to-earnings ratios of many companies in this sector, Senan expects them to rebound over time.
still sports a P/E above 100.
"The P/Es will expand, but people are waiting for 3Com and Cisco to report numbers," says Senan. He adds that the P/Es fell after some computer networking concerns missed analysts' estimates, while the industry as a whole was hurt by worries that there was a sector-wide slowdown, which Senan says hasn't proven true.
Meanwhile, the overall stock market was trending downward.
By Erle Norton