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3Com stock gets boost

News that the networking giant's earnings slightly exceeded analyst expectations caused its share price to surge as much as 4 percent.

3Com (COMS), after beating revised third-quarter earnings estimates, saw its stock jump as much as 4 percent in morning trading.

Shares of 3Com traded as high as 35 before closing the day at 33-1/8, up 1/2 from yesterday. The company announced its quarterly results after the market's close yesterday.

3Com reported a 17.4 percent increase in its third-quarter earnings, slightly beating analysts' estimates.

Earnings were $87.6 million, or 47 a share, for the quarter ending February 28, compared with net profits of $74.6 million, or 42 cents a share, a year ago.

Analysts had lowered their estimates to 46 cents per share for the quarter, according to First Call, after company officials late last month warned of slowing third-quarter sales.

Eric Benhamou, 3Com chairman, president, and chief executive, reiterated this week that weak revenue growth continued through the third quarter as users decided how to expand their networks and implement intranet technologies.

But revenues for the quarter rose 30 percent, to $786.8 million, compared to a year ago. Sales did come down from the previous quarter, by four percent.

After a sustained boom for networking companies over the past few years, there appears to be a growing sense that revenue streams may slow this year due to a network transition period. New technologies, such as switching based on the IP protocol and gigabit-speed Ethernet, may simultaneously draw interest and create confusion in the customer base, as administrators tread cautiously.

3Com is also seeing renewed competition from giants like Intel in the network interface card (NIC) market, which accounts for close to 40 percent of 3Com's revenue. A price war is pushing down margins on the high-volume PC cards, which is not good news for 3Com in the short term, according to analysts.

These concerns have contributed to Wall Street's recent selloff reaction, as have subtle statements from networking company leaders. For instance, 3Com stock dropped nearly 30 percent one day in February and Cisco Systems stock has been heading downward ever since president and CEO John Chambers made similar comments concerning market softness.

3Com's revenue slowdown and its spiraling share price could add a new wrinkle to merger negotiations with modem and remote access giant U.S. Robotics.

Under the proposed deal, 3Com will exchange 1.75 shares for every share of U.S. Robotics. Based on 3Com's 39-1/8 share price the day before the acquisition plan was announced, it would be a $6.6 billion stock swap deal, making it the largest data networking acquisition in the United States.

But the company's stock has since fallen 14 percent to close today at 33-5/8--making the merger approximately a $5.7 billion deal.