3Com to restructure after successful Palm spin-off

The struggling networking company is seeking ways to bolster its business and stock, following the spin-off of its popular and fast-growing handheld Palm unit. That move helped propel 3Com's lagging stock price to record highs, as investors snapped up its shares as a way to participate in the Palm IPO.

3Com's shares have since reversed course in the aftermath of Palm's debut earlier this month, losing about 25 percent of their value.

The company's woes are indicative of a networking industry that is rapidly morphing. Sales of equipment for corporate networks, once the lifeblood of the industry, have slowed, with the niche entering a mature phase. In its place, many of the fastest-growing networking companies have targeted their technology at Internet service providers (ISPs) and telecommunications companies, taking advantage of the growth of the Internet. But 3Com was slow to shift its strategy to account for this change in the networking business.

The networking company is making the rounds to brief industry analysts this week on its major plans, said industry sources. In the past, it has used analyst meetings--like the one scheduled for next week in conjunction with earnings--to disclose major news, such as the company's acquisition of US Robotics in 1997.

But according to one source familiar with the board's thinking, 3Com has yet to get down to the nitty-gritty in determining which lines of business to spin off or sell.

"There are too many moving parts right now, and no decision has been made," a source said.

3Com representatives declined to comment.

The company's restructuring efforts are the latest in a string of moves the company has attempted over the past few years. Over the past year, for example, the company decided to focus on its higher-growth businesses such as Internet telephony, home and wireless networking and digital subscriber line (DSL) modems, and move away from its slower-growing network adapter cards and analog modems--an area that had been its bread-and-butter business.

In this latest restructuring, 3Com will likely split its corporate business--consisting of network switches--from its telecommunications-oriented business which consists of telephony equipment and related network access gear, according to sources.

The company's plans could also include a new role for chief Eric Benhamou, the company's longtime leader who has come under criticism in light of the firm's strategic missteps, sources say.

Analysts speculate that 3Com may follow a strategy taken by competitors Lucent Technologies and Cabletron Systems and spin off its stagnant corporate networking business to concentrate on the faster-growing, more profitable service provider market.

"The writing is on the wall. They have to follow suit with what Lucent and Cabletron have done," said Cahners In-Stat Group analyst Laurie Gooding.

If 3Com spins off its slower-growing businesses, the move may help the networking company's financial picture, but it raises questions of who would invest or buy such businesses.

Analysts say 3Com needs to reorganize after spinning off its prized Palm Computing division and could break the company up into two or three pieces. For the past year, 3Com's quarterly revenue has stagnated in the $1.4 billion to $1.5 billion range. Palm, which was 3Com's fastest growing division, made up 17 percent of the company's overall revenue.

The company has often been linked to German giant Siemens in the past, a close partner of 3Com.

Dataquest analyst John Armstrong believes 3Com needs to turn its corporate networking business into a wholly owned subsidiary, leaving 3Com with its carrier business, aimed at telecommunications carriers and Internet service providers.

3Com executives have said the carrier business makes up more than 10 percent of the company's overall revenue and its highest growth business now that Palm is gone. But its sales of network equipment to large businesses fell 12 percent sequentially last quarter to $593.2 million.

The move would give the carrier division separate earnings--and allow 3Com to show Wall Street analysts and investors stronger growth.

3Com is pursuing a strategy of selling Internet-based equipment to service providers which will allow them to offer more services to its customers, such as the ability to send faxes over the Internet, Web conferencing and call routing--a service that can redirect a call made to a work phone to a cell phone or voice mailbox.

While the corporate networking business has slowed down, analyst Jeremy Duke of Synergy Research Group said the corporate business does have some growing areas, including Internet-based phone systems. The new corporate business could include wireless and home networking technologies, two markets that are expected to take off in the coming years.

Burton Group analyst Dave Passmore believes the company can split into three: carrier, large corporate networking, and small business and home networking.

"They have to do something," Passmore said. "One of the advantages of these spin-offs is to offer employees lots of stock options and make them feel like they're working for a start-up, and give them a reason to get out of bed in the morning."

A 3Com reorganization would end speculation concerning the company's future. 3Com is the lone remaining large struggling networking firm rumored to be an acquisition candidate. Newbridge Networks was recently acquired for $7.1 billion by telecommunications equipment firm Alcatel, while Cabletron chose to break into four companies.

"This is just another example of the deconstruction of the networking industry, where the companies are trying to focus their resources on the area of greatest opportunity and growth," Armstrong said.

News.com's Ben Heskett contributed to this report.