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CEO change signals new era for 3Com

With Eric Benhamou's planned exit as chief executive of the networking company, an era for the industry ends.

With Eric Benhamou's planned exit as chief executive of 3Com, an era for both the networking company and the industry has ended.

3Com has suffered through the pitfalls of strategic shifts and missed technology opportunities, but analysts say Benhamou leaves it an altered, yet stable, company.

Benhamou, one of the few remaining prominent networking technologists, yesterday announced plans to step down by year's end. He will be replaced by president and chief operating officer Bruce Claflin, a former IBM and Digital Equipment executive who has led 3Com's daily operations the past two years.

"Benhamou is very tech savvy, but he didn't understand the market dynamics and the pace of change," said Lehman Brothers analyst Mark Sue. "Claflin will accelerate the pace of change at 3Com as it targets new growth markets. The company has taken a lot of steps to improve revenue growth, and he will improve the pace."

In recent times, 3Com was viewed on Wall Street as lacking some essential operational elements, particularly during a rough stretch following the company's 1997 acquisition of US Robotics.

But after 10 years as CEO, during which he guided the company through several years of financial turmoil, Benhamou is stepping down from his post with the company's fortunes headed in the right direction. He will remain the company's chairman.

3Com on Tuesday posted strong first-quarter earnings, which comes after a major reorganization earlier this year when the company spun off Palm and shed its slow-growing businesses. 3Com lost $41.3 million, or 12 cents a share, beating analysts' predictions of a loss of 33 cents a share. Revenue grew 20 percent sequentially to $806.3 million for the quarter.

The good results prompted several Wall Street analysts to predict 3Com will become profitable within the next two quarters, despite 3Com executives' declarations that the company will become profitable three quarters from now, in the fourth quarter.

Handing over the reins
With 3Com's financial woes seemingly over, Benhamou said now is the perfect time to hand over the reins to Claflin. Although Claflin's history is with PC manufacturers, Benhamou said he has been a quick study in the networking industry the past two years.

"Bruce was not a networking industry specialist coming in, but he's learned a great deal about our business, our technology and our competitors," Benhamou said in an interview. "He co-architected the transformation we went through the last year. His fingerprints are all over the company, and the company is in great shape strategically. It feels like the company is now on a growth path."

Benhamou of late has been more frequently linked to supporting various causes, such as narrowing the so-called Digital Divide, with Claflin serving as the company's primary spokesman more often.

3Com has grown smaller over the past year after spinning off Palm, shedding its slow-growing analog modem business, and killing off its networking equipment arm for large businesses. The company now caters to small and midsized businesses and consumers, as well as software and equipment to service providers.

3Com's new focus on emerging markets, such as high-speed modems, wireless and home networking, and Internet telephony, is starting to take hold, accounting for 18 percent of total revenue. In the first quarter, sales from emerging technologies grew 70 percent sequentially to $147 million.

Analysts say the executive change is positive for 3Com.

"They needed some fresh blood," said Cahners In-Stat Group analyst Mike Wolf. "Not that Benhamou did a terrible job, but some CEOs would have been fired over the US Robotics acquisition and all the indigestion that caused."

Under Benhamou's helm, 3Com's revenue grew from $430 million in 1990 to $5.8 billion last year. But Benhamou's leadership had been questioned by analysts, investors and company insiders for the past year. Analysts say Benhamou is a technologist at heart but took too long to ponder strategic decisions when quick, decisive action was needed.

The troubles began in 1997, following 3Com's $6.6 billion acquisition of modem maker US Robotics. The company found itself with an unexpectedly large inventory of analog modems that temporarily forced it to discontinue sales.

Afterward, Benhamou tried a number of different strategies, but none of them proved sustainable. First the company attacked Cisco by pushing sales of high-end equipment to telecommunications carriers. When that effort failed, 3Com focused on its sales to businesses.

In 1999, 3Com briefly announced it would enter the market for storage area networks, but then quickly backpedaled. In the spring of 1999, Benhamou declared the popular Palm handheld device as central to 3Com's overall strategy. Then in the late summer, he switched gears and announced the company would spin off its Palm Computing unit so 3Com could concentrate on its networking roots after failing to convince the 3Com board of directors that Palm should be kept as an in-house asset.

After the fits and starts, the company now appears to be on the right track with its reorganization earlier this year. And analysts say they expect Claflin will do a good job.

"Benhamou has been associated with things of the past--the US Robotics merger...the Palm spinout," said Lehman Brothers' Sue. "Bruce is very (Wall) Street savvy. He understands the importance of improving shareholder value and moving away from the legacy pretty quickly. He understands he has a big opportunity with the brand name that 3Com carries, and he will do very well."

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