Investors bless 3Com-USR merger
As expected, shareholders approve the $8.5 billion deal.
The stock-swap deal, valued at approximately $8.5 billion, will officially close tomorrow, and 3Com will become a $5.5 billion company with 13,000 employees. That's wehn efforts to meld the two corporate cultures with end-to-end networking packages will begin in earnest.
Investors who attended the shareholders meeting appeared pleased with the deal.
"I do a lot of trading in stocks, but I've been holding on to [U.S. Robotics]. I also intend to buy more. I think we'll see the price climb to $80 to $90 a share in the first quarter," said Matthew Jones, who now holds 1,000 shares of 3Com stock. U.S. Robotics investors received 1.75 shares of 3Com for every share of U.S. Robotics they held.
Eric Benhamou, 3Com's chief executive and chairman, told shareholders to expect rapid integration of the two companies. "We intend to make the changes very quickly and not dribble them out," said Benhamou. "By the first quarter, we want to have our sales force fully integrated at all geographies. That's what we're doing in the short term."
A larger project that looms ahead is combining the product plans that both companies have laid out, Benhamou added. Specifically, he said, products that 3Com has been working on but has not yet announced may be changed or scrapped. "We had virtually no product overlap [with U.S. Robotics], expect for some internal projects. This merger will result in big news inside the company, but not to outsiders."
Wall Street wants to know how the merger will help 3Com save money. Benhamou said 3Com will discuss its plans about how to do that in the coming weeks, probably some time after the company reports its quarterly results on June 24, the last reporting period before the companies are combined.
3Com has said repeatedly that the merger would not drag down earnings for fiscal 1998. In fact, the combined company may possibly improve on Wall Street's current 3Com estimates. Benhamou stuck to that statement today but declined to provide a more precise projection of how the post-merger company will do financially.
Wall Street has a mixed earnings outlook for the merged company for fiscal 1998.
3Com has said they expect analysts' 1988 estimates to hold steady after the merger or even to increase. Wall Street has an estimate of $2.50 a share for fiscal 1998, according to First Call.
Farrokh Billimoria, an analyst with Hambrecht & Quist, expects the company's earnings to remain "neutral" next year and become "accretive" or increase in 1999. "The question is, however, how will they reach accretive in 1998, as they say could happen."
For the nine months leading up to the period ending February 28, 3Com reported revenues of $2.32 billion with net income of $284.8 million. Last year, the company reported revenues of $2.33 billion with net income of $177.9 million for the entire fiscal year.
"I think this was a good idea. There are a lot of synergies for the companies. U.S. Robotics is in the retail market and 3Com has never been there. I think this will create a stronger company," said Renee Coe, a 3Com investor who holds 4,000 shares of 3Com stock.
The road to the shareholders meeting has been rocky; investors in 
both companies filed class-actions suits opposing the deal and the U.S. Robotics lost a third of its value after the merger deal was announced in April.
The USR stock has since rebounded, partly due to a soldier-like campaign by company executives to convince shareholders and Wall Street that the merger was a capital idea.
For 3Com, the merger will give them an opportunity to offer their customers a one-stop shopping alternative for networking equipment and compete with the other megamerger announcement from Ascend Communications (ASND) and Cascade Communications (CSCC). For USR, the deal will enlarge the market for its x2 56-kbps technology overnight.
The merger is designed to maintain 3Com's lead in the middle-tier market that serves doctors and lawyers offices, home businesses, and other small companies. Competitors like Cisco Systems (CSCO), which mainly caters to the networking market for big corporations, and Cabletron Systems (CS) have both in the past year threatened 3Com by targeting these middle-tier customers.
3Com has conceded that its product line overlaps a bit with U.S. Robotics in the local network and remote access arena, but hasn't said how it will eliminate the overlap. The type and depth of cost-cutting measures, such as layoffs and plant closures or consolidations, have not been laid out.
The companies will have a challenge, of course, melding two corporate cultures and business operations.
"These are different business models and different geographic areas," said Stephen Dube, an analyst with Wasserstein Perella Securities. "They risk losing market momentum as they get it [the merger] together."
Still, 3Com has experience with this sort of thing; it has completed 12 mergers and acquisitions in the past five years, while U.S. Robotics has wrapped up 9 such deals of its own in that time.
This one took only three months to get to the public handshaking part, according to a recent SEC filing.
"helvetica"="" size="-1" color="#CC0000">January 8: USR's president and chief operating officer, John McCartney, met with representatives of Morgan Stanley and requested a list of a small number of potential strategic partners.
"helvetica"="" size="-1" color="#CC0000">January 16: Casey Cowell, USR chairman and chief executive. called Eric Benhamou, chairman and CEO of 3Com, to ask if 3Com might be interested in a deal.
"helvetica"="" size="-1" color="#CC0000">January 17-18: The 3Com board held its annual offsite meeting. 3Com management discussed with the 3Com board possible business combinations, including a possible combination with USR.
"helvetica"="" size="-1" color="#CC0000">January 22-23: Members of 3Com senior management met with members of USR senior management in California.
"helvetica"="" size="-1" color="#CC0000">January 24: Cowell spoke by telephone with USR board members Paul Yovovich, Peter Mason, James Cowie, and Terence Graunke to discuss a possible strategic combination with 3Com. 3Com also retained Goldman Sachs as its financial adviser.
"helvetica"="" size="-1" color="#CC0000">February 7-8: McCartney, Benhamou, Roberts, and Robert Finocchio, president of 3Com Systems, met in Paris to discuss cultural and organizational issues.
"helvetica"="" size="-1" color="#CC0000">February 9: USR and 3Com executed a confidentiality and standstill agreement.
"helvetica"="" size="-1" color="#CC0000">February 11: The 3Com board directed 3Com's management to proceed with merger discussions.
"helvetica"="" size="-1" color="#CC0000">February 24: The 3Com board met at its headquarters in Santa Clara, California, with members of management and representatives of Goldman Sachs and Gray Cary Ware & Freidenrich to review the terms. The 3Com board voted to give preliminary approval to the combination of 3Com and USR.
"helvetica"="" size="-1" color="#CC0000">February 26: The 3Com board unanimously approved the merger. Meanwhile, on the East Coast, a meeting of the USR board was held where they unanimously approved the merger. 3Com and USR issued a joint press release announcing the merger.
"helvetica"="" size="-1" color="#CC0000">March 13: The 3Com board approved the authorized number of shares of 3Com capital stock would be increased from 403 million to 1 billion, subject to shareholder approval.