Market thinks USR was no bargain
3Com investors voice their displeasure over the megamerger with U.S. Robotics, sending the stock down 10.3 percent.
      928K Chris Paisley on the timing of the deal |
3Com closed at 35 a share, down 4 points from yesterday. U.S. Robotics shareholders weren't really excited either. Its stock crept up only slightly before ending the day down 1-7/8 to close at 59-1/8.
Analysts note that the purchase price may have played a role in the drop.
"Some people question whether this was the right time for the companies to get together. Because 3Com's stock has recently gone down, it makes the deal more expensive," said Rakesh Sood, an analyst with Hambrecht & Quist. "And U.S. Robotics is poised to roll out its high-speed modem technology, so it was expected the stock would go higher anyway. So some people question whether the premium paid to them was too low." 3Com earlier this month saw its shares drop by nearly half due to a competitor dropping its pricing on adapter boards.
Under the merger deal, 3Com will swap 1.75 shares for each share of U.S. Robotics, a deal valued based on yesterday's trading price at $6.6 billion. Analysts noted that if 3Com had reached a merger agreement in early February when its shares were trading around 75, it would have been able to offer a lower exchange rate.
3Com might have been able to offer slightly more than 1 share for each share of U.S. Robotics several weeks ago, said Noel Lindsay, an analyst with Deutsche Morgan Grenfell.
But he noted that 3Com paid a low premium of 12 percent for U.S. Robotics. This premium is lower than typical networking acquisitions, but 3Com's depressed share price may have been a factor when negotiating this premium above its current stock price, Lindsay said.
Paul Deninger, chief executive of technology mergers and acquisitions firm Broadview Associates, said most technology deals go for a premium of 45 percent over the acquired company's stock price.
"This 3Com deal would probably be in the bottom 20 percentile for premiums in tech deals," he said.
Lindsay noted, however, that U.S. Robotics' shareholders, which will inherit 3Com stock via the merger, may do well in the long term--given that 3Com's stock took a hard fall, reducing its chances for a further decline and that the company has a strong financial foundation.
"We think 3Com may outperform the market over the next 6 to 12 months," Lindsay said.
Meanwhile, analyst David Takata with Gruntal & Company said it's hard to gauge whether 3Com overpaid for U.S. Robotics. He noted that both companies' stock have fallen in recent weeks, so even if an agreement was reached several weeks ago, U.S. Robotics stock would have been higher also.
"I'm not so sure the exchange ratio would have been different," Takata said.
Meanwhile, Takata cut his 3Com recommendation to "neutral" from "outperform" for the long term.
But despite the lack of enthusiasm, Sood says it's not very likely that shareholders will vote down the proposed merger. After all, while the timing may have been poor, many observers think the business case for the merger has some appeal.
"Both companies need the other's technology and presence from a networking sector point of view," he said.