RoboCom packs double punch

The proposed $6.6 billion merger of 3Com (COMS) and U.S. Robotics (USRX) is sending shock waves across the networking industry today.

The Santa Clara, California-based 3Com specializes in desktop network interface cards (NIC) and networking hardware for local and wide area networks, while U.S. Robotics (USR), headquartered in Skokie, Illinois, is a dominant player in desktop modems and remote access servers. The combination of the two could spell trouble for companies such as networking leader Cisco Systems, high-end remote access player Ascend Communications, and struggling low-end remote access entrant Shiva.

"It's an unusual merger in the sense that they are very complementary companies," notes Michael Howard, president of the Infonetics Research consultancy. "It builds a powerhouse of end-user connections."

"It just doubled, theoretically, the number of desktops they own," added Don Miller, an analyst with market researcher Dataquest.

"helvetica"="" size="-1" color="#cc0000"> Janice Roberts, 3Com marketing VP, on merger benefits

3Com and USR executives said the combined desktop presence of the two companies approaches 100 million users. The merged company should be able to drive networking to the desktop in ways that may prove daunting to competitors, according to analysts, particularly Intel, which has made it clear it wants a larger piece of the networking pie in recent weeks and has initiated a NIC price war with 3Com.

"This merger is a continuation of what [3Com] has been doing, only on a larger scale," said Beda Fong, analyst for the Dell'Oro Group.

But the combination of 3Com and USR--a confluence that will retain the name 3Com--could have its most significant effect on 3Com's currently minimal presence in wide area remote access networking. USR's remote access servers maintain a huge presence in the Internet service provider market and will replace 3Com's gear moving forward, according to a 3Com spokeswoman.

USR technology will also soon be added to 3Com's strengths in corporate enterprise networking, according to Casey Cowell, current chairman and CEO of USR, which is not good news for Cisco and Ascend.

Other areas where synergies between the two companies may be felt is in the developing cable and digital subscriber line (xDSL) markets. "He who plays the game best now is in the best position to take advantage of those markets going forward," Cowell said, alluding to the newfound clout of the 3Com-USR combination.

The new "RoboCom," as one competitor characterized the merger, will own a large percentage of the "edge" of the network, meaning desktops that are networked into local area switching hardware. Add 3Com's growing wide area business and its to the newly acquired remote access prowess and the company will be able to offer customers a compelling end-to-end networking solution, which has proven to be a trend in the industry. A recent report from Forrester Research found that 40 percent of customers preferred to go through one vendor for networking equipment.

"There's a lot of things that make a lot of sense in this," noted Dataquest's Miller. "I give it a high probability of success."

Analysts say Cisco in particular should be worried because the combination of 3Com and USR will have a much greater market impact and presence, testing Cisco's ability to drive the networking market in its direction. From a product standpoint, the two will butt heads for remote access dollars and networking solutions. But the more profound change will be the influence a newly transformed, $5 billion 3Com has on the marketplace as it exploits its ubiquity.

"It's end to end. That's what customers want, but Cisco isn't end to end. They really aren't at the edge of the network," USR's Cowell said.

Analysts agreed. "This gives 3Com a real advantage at the edge of the network," said Virginia Brooks, manager of network technology at the Aberdeen Group. "I think it's an aggressive move by 3Com to go after market share."

With the recent woes of Bay Networks, 3Com has been viewed as the primary competitor to networking kingpin Cisco. But Cisco executives downplayed the merger, noting that it signaled yet another trend toward consolidation in the networking industry.

"Our success and leadership in this area will spawn more relationships like this," said Don Listwin, senior vice president of market development at Cisco. "We expect to see other moves like this."

"It doesn't really strengthen them in the enterprise, it helps them in the channel," he added about the companies.

Cisco, a veteran of several acquisitions including last year's $4 billion purchase of StrataCom, uses a five-point list when contemplating moves: shared visions, shared cultures, short-term wins, long-term wins, and geographic proximity. "This scores pretty low on that checklist," Listwin said, adding that the merger was a risky "bet-your-company" move similar to the merger of Synoptics and Wellfleet Communications as Bay Networks.

Representatives at Ascend refused to comment on the merger.