3Com stock jumps on renewed rumors

Shares in the networking firm soar 16 percent amid rekindled rumors that 3Com might sell all or part of its business.

3 min read
3Com's shares shot up 16 percent today amid rekindled rumors that the struggling networking firm might sell all or part of its business.

Rumors that Ericsson, Siemens, or other firms may be interested in buying 3Com ignited heavy trading today as 33.8 million shares of 3Com stock exchanged hands.

3Com's shares, which opened at $22.31, shot up 21 percent to $27 before closing at $25.50.

"It's not the first we've heard the rumors, but selling makes strategic sense," said analyst Michael Davies, of Punk Ziegel.

A 3Com spokesman today declined to comment on the merger speculation. When rumors of a possible Siemens buyout were spread in March, 3Com's chief operating officer Bruce Claflin said the company was not in merger negotiations with the German telco equipment giant.

The buyout rumors resurfaced again today after a published report by the California Technology Stock Letter, which speculated that Ericsson executives have recently met with 3Com executives on a potential buyout.

"The talk is all over the Valley that several companies have met with 3Com and the most recent one down there is Ericsson," said Michael Murphy, editor of the investment newsletter.

Ericsson and four other telephone equipment makers--Siemens, Alcatel, Lucent, and Nokia--are among 3Com's potential suitors that need the firm's data networking equipment as they scurry to build new telecom technology that merges voice and data, Murphy said.

"The situation is that 3Com is the second largest data communications equipment maker behind Cisco. And the third largest one--Bay Networks--was already bought by Nortel," Murphy said. "So you've got one big guy left that has a broad suite of products. There's one target and five companies that need to buy them. One of these companies will bite the bullet."

Alcatel may be the least likely to take a chance on 3Com. The company has already spent more $2.5 billion on three data-oriented networking companies in recent months.

3Com has struggled financially as prices and sales of networking cards and modems have dropped. Its stock price has plunged from the high 40s in January to the low 20s this month.

Yet 3Com executives have said they plan to move away from the slow-growing analog modem and networking card market to focus on emerging opportunities, including cable and DSL modems. The company also plans to dedicate more resources to its home networking and IP telephony, as well as to its successful PalmPilot line of handheld PCs.

Gruntal analyst David Takata said a 3Com buyout is possible. "3Com is a good networking company. They have good brand status. And the Siemens, Alcatels and Ericssons are too voice-centric right now. They need to build a data portfolio."

But Ericsson is in the midst of a management transition, Takata said, "so it makes you wonder if they would do a takeover at a time like this, but they haven't made a move in terms of data yet, so they have to respond."

Davies, however, said Siemens is a perfect fit since the two companies have recently partnered to build telephony products for local corporate networks.

Murphy, of the California Technology Stock Letter, said Lucent might still be interested in buying 3Com, despite its recent purchase of Ascend. Such a move would allow Lucent to compete head-to-head with Cisco, he said.

Murphy speculates the next 60 days is the perfect time to close a deal, as 3Com's fiscal year closes at the end of May.

"3Com will have audited numbers, so the buyer doesn't have to do another audit," he said. "If someone bought them, they would have an entire fiscal year to contribute to it. It would make a lot of sense."