3Com Restructures, Sheds Its Low-Growth Product Lines
After struggling for years as a runner-up maker of networking equipment, 3Com Corp. announced Monday a radical plan to revive the company’s growth by ending its business in high-end networking gear and low-end analog modems.
The restructuring follows the company’s successful spinoff of its hot Palm Pilot division earlier this month, and will focus 3Com on making equipment for consumers, small- and medium-sized businesses and Internet service providers. The reorganization will also trim Santa Clara-based 3Com’s work force by 2,500 to 3,000 jobs.
“This is a new strategic direction,” said 3Com Chief Executive Eric Benhamou. “About one year ago, our growth stalled and I said then we needed to fundamentally change our direction. . . . We need to complete our transformation and the time is now.”
3Com’s restructuring is a concession of the company’s failure to beat bigger and more nimble networking companies, such as Cisco Systems, and of 3Com’s past strategic blunders, which saddled the company with low-margin products like analog modems that connect computers to the Internet over phone lines.
Benhamou said the company’s new strategy is to focus on faster-growing markets with such popular products as wireless home networking equipment, high-speed cable modems and equipment that can send telephone calls and data over the Internet.
The company’s plan was announced Monday after the market closed during a meeting to report its third-quarter earnings.
3Com earned $97.4 million last quarter, or 27 cents a share, beating analyst estimates by 2 cents. The company’s stock, which shot up recently because of its spinoff of the Palm unit, was up 56 cents to $68.56 in anticipation of the earnings report and rumors of the company’s restructuring plan.
As a result of its latest moves, the company expects to take pretax charges of $200 million to $300 million.
Sutro & Co. analyst Patrick Houghton said the restructuring was a sensible move for 3Com, which needed to discard its low-growth product lines.
He said 3Com could further enhance its position by eventually spinning off its products for Internet service providers.
The spinoff strategy has so far proved successful for 3Com.
The hand-held Palm Pilot, a personal electronic gadget that stores addresses, calendars and to-do lists, was one of 3Com’s hottest products, although it was largely unrelated to the company’s other product lines.
The stock of the new Palm company opened at $38, netting 3Com, which still owns 94% of the company, $785 million.
The stock zoomed up to $165 on its first trading day high. Since then, Palm’s stock has slid downward, closing unchanged Monday at $55.25.
In 3Com’s restructuring plan, its modem business will be handed over to a new joint venture made up of 3Com, Taiwan-based Accton Technology Corp. and NatSteel Electronics of Singapore.
Approximately 250 3Com employees in engineering, marketing, sales and support will transfer to the new company, to be headquartered in the Chicago area.
More than 200 3Com sales, engineering and marketing staff will be shifted to one of 3Com’s new partners, Santa Clara-based Extreme Networks.
