3Com faces fierce rivals, collapsed deal

Question: My shares of 3Com Corp. are going nowhere but down. Any thoughts about their future? — F.C., via the Internet

Answer: The data-networking-equipment manufacturer and its investors must cope with the harsh reality that an attractive $2.2 billion buyout offer for the company was dropped.

Private-equity firm Bain Capital Partners LLC and its Chinese partner, Huawei Technologies Co., withdrew their bid with the explanation that the U.S. government intended to block it on national security concerns.

Among its numerous businesses, 3Com sells anti-hacking and other network security services to the U.S. Defense Department. The government apparently had feared that technology information could be leaked to China because of Huawei's 16.5 percent stake in the firm.

After the withdrawal news, 3Com shareholders nonetheless approved the proposal in order to seek a $66 million breakup fee on the legal grounds that Bain's rejection was invalid.

3Com sells data networking equipment to small and medium-size businesses, including network switches, wireless LAN access points, shared hubs, DSL routers, security software and network jacks. It faces fierce competition in virtually all of its businesses, with Cisco Systems Inc. a particularly strong competitor.

Shares of 3Com (COMS) are down 45 percent this year, following a gain of 10 percent last year and 14 percent in 2006. The firm had a net loss of $7.8 million in its third fiscal quarter that ended in February

Indication of the importance of China to 3Com is the fact that new Chief Executive Robert Mao, who was appointed in late April, is based in that country. This emphasizes the firm's growing and profitable business operations and joint ventures there.

Mao, 64, is a director and a former 3Com executive who lately has been an aggressive purchaser of the company's shares. The firm also hired Tropos Networks Inc. President Ronald Sege, 51, as chief operating officer. He is based in the U.S.

Experts believe that 3Com, once dominant in networking, outsourced too many services and overemphasized the small-business sector. It also got caught in the tech market plummet. It has shrunk and is struggling to get its cost structure in line with its smaller base. Top management turnover has been high.

Earnings are expected to rise 26 percent in the fiscal year that ends in May 2009. The forecast of a five-year annualized growth rate of 10 percent compares with the 15 percent increase expected for its peers.