Through TheFLY's Eyes: 3Com
from Joseph Lazzaro of Theflyonthewall.com
One Good Buy-Out...May Deserve Another
Now that 3Com (COMS) has purchased the rest of its H3C joint venture in China from Huawei Technologies for $882M, what could be up next for network equipment operator 3Com?
Try being bought-out, itself.
It’s almost paradoxical to state that a company that recently made a major purchase is a setting itself up to be acquired, but that may very well be the case with 3Com, given the increasing amounts of money available in capital markets, and the characteristics unique to this particular potential deal.
Sources say potential bidders for 3Com could include established companies, or possibly, although less likely, a private equity player, or possibly a company/private equity combination.
What’s generating the deal buzz? A purchase of 3Com may make considerable sense for an existing company operating in/near that space, and that also views 3Com as a suitable fit, both operationally and in terms of market characteristics. Analysts say that 3Com may make sense for a Juniper (JNPR) and Nortel Networks (NT).
Also, previously there were reports that private equity firms were interested in Huawei’s H3C stake: a private equity player may be interested in the total 3Com package now, but analysts say the more likely bidder, if one occurs, would come from a publicly listed company.
A combination of macro / sector / deal-specific factors appear to be driving this potential play. First, a considerable amount of capital exists in the current market – and ultimately a portion of it must be deployed – a factor that has helped drive recent buy-out/merger deals. Add the fact that 3Com could use the cash, and there are two data points that argue for a potential deal.
Also, analysts say 3Com has a very attractive tech-sector plum that bidders may try to pick: a strong position in the surging market of China. 3Com ranks second to industry giant Cisco (CSCO) in China’s telecom/networking equipment sector. Hence, with China’s economy growing at near-double-digit rates and with prospects for tech sector growth even rosier, any bidder that succeeds in a 3Com deal immediately vaults itself to No. 2 status in, arguably, the world’s No 1. growth market. Further, in its August quarter report 3Com said its H3C operation generated revenue of $170M and net earnings of $18.2M. Not a bad takeover plum, indeed, in the eyes of many analysts.
On Tuesday afternoon 3Com was down 40c to $4.10, Juniper was up 30c to $20.98, while Nortel was unchanged at $2.14. Meanwhile, Cisco was up 5c to $27.08.
Nevertheless, a potential bid could take other forms. The drop in 3Com’s stock price on Wednesday suggested to some that 3Com itself may possibly seek financing / funding. Or, a private equity firm could team-up with a publicly traded company in a bid for 3Com.
Investment Analysis: The best way for the typical investor to play 3Com? As potential merger/takeover deals are fraught with many unknown factors, this is a high- risk investment not suitable for conservative or moderate-risk investors.