The largest merger in the history of the networking industry, between 3Com and US Robotics (USR), has divided industry opinion. Is 3Com set to be a networking powerhouse? Or will time-wasting channel conflicts alienate resellers worried about long term relationships? Will the necessary rationalisation cut far deeper than 3Com is prepared to admit?
The jury?s out. The $6.6 billion share exchange - one USR share for 1.75 3Com shares - creates a company with around $5 billion revenues. The new company is called 3Com, not 3Com-USR. That is not an indication that 3Com has the whip hand, according to USR - but we know who?s wearing the trousers.
This amicable joining is no marriage of equals. Not only is the mega-company called 3Com - ?a decision that took all of two minutes?, according to 3Com CEO and chairman Eric Benhamou and USR chairman and founder, Casey Cowell - but the board is split seven to three in 3Com?s favour. Benhamou continues in the driving seat, while Cowell rides pillion as vice chairman.
Regardless of the politics of their relationship, both companies reaped immediate rewards on announcement of the deal. USR's share price, down almost 40 per cent from over $100 about nine months ago, gained a full 10 points, up to $71.5. 3Com chalked up a couple of points, $39 to $41.
Theoretically, a key advantage of this merger is the creation of highly effective distribution channels. Benhamou says the two companies are apart geographically, but they frequently operate in the same localities. He is adamant that there are no favourite sons. All dealers and resellers will be treated equitably, but he acknowledges that where 3Com is the stronger player, USR will put resources into that distribution outlet - and vice versa.
Is there a danger that this focus on individual strengths will lead to over-distribution? He commented, straightfaced: ?We?ll be careful never to get to that point?. Trevor Deary, manager with key rival, Bay Networks, disagrees, saying: ?3Com is over-distributed anyway?.
Rationalisation is inevitable, but Benhamou denies that there will radical surgery. Speaking yesterday with Cowell, they both went out on a limb, saying there are no planned redundancies. ?There will be redeployment,? added Benhamou. Cowell, quizzed about the marked difference between 3Com and USR?s headcount, explained: ?The higher headcount is due to our inhouse manufacturing facilities.?
The implication of pooled manufacturing and distribution channels is that headcount will fall, and some degree of rationalisation is a joint objective - one that would be a major benefit to the new company. 3Com acknowledged as much in a statement issued prior to the press conference. ?3Com expects cost savings can be achieved from economies of scale throughout the company, particularly in manufacturing, purchasing and facilities.?
The logic of consolidated research and development, manufacturing, sales and distribution should lead to improved business processes and lower overheads.
Again, Bay?s Deary comments; ?12,000 staff, even for a $5 billion company, is heavy. It?s overweight. With that amount of fat, there must be consolidation."
On the channel issue, USR is perceived as the one with effective retail channels, while 3Com has a stronger name and presence, particularly in Europe. Stateside, the general expectation is that 3Com will focus on Lans, while USR?s strengths are in the Wan marketplace and its growing Internet business. Interestingly, 3Com derives about 50 per cent of income from network interface cards, and now that Intel is installing Ethernet on motherboards, this must have serious consequences on sales and margins, according to Bay?s Trevor Deary.
Further, remote site management is a crucial area for all these companies, which 3Com is targeting with desktop to Lan/Wan and Internet capabilities. Deary warns: ?There are problems with their network management products, and the degree of overlap in that area is not yet apparent - but it will become obvious.?
There has been a rash of mergers and alliances in the networking sector, most of which are aiming for enterprise capability, covering the whole spectrum of Lans, Intranets, Wans and Internet. Despite the cost of planning a merger and acquisition, many have come to nought or proved highly expensive distractions. Cisco reckons that 50 per cent of large mergers and acquisitions fail. With 2,000 fewer employees than the merged 3Com-USR, its recent Stratacom acquisition incorporated into the stable, and anticipated revenues of $6.5 billion, it feels it can comment on where 3Com is going astray.
?3Com and USR are betting their companies... the purchase price is roughly equal to the market capitalisation of each company individually,? said a Cisco spokesman. (The transaction will incur a charge, not yet decided, in the last quarter of 1997 or first quarter of 1998.)
Cisco again: ?Large mergers of ?equals? in high growth markets typically cause both companies to lose momentum.? Taking a swipe at the rest of the competition, Cisco cites Bay Networks as an example. 3Com?s Benhamou and Cowell agree, saying waspishly: ?Bay is model of how not to do a merger.?
With 12,000 staff in 130 countries, it?s difficult to see how rationalisation can be avoided - but the fact is, two highly professional organisations are coming together, merging portfolios and making more effective use of successful technologies. The bad news, apart from channel conflicts and the extent of rationalisation, is that there are unresolved technical issues. For instance, USR?s proprietary X2 56Kbps modem technology sits particularly uneasily with 3Com?s support for the Open 56K consortium.
Not withstanding these difficulties, Cowell argues that the merging of Lans, Wans and Internet technologies is fuelling demand for bandwidth. It is growing exponentially, and that, he believes, is where the combined forces of 3Com and USR come into play.
Cisco comments: ?The deal combines product lines but it doesn?t address the future of networking - software and network services. Long term industry leadership is based on software, which this merger doesn?t address at all.?
3Com disagrees. ?Customers are driving this merger," says Benhamou. He argues that they are buying bits of enterprise networks from a gamut of suppliers. What they lack, and what they want, is a one-stop shop. A supplier who blends different networking technologies and provides end-to-end connectivity.
Cisco again: ?3Com has identified short term wins in manufacturing and some distribution synergies... but built from two very hardware-centric companies, the new 3Com doesn?t gain the critical software value that customers expect to tie together their end-to-end solution.?
3Com argues that its component parts are experienced in the politicking of mergers and acquistions; its breadth of technical know-how is ideal for the sophisticated issues associated with enterprise network management. Cisco differs: ?They are already saddled with rationalising incompatible software from their acquisitions of Primary Access, Sonics, Amberwave and Scorpio.?
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