The largest merger in the history of the networking industry should be something to get excited about. So when 3Com announced last week it was buying US Robotics for $6.6 billion (#4.1 billion), eclipsing any deal that had gone before in that sector, ripples of surprise spread through the industry. But from certain quarters, including the shareholders of both companies and industry analysts, the reaction was a more muted "no big deal".
Under the terms of the deal, 3Com will exchange 1.75 shares for each US Robotics share. The combined company will have annual revenues of $5 billion, employ around 12,000 staff worldwide and operate under the name of 3Com. The aim of the merger, which is expected to be completed in three months, is to offer users a one-stop shop for everything from adaptor cards to high-speed modems.
But despite its sheer size, the deal has left some observers non-plussed.
"It's not earth-shatteringly huge," said Rana Mainee, analyst at market research firm IDC. "End users aren't going to notice much difference."
Mainee added that the one sector of the user community likely to see any difference in their dealings with the companies are remote users - those involved in buying modems to connect themselves to their business networks.
Also less than thrilled by the merger were the shareholders of both companies.
After the announcement, shares in both firms fell, 3Com slumped $4 to $35 and US Robotics dipping $1.88 to $59.13. However, this was amid a general decline in the technology sector. Cisco shares also dropped $3.06 to $55.06.
After the announcement, there was much speculation that the real aim of the deal was to bash 3Com's arch-rival Cisco. While Eric Benhamou, 3Com's chairman and CEO, acknowledged a minor reason for the merger was to create a company that would be bigger than Cisco, Mainee doubted such a motivation.
"All the major network vendors are trying to lessen the proportion of their business that's in direct conflict with the others," Mainee noted.
"The point is not trying to plug the gaps in your product range to match a competitor's portfolio - it's much better to find areas where competing brands haven't infiltrated."
Val Sribar, vice president of analyst firm the Meta Group, agreed. "This deal only marginally improves 3Com's competitiveness against Cisco," he commented.
3Com also denied the merger was mainly aimed at squaring up to Cisco.
"We don't necessarily look to compete directly with other players," explained Bob Cushing, European marketing director at 3Com. "We look to offer a distinct alternative. It's not our intention to replicate exactly what Cisco does." However, he added the deal will redress the balance in the network market.
Cisco's UK managing director Paul Mountford agreed the move draws 3Com's fire away from his company. "It looks like they're going for the low-value, high-volume end of the market rather than the systems side, where we are," he said. "They've gone for a direction where they could be market leader - but it's not our market."
Corporately, Cisco played down the news. "3Com's decision to merge with US Robotics is another example of competitors reacting to Cisco's leadership," the company said in a statement. Although acknowledging 3Com now has the capability to offer customers an end-to-end solution from a single supplier, Cisco argued it already gives that.
Cisco also reckoned it may be a bigger company than 3Com in terms of revenue. It is projecting $6.5 billion in revenues this year, compared with analysts projections of $5 billion for the new 3Com group.
Cisco also said its strategy was following a different course to 3Com's.
"Cisco's long-term industry leadership is based on software, which the 3Com merger doesn't address at all," continued the company in its statement.
"The real future of networking is software and network services." 3Com's Cushing refuted this suggestion, saying 3Com was poised to make some important software announcements in the near future.
Large mergers and acquisitions carry a high risk of failure. Bay Networks is a recent example, having experienced a decline in market share and share price since it was formed in 1994 by the merger of SynOptics Communications and Wellfleet Communications. 3Com is all too aware of the possibility of failure, and the company has firmly asserted its determination not to be caught out.
"We're thankful to Bay Networks as an example of things not to do," Benhamou joked as he announced the deal. Firstly, he said, the company would not be changing its name, but taking forward its respective brands and ensuring the US Robotics brand continued to grow. Neither would the company be splitting the management team. The board of the merged company will consist of seven 3Com and three US Robotics executives. This will cut through any potential political infighting, he said.
Benhamou also maintained 3Com and US Robotics' products are "completely complementary", avoiding any potential conflict in technology. He also pointed to US Robotics' membership of the Network Interoperability Alliance, formed last summer, which will ensure the pair are working on common standards.
On the channel side, he claimed Bay had failed to reassure its sales staff they would still have jobs after integration. That will not happen with 3Com, he vowed. "I do not mean to minimise the task in hand, but we are very well prepared."
Likewise, US Robotics' CEO Casey Cowell insisted his company would ensure the merger was a success. "USR initiated the merger because we wanted to seize the opportunity of achieving the objective we've always had - to be the strongest organisation possible," he said. "We are 100% behind making this work."
Another factor that may influence the success or failure of the merger is physical location. The two companies have facilities near each other in Ireland, Israel, Silicon Valley and Boston. However, their respective headquarters in the US are situated thousands of miles apart, with 3Com in Santa Clara, California, and US Robotics in Skokie, Illinois. This was one of the problems Bay Networks also faced; SynOptics was based in Santa Clara, whereas Wellfleet wasat the other end of the country in Massachusetts.
Although the plants sited near each other are likely to merge, 3Com claimed no major layoffs are envisaged. "There will perhaps be a small amount of redeployment, but it's hardly an issue," said Benhamou.
One question left hanging over the merger is the issue of new fast-modem standards. US Robotics is pushing its own x2 technology for 56kbps modems.
However, it is lined up against an industry alliance that includes rivals Rockwell and Lucent, supporters of the K56Rex technology. Crucially, the Open 56k Forum which Rockwell and Lucent belong to also includes 3Com.
How to resolve this conflict is one of the key areas of debate the merger has given rise to.
Both 3Com and US Robotics seem determined not to let this glitch spoil the party. US Robotics' Cowell said: "There's no way they (3Com) will not support x2 technology - it would be inconceivable." Some have seen a role for 3Com as a mediator between the rival standards bodies. This would involve finding a means of devising interoperability between the two. However, as yet, no firm commitment has officially been made.
For users, the deal can hardly bring any disadvantage. If it succeeds, it will offer a one-stop shop for everything from network interface cards and switches to high-speed modems. If the companies manage to share their brains and technologies, it could result in faster product development.
If they resolve the confusion over the 56kbps modem standards, it will stop users having headaches over which to plump for. And if they manage to save money due to economies of scale in manufacturing and distribution, these savings should be passed on to customers.
Perhaps it is "not earth-shattering", but the chances are that users may get something worthwhile out of it.
3COM: FACTFILE - Founded: 1979
- US HQ: Santa Clara, California
- Employees: 6,500 worldwide
- Sales: $2.8 billion
- Manufacturing: US, UK, Israel
- Products: network interface cards
- High-function switches
- Boundary switches
- Internetworking platforms
- Stackable networking systems
- Multifunction switching hubs
- Network management
- Remote access platforms.
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