3Com Agrees to Purchase Chipcom for $700 Million - NYTimes.com
Feb 17, 2014
3Com Agrees to Purchase Chipcom for $700 Million
Published: July 28, 1995
SANTA CLARA, Calif. July 27— The 3Com Corporation agreed today to buy the Chipcom Corporation for roughly $700 million in stock, creating the nation's second-largest maker of computer network equipment. The combined companies would rank behind only Cisco Systems Inc. in the $10-billion-year market for network devices. 3Com will be able to sell a wider range of products to corporate customers that want to buy equipment from as few suppliers as possible. "This is a business of setting up networks," said Paul Merenbloom, analyst at Piper Jaffray. "For 3Com, this takes care of how to deal with this marketplace. "
The transaction, 3Com's 10th acquisition in three and a half years, is the latest in a consolidating industry. The accord comes as Chipcom's explosive growth of the last five years is beginning to slow. 3Com, based here, gains Chipcom's expertise in making high-end computer network equipment and its line of hubs, the electronic devices that serve as switching boards that route data in a network. 3Com is one of the fastest-growing companies in the network-systems market, and integrates newly acquired businesses well, analysts said. 3Com said the acquisition was expected to hurt fiscal second-quarter results, but would be "neutral to slightly positive" in the second half. Chipcom shares gained $7.50 today to close at $37.25, but 3Com shares lost $2.125, closing at $73.50. Both are traded on the Nasdaq. Under terms of the transaction, 3Com would exchange 0.53 of a share of its common stock for each of Chipcom's 17.53 million shares outstanding. The transaction is subject to the approval of shareholders of Chipcom, based in Southborough, Mass. 3Com plans to take a $50 million to $60 million charge in the quarter the acquisition is completed, Eric Benhamou, chairman and chief executive, said. The companies expect to complete the deal before December. "This verifies a trend that has existed for three years -- and that is the convergence of the hub, router and switch markets," Laurence Walker, general manager of the Digital Equipment Corporation's networking business, said. "This is just a further stage in the consolidation of the market. "
3Com has grown from a company that sold adapter cards that slide into a personal computer and other networking hardware products with sales of $156 million in 1987 to 1995 fiscal year revenue of $1.3 billion. In 1987, 3Com merged with Bridge Communications, and the company has been expanding by acquisitions ever since. Just this year, 3Com bought AccessWorks, Sonix Communications and Primary Access. The purchases broadened 3Com's product offering, but it has remained on the periphery of the core networking business of hubs and routers. "They could never get into the bread and butter part of the market," said Roxane Googin, an analyst for Gruntal & Company. "What Chipcom allows them to do is become an across-the-board competitor right away. " Chipcom's presence in the high-end market for hubs is complementary with 3Com's low-end products and distribution, she added. "I think it puts the heat on Bay Networks and Cabletron," she said, referring to competitors. The acquisition comes at a time when Chipcom faces declining sales from its biggest distributor, the International Business Machines Corporation. In the latest quarter, Chipcom's net income plunged 81 percent as I.B.M. cut shipments of Chipcom hubs because of an inventory backlog. About 38 percent of Chipcom's revenue comes from products sold by I.B.M. 3Com said it had a "memorandum of understanding" from I.B.M. that the distribution agreement with Chipcom would continue following the acquisition.