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3 Com Is Showing A Lot Of Hustle


Information Processing: NETWORKING

3COM IS SHOWING A LOT OF HUSTLE

Eric A. Benhamou, chief executive of 3Com Corp., says he knew all along there would be a backlash from sports fans when he agreed to a deal with the city of San Francisco to change the name of Candlestick Park to 3Com Park on Sept. 8. He's getting more than he bargained for: from ill will in the Bay Area to nationally syndicated cartoons that deride the obscure company's rush for the spotlight. "We're trying to bring the networking industry out of its shadow, and I knew we would have to break a few eggs in the process," says the soft-spoken CEO, happily noting the 40 mentions of 3Com on NBC's nationally televised 49ers game on Sept. 10.

Sports fans are just finding out what Wall Street and the folks in Silicon Valley already know: 3Com is one of the fastest-growing players in the red-hot market for networking hardware. From simple circuit cards to exotic switches, 3Com makes the gear that corporations rely on to move data between PCs, larger computer systems, and other devices such as printers. After a three-year buying binge--including the July 27 deal to pay $775 million for rival Chipcom Corp.--3Com has quadrupled in size. Sales for the year ended May 31 reached $1.3 billion (not including Chipcom's $267 million in revenue), putting it right behind Silicon Valley rival Cisco Systems Inc., the leader in the $15 billion network equipment industry.

3Com already sells the widest range of products. It dominates the market for the interface cards that attach PCs to networks and for certain types of "hubs" used to connect networks in smaller businesses and remote offices. After spending $1 billion on 10 acquisitions, Benhamou says he is putting together the pieces that will make 3Com a one-stop global networking supermarket. "This is incredibly complicated stuff, and customers want to buy everything from one company," says Noel P. Lindsey, a Hambrecht & Quist Inc. analyst. In the latest quarter, ended Aug. 31, revenues rose 64% to $430 million and earnings doubled, to $59 million. For fiscal 1996, analysts expect a 26% jump in per-share earnings.

Benhamou sees an even wider portfolio for 3Com. He wants to spawn vast new markets serving small businesses and consumers. By 2000, he says, these initiatives could bring in 60% of revenue. That's a bold goal, given that the folks building public networks--phone and cable companies--have yet to figure how and when they'll bring high-speed connections to consumers. Benhamou's strategy is to be ready for uhatever they build so he can sell what's needed to replace today's modems and give consumers data at speeds rivaling those of corporate networks. Given the Internet craze, says Benhamou, "I can't see how this won't happen."

SHOPPING LIST. So far, the plan has won raves on Wall Street. Revenues have more than tripled since 1992, even before the Chipcom acquisition. And despite annual price drops of 10% or more on network cards, 3Com's gross margins have actually risen from 45% in mid-1993 to around 55% in the quarter ended Sept. 19. Adjusted for splits, its stock price has streaked from $3.50 in September, 1992, to around 43 now.

What sets 3Com apart in the rapidly consolidating networking market is its unmatched ability to make acquisitions work. The credit goes to Benhamou, a man who "knows how to buy companies," says Thomas J. Pincince, a senior analyst with Forrester Research in Cambridge, Mass. "It's almost like he's got a checklist he goes down."

In fact, 3Com has a database of 140 possible acquisition candidates and tracks everything that happens in those companies, down to personnel changes. The secret to takeover success, says Benhamou, is to offer a corporate vision that's at least as compelling as the founders' original dream--either in price, work environment, or societal impact. As a result, "If we know about a deal and make a similar bid as others, we'll win the bid every time," he gloats.

Benhamou learned about takeovers the hard way when he was called on to fix the fractious merger with Bridge Communications that brought him to 3Com in 1987. A co-founder of Bridge, Benhamou watched as 3Com moved away from its core PC add-in card business to develop network server computers to run software being jointly developed by IBM and Microsoft Corp. When the alliance blew up in 1989, 3Com was left in a bind.

After the board nudged out co-founder and President L. William Krause, Benhamou launched a turnaround plan that involved rebuilding the circuit-card business and using 3Com's still healthy balance sheet for acquisitions to add new technology and expand distribution. He laid off 12% of the company and scotched the computer-making effort in early 1991.

Benhamou is well-suited to the re-engineering task. Krause says he brought Benhamou on board in part because of his calm and even style. "To pull a company through a transition, that's what you need." His technical background didn't hurt either. An Algerian raised in France, Benhamou helped install the first Internet site at Stanford, where he received a master's in electrical engineering. He's not all techno-geek, though. Benhamou is an avid guitarist and helped found the only Sephardic Temple in Silicon Valley.

The technical knowhow has paid off. Take network cards, once regarded as a dead-end business. Benhamou invested heavily in custom chips that add features, improve reliability, and lower costs. He also added seven $10 million production lines that can beat Asian job-shops on cost. 3Com's share of the network card market has doubled to 40%-plus and analysts figure its gross margins on the cards exceeds 40%. Another plus: its manufacturing prowess has helped the company jump quickly into new markets, such as stackable hubs used to connect branch offices to corporate nets.

The next phase may prove a bit more difficult, expecially since 3Com keeps bumping into Cisco. The market leader has mainly focused on corporate sales, while 3Com has used dealers to reach a variety of customers. Now, Cisco plans to attack the low end of the market. It forged a deal with Compaq Computer Corp. to resell its IOS network-management software on Compaq's server PCs, and has plans to sell network interface cards as well.

Now the two are locking horns in the consumer market. In early September, 3Com brought out $495 circuit cards, sold at California's Fryes Electronics stores, that let home PCs use high-speed ISDN data services. In October, it plans a pilot program for selling networks to very small businesses at CompUSA stores. These setups will let a company with a few PCs share a printer and pass around E-mail just like the corporate crowd.

It will be up against Cisco's new CiscoPro line, slated for introduction Sept. 27. The line will include packages for hooking telecommuters to the corporate network or speeding up Internet access. "We'll take a leadership position very quickly," vows Cisco CEO John T. Chambers. He figures small-business and consumer sales could reach $300 million in a year. He readily acknowledges that 3Com can leverage its PC-card expertise to grab 10% to 20% of the new mass markets, but insists that Cisco can lock up as much as 40% because of its lead in corporate networks.

NET BREAKS. Benhamou is taking his message directly to the people. "Today's PC users are just begging to be connected," he says. In addition to exhibits at 3Com Park (eight Internet kiosks for mid-inning cyber-surfing), 3Com is undertaking high-profile community projects, including wiring public schools in San Jose, Calif., England, and Ireland. Marketing Vice-President Janice M. Roberts is planning the company's first TV ads.

That's only part of the plan. Benhamou has filled his board with executives who can help guide the expansion beyond business networks, including James Barksdale, CEO of high-flying net-browser developer Netscape Communications, and Pacific Telesis President David W. Dorman. With a vast consumer market as the prize, it's a whole new ball game for 3Com.

3Com's Buying Binge

After three years of acquisitions, it now tops a billion dollars in sales

1987 Buys Bridge Communications to get into the market for bridges and routers used to connect corporate LANs.

1992 With British-based BICC Group PLC, gains a customer base in Europe.

1993 Buys Star-Tek Inc. for $43 million and gains its IBM-standard network products. Pacific Monolithics brings wireless technology.

1994 A busy year. Centrum Communications, a $36 million deal, brings in products for remote access to corporate networks. For $59 million, 3Com buys Israel-based NiceCom Ltd., maker of speedy asynchronous transfer mode (ATM) switches. Synernetics Inc., acquired for $104 million, gets 3Com into LAN switches.

1995 Another binge: Access Works Communications, acquired for $240 million, makes ISDN equipment for PCs. Sonix Communications and Primary Access Corp., bought for $174 million and $70 million, respectively, let 3Com sell ISDN gear for phone companies. The capper: the $775 million bid to acquire Chipcom.By Peter Burrows in San Francisco


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