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3Com Is Now REALLY Going After Cisco

Posted on Friday, Sep 28th 2007

I just got off the phone with Eric Benhamou, with whom, as you know, I have been discussing 3Com and Palm recently.

I said earlier, that 3Com is trying to take on Cisco with its Chinese JV H3C in my Online Video Beneficiaries series, and that Cisco is a fat company that deserves to be gone after by someone who has his acts together with a lower cost alternative, especially in emerging markets.

Well, 3Com has agreed to be acquired by private-equity firm Bain Capital Partners LLC for about $2.2 billion in cash.

The $5.30 a share offer is a 44% premium to Thursday’s closing stock price. Shares of 3Com surged ahead of the announcement as The Wall Street Journal reported a deal was imminent and the rest of the financial media started picking up the news. At the time of writing this piece, the stock has surged to $5.10.

As part of the deal, set to close in the first quarter, Chinese networking giant Huawei Technologies Co. will acquire a minority stake in 3Com. The stake, currently at 10%, may increase over time to 15-20%, as the strategic alliance gets sorted out in more detail.

The obvious reasons for the market’s excitement is that this is the first large private equity transaction since the subprime credit meltdown, and also this is one of the first major China deals this year. Huawei is China’s largest telecommunications-equipment maker, and with their low cost structure can give Cisco and others a run for their money.

3Com had a JV with Huawei called H3C which they bought the outstanding 49% of last year at a cost of $882 Million. At this time, Bain Capital tried to buy H3C as well, and in the process got close to 3Com. The investment thesis for both Bain and 3Com have been the same: to go after Cisco with a substantially lower cost alternative, starting with emerging markets. In fact, although 3Com’s strategy has been to go after Small Medium Enterprises (SME) in the US, in the emerging markets which are far more price-sensitive, the H3C cost-structure is incredibly important. And now, with Huawei’s air-cover, they can meaningfully penetrate both small AND large enterprises in China, as well as expand into Latin America, Eastern Europe, etc. through 3Com’s channels.

It’s an exciting deal, and finally, Cisco would need to sit up and watch!

Contrary to the Wall Street Journal’s reporting, Tipping Point, 3Com’s secure networking arm, which is believed to be a valuable asset and which 3Com has announced would be spun off and taken public separately, is still on track to be spun off. The only difference may be that the company could undergo a strategic sale, rather than an IPO. That is yet to be determined.

Of course, there have been lots of concerns about 3Com’s ability to integrate the H3C merger and be able to execute on the market opportunity which clearly is there. The Bain transaction, so far, is silent on any management team changes, although it is fair to assume that whatever changes are necessary will be made.

I asked Eric to comment on the similarities between the 3Com and Palm Private Equity deals.

“Yes, there are similarities between the two transactions, in that each have one Private Equity sponsor with a clear strategic insight. The investment thesis is one of a large market opportunity, and under-execution on the part of the public company. In the case of Palm, Elevation Partners is betting on the Convergence Device movement, and that Palm has been under-executing. They have also brought to the table a unique strategic value, in form of John Rubinstein, father of the iPod.

In the case of 3Com, the bet is on the networking market, the growth of online video, the tremendous emerging market opportunity, and the strategic value addition is Huawei.

In both cases, I came to the conclusion that the market at present is not rewarding steady execution in a turnaround. We could return to profitability and produce better products, but the market continues to ignore us. Incremental improvement is not what the market rewards. It is looking for bold moves, and so we have, in each case, gone ahead and included a private equity player to signal that bold move.”

3Com’s stock went from an opening price of $3.70 to $5.11 since the market opened this morning, and the deal announcement was made. 56.5 Million shares have traded hands already this morning.

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After all these years you are asking Eric Benhamou for expert opinion. What a shame! He had a head start with 3Com and Palm. He dropped the ball on both. Many attempts have been made to topple Cisco. You know the history. None have come to fruition. Maybe they will lose a few points of market share. Maybe not.

sk Friday, September 28, 2007 at 11:21 AM PT

Eric will have nothing to do with the execution on the current market opportunity in either 3Com or Palm. With 3Com, it will be up to Huawei and Bain, and with Palm, it will be upto Rubinstein, Fred Anderson, and Roger McNamee.

If you read the interview I did with Eric, he admits openly that he made a fatal mistake on 3Com, which lost the company its neck-to-neck position against Cisco.

That mistake was to pull out of the enterprise.

Now, the game is very different, and this is going to be a massive price-war, a game at which only the Chinese can compete and win.

I apologize, though, for asking Eric for expert opinion instead of asking you 🙂


Sramana Mitra Friday, September 28, 2007 at 11:31 AM PT

Clarifying a little bit of what I said on linkedin….

Circa ’98. Can we take on the establishment of Search?

This was the climate when Google launched. Can you imagine taking down the establishment at the time? Yahoo, Infoseek, Altavista, etc, saturated and seemingly matured. What looked like a modest improvement in the way search worked ended up being the difference that paved the way for an upset of the status quo.

So I say, yes, there is always an opportunity. I don’t know enough about this sector to provide evidence or even to ponder a possible vector on which this would happen, but the opportunity must always be there.

Richard Ault Friday, September 28, 2007 at 2:01 PM PT

The opportunity is there. The vectors are emerging markets and US SME/SOHO. The differentiator is the Chinese cost structure.


Sramana Mitra Friday, September 28, 2007 at 2:18 PM PT

Cisco weathered the dot com crash better than the rest of the industry. Here are a few of my personal opinions on how it played out and where we stand today. Keep in mind that they are very US-centric.

3COM, once my personal favorite network equipment manufacturer, dropped its high-end equipment that competed with Cisco. However, they maintained what I believe is the single best lineup of wireless goods in the industry. In my opinion, 3COM did “take on Cisco” in the wireless market. However, I have no doubt they will go the way of Lenovo and will be doing good simply maintaining market share. I do not mind conceding that there is some possibility for growth in their VOIP/telco lineup.

Nortel was an industry leader that I migrated my last employer away from in favor of 3COM. They seem to be unable to make the news outside of announcing layoffs. Once a full-service outfit, Nortel was a little late to market with gigabit and now fights for space in the VOIP/telco market. They appear to target bigger players than 3COM’s lineup. I will stop short of stating that they “take on Cisco” since I do not directly interact with their product anymore.

Foundry is a company that filled the void when 3COM abandoned the enterprise (large corporation) market. Do not feel bad if you are a small business professional and have not heard much about them. They have the ability to “take on Cisco” and do not have any problem with name recognition among their target audience.

I saved my favorite for last. ProCurve (by HP) has the potential to “take on Cisco.” You may have not ever heard of ProCurve, but here’s the findings of a recent market research report: “According to the analyst firm’s data, ProCurve, the world’s second largest enterprise LAN networking vendor, grew worldwide port shipments by 46 percent in the second calendar quarter of 2007 compared to the same period in 2006. The year-over-year industry growth rate for this period was 21 percent.”
Here is why this growth will continue:
Open, not proprietary- No ProCurve-only protocols or unusual implementations of industry standards.
Short Learning Curve- Uses Cisco CLI and an admin-friendly GUI.

In total, I do not see any one player that can compete with Cisco on all fronts. The saying goes, “No one ever got fired for buying Cisco.” That is true. At the same time, no one ever embraced the budget of a project that relied on Cisco hardware. This is just my opinion, but look for the market to catch up with ProCurve leading the charge.

On a related note, 3COM’s prospects outside of the US may be very different. Much like debating DSL vs. Cable Internet does you no good in developing counties that embrace wireless technology; there is no value in applying 3COM’s US market presence to other markets. I can’t speak to what the world has in store for 3COM, but I wouldn’t be surprised if US manufactures like those listed above suddenly find foreign markets more competitive thanks to this deal.

Andrew C. Ivey Friday, September 28, 2007 at 2:20 PM PT

Hi Sramana,
I do not think it is possible without a huge leap in Technology by Huawei.

Huawei is not an innovator – not in the same league as Cisco’s innovation( Actually Cisco does not innovate by itself; However it let’s engineers go outside and build companies, makes strategic investments and buys back the engineers at a premium when they see the technology adoption curve).

And networking is not a commodity, manufacturing segment, unlike PC’s where the profit comes not from innovations , but from effective supply chain management. I don’t think the game will be about price and cost-structure for at least another 7 years.

Radha Popuri.

Radha Popuri Friday, September 28, 2007 at 2:20 PM PT


Your point about Foundry’s position in the Enterprise is on the mark. Yes, they’re executing very well in that particular segment. Juniper is executing well in carriers. SME in the US, and Enterprise AND SME in emerging markets is the 3Com opportunity, and I am pretty sure Bain has done their homework. They have been chasing this opportunity for almost 2 years now, first trying to acquire H3C, and now actually acquiring 3Com itself, in strategic partnership with Huawei.

This is a very smart deal.


Sramana Mitra Friday, September 28, 2007 at 2:34 PM PT


With all due respect, you contradict yourself. Cisco can “buy innovation” and others cannot? That’s a naive assumption, that I bet will not hold true for the 7 year horizon that you are prognosticating on.

As for the game being on cost/performance versus innovation, SME and Emerging market is already on that vector. And to grow, Cisco needs to win in those segments. I think, Cisco would find it extremely competitive to do that, given how many fat and wealthy engineers are sitting inside Cisco, resting, vesting, and producing nothing.

On the Enterprise, the horizon is much longer. For now, Cisco is okay. Watch Foundry, though.

And with Carriers, watch Juniper.


Sramana Mitra Friday, September 28, 2007 at 2:38 PM PT

Hi Sramana,

Though it is wise to never say never, in my opinion it would take the combination of several large mis-steps by Cisco in the near term.

With Cisco it is no longer about the risk of being taken down by one technology or the other, but about market power. They have developed a level of entrenchment that is broad, even if a bit resented.

In looking to tackle Cisco (or Microsoft, or any other player with notable market power) we have to learn from pack animals and their hunting strategy. There is no way for one lion to take down an elephant, so they sorround and take small chunks until the mammoth animal surrenders or escapes. Several may die even in a successful mission, but most often the missions are unsuccessful and you try again. In this case, the parallel is that smaller companies (or the many larger ones who are consolidating in this space) can at best hope to chip away at Cisco’s dominant position in one area or another, and collectively over time the tide may turn.

But without a major growth market that allows some significant CapEx to fight for, and without a major mis-step by Cisco on key emerging markets (like IPTV, WiMax or whatever), there is not a high chance that the status quo will be overturned soon.

That said, more and more service provider and large enterprise customers are quite conscious of Cisco’s healthy (50-60%+) gross margins, and realize that their key vendor is far more profitable than they are. As such, they start to resent the imbalance in the value chain and look for alternatives that minimize their market power.

This is also a force that can weaken Cisco over time, but by itself is probably not enough to topple the giant.

In short, if it was easy, one of the many who have tried to date would have succeeded. The best case studies we have right now are Juniper (almost exclusively in the core, and starting to give back some of their share, at least until the launch of their MX960), Redback (Ericsson), Alcatel (TiMetra), Force 10, and a lot of small fries whose bones still remain fall short of the summit.

After all, market power counts for something… 😉


Houman Modarres Friday, September 28, 2007 at 2:59 PM PT

from the Linked-in discussion:

Yes it is certainly possible, but I don’t think 3Com will be the company to do it. They have made a pretty good name in the SMB space but there is a lot of stiff competition there as well. 3Com would be wise to stay where they are and be a leader in that area.
Someone else mentioned HP’s ProCurve products and I totally agree that they are a contender to compete with Cisco. Everyone is talking about price and not only are most ProCurve products slightly less expensive than Cisco, they have what I believe to be a huge marketing coup; Lifetime warranty and no service contracts (unless ou want onsite hardware support). As a Cisco customer that is one of my biggest complaints about Cisco and is why we’re moving to HP. You can’t get anything from Cisco without a service contract, not even most security updates. HP; free updates for life, you can’t beat that. And they are excellent products.

Kenton Friday, September 28, 2007 at 5:57 PM PT


To Radha’s point, yes it is easy to “buy” innovation but not easy to integrate and leverage it. Cisco is one of the few large companies who have acquired and integrated companies well into their strategy. Look at Linksys and Scientific Atlanta. Their revenues have surged after aquisition than when they were standalone.

You can make a lot of strategic moves that make sense. But if you cannot execute on them then those moves don’t mean much. Cisco has been executing well for last several years and unless they make big mistakes on execution, it will be really difficult to “take on” Cisco.

Only time will tell who is right.


Ashwin Sunday, September 30, 2007 at 2:51 PM PT

Oh Eric, oh! What a loser!!!

Just because the market haven’t yet reward their so-called “steady” execution, now they’re throwing the white flag ?? Give me a break!

He’d successfully bring down 3Com from Cisco level to an irrelevant level. Now he’s trying to put the final nail in this coffin. What a shame!

Eric Cheng Tuesday, October 2, 2007 at 2:44 AM PT

The interview with eric benhamou was an amazing read. As a long time 3com employee who suffered the whole March 2000 restructure (a black day in networking) and still kept fighting the good fight afterwards, it was vindication to see Eric admit the monumental mistakes he and Claflin made. The Claflin situation is very interesting though. Whilst i can blame Eric and the board for lack of foresight, i cannot believe that Eric did not have 3com’s best interests at heart – after all he single handedly saved 3com before. Bruce Claflin on the other hand was a miserable failure from the begining. He was the brains behind the restructure, he was the executioner (literally), he presided over and was solely responsible for the demise of 3com from a 4 Billion company to a 800 million shadow of its previous self – yet he was arrogant enough to never publicly admit the mistakes he made. The golden handshake in the end when he left was the nail in the coffin for all the 3com shares long term employees held who until last week have not broken even.
Claflins was not only incompetent and ignorant he was criminally negligent and i am afraid to say that the board who supported him were equally responsible.
They make a company that was the pinacle of excellence in the networking industry the laughing stock of the industry.

sfougiman Tuesday, October 2, 2007 at 6:02 AM PT

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Like SFoug., I am a former 3Com employee who suffered through most of the Claflin era and 2000’s infamous ‘catapult’ strategy of getting out of the Enterprise. I agree that Eric had 3Com’s best interest in mind, especially after seeing his face at the March 2000 CEO videoconference, announcing the beginning of the end. Eric was an engineer who absolutely loved living out Bob Metcalf’s Ethernet dream, but his hands were seemingly tied behind his back at that point. Much has been written about this former Silicon Valley icon’s demise (remember traffic on the 237?), but something tells me its alumni association (if there were one) would be one of the proudest group of former employees in the world.

So the Bain deal opens up tons of possibilities, but I can’t help but think about a joke Bruce Claflin once told his channel partners. I don’t recall the lead up, but the punch line went something like, “3Com execs will sit at the foot of the bed telling you how good it’s going to be.”

Investors: Cisco has nothing to worry about.

3Com-StaClara Wednesday, October 17, 2007 at 3:47 PM PT

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