3Com Gets Poor Reception

Yesterday I keyed in about some concerns about 3Com (COMS) paying out $882 million for the other 49% of the Huawei joint venture called H3C.  The buyout itself isn’t the big deal, but they fact that they are going to go it alone is a big deal. 

Apparently I wasn’t alone.  The stock is trading down 10% pre-market and it has already traded 5 million shares pre-market.

Analysts are a perplexed as well, and the influential calls are negative so far.  Lehman thinks this stinks, and they downgraded COMS to Underweight.  Bear Stearns also downgraded the stock to a Peer Perform because of execution risks (i.e. management dropping the ball like they always have).  Sanford Bernstein maintained a market perform rating but took its target to $4.15 (under yesterday’s $4.49 close).

A couple of relatively positive calls came this morning.  One came from UBS after it thinks this is accretive to earnings and Citigroup thinks they got a good price.

My issue with this is that they zeroed their cash for all practical purposes, and the company is operating on losses and still trying to complete a restructuring.  Now their break-up value is gone too, so upon completion the company will have removed the perceived $3.00 floor because the liquid asset base will have been paid outto secure the rest of the Huawei venture.

After seeing the various notes today, it makes my initial fears of yesterday seem more and more likely.  Long-term investors in COMS are hoping this isn’t the case, but hoping doesn’t work to well in the same sentence as investing.

3Com’s only hope the street hasn’t factored in is IF a private equity white knight is hiding to participate in this deal too.  The company wiped out its liquidity on this deal and management would be comparable to getting Arthur (Dudley Moore) to run a distillery.

Jon C. Ogg
November 29, 2006