3Com Mixed Results For Bulls & Bears; Still Hopes For Merger Approval (COMS)

3Com Corp. (NASDAQ: COMS) posted what may be one of its last quarterly financial results for its fiscal second quarter ended November 30, 2007:

• The company posted earnings with non-GAAP net income was $13.0 million, or $0.03 per diluted share on a non-GAAP basis, compared with net income of $7.8 million, or $0.02 per share, for the second quarter of fiscal year 2007.
• On a GAAP basis, 3Com’s net loss in the quarter was $35.6 million, or -$0.09 per share. 
• Revenue in the quarter was $317.8 million compared to revenue of $333.0 million in the year before period. 
• First Call had non-GAAP estimates at $0.02 EPS and revenues pegged at $326.8 million. So it beat slightly on non-GAAP earnings but revenues were light.

The net loss increase was listed as being primarily tied to purchase accounting related to the acquisition of Huawei’s 49 percent ownership of H3C.  In its second quarter, 3Com generated $6.4 million in cash from operations.

The company is noting its merger progress, sort of.  3Com and affiliates of Bain Capital (and Huawei) continue to work together towards closing the previously announced proposed acquisition of the company. The transaction is expected to be completed by the first quarter of calendar year 2008, subject to receipt of 3Com shareholder approval, customary regulatory approvals and other customary closing conditions.  We had featured this as a company that management couldn’t fix, so it needs the merger.

If those revenues stay soft there, you’d wonder if Bain & Huawei want those regulatory approvals to go through.  We have 3Com under review for our next "10 Stocks Under $10" weekly subscriber newsletter.

Shares are actually up marginally by under 1% at $4.45 in after-hours trading after closing up 0.5% at $4.42 today.   With a $5.30 buyout there is still a 19% merger-arb spread on this deal, so there is still a perceived risk that the deal could get blocked.

Jon C. Ogg
December 19, 2007

Jon Ogg can be reached at [email protected]; he produces the SPECIAL SITUATION newsletter and he does not own securities in the companies he covers.