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3Com Corporation

3Com Corporation

5400 Bayfront Plaza
Santa Clara, California 95052-8145
U.S.A.
Telephone: (408) 326-5000
Toll Free: (800) 638-3266
Fax: (408) 326-5001
Web site: http://www.3com.com

Public Company
Incorporated:
1979
Employees: 13,027
Sales: $5.77 billion (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: COMS
NAIC: 334210 Telephone Apparatus Manufacturing; 334418 Printed Circuit Assembly (Electronic Assembly) Manufacturing; 334419 Other Electronic Component Manufacturing; 511210 Software Publishers; 541512 Computer Systems Design Services

3Com Corporation is the worlds number two provider of computer networking products, systems, and services, trailing only Cisco Systems, Inc. A pioneering networking company, particularly in the area of Ethernet network adapters, 3Com offers products and services for local area networks (LANs), wide area networks (WANs), and the Internet. The company also is aggressively targeting emerging areas for future growth, including home networks, wireless products, broadband cable, digital subscriber line (DSL) services, and Internet telephony. Some of its key product areas include switches, network hubs (central switching devices for network communication lines), internetworking routers (devices that automatically select the most effective routes for data being transmitted between networks), remote access systems, network management software, network interface cards, and modems. 3Com also owns about 95 percent of Palm, Inc., the number one maker of handheld computer devices, which 3Com planned to completely spin off to shareholders in late 2000.

Ethernet Origins

3Com Corporation was founded in 1979 by Robert M. Metcalfe as a consulting firm for computer network technology. The name 3Com was derived from its focus on computers, communication, and compatibility. Bob Metcalfe, an M.I.T.-educated engineer, originally established the firm as a consultancy because the market for computer network products had not yet emerged. Six years earlier at Xeroxs Palo Alto Research Center, Metcalfe had led a team that invented Ethernet, one of the first local area network (LAN) systems for linking computers and peripherals (printers, scanners, modems, etc.) within a building. In 1979, after attending an M.I.T. alumni seminar on stalling ones own business, the 32-year-old Metcalfe quit Xerox to start his own consulting firm. Later that year, he incorporated 3Com, with the participation of college friend Howard Charney, an engineer turned patent attorney, and two others as cofounders.

In 1980, the group of four decided the time was ripe to convert their company into a LAN equipment manufacturing business using the Ethernet technology. It was at this time, following Metcalfes encouragement, that Xerox had decided to share its Ethernet patent with minicomputer manufacturer Digital Equipment Corporation and microprocessor manufacturer Intel Corporation to establish Ethernet as a LAN industry standard. As a manufacturer, 3Com was still a little ahead of its time; although there were very few enterprises that had multiple computers, most having only one mainframe or at most a couple of minicomputers, Metcalfe foresaw that personal computers would someday become commonplace.

The group began approaching California venture capital firms in October 1980 for financing to begin developing products. 3Coms business plan emphasized a strategy of letting market demand determine its rate of growth, taking the risk that the market might run away, and focusing on long-term growth, rather than short-term market share. Despite the initial slow growth predictions, three venture capitalists contributed a total of $ 1.1 million in the first round of financing, in large part on the strength of its founders reputations.

In March 1981, Metcalfe recruited L. William Krause, who then was general manager of Hewlett-Packards General Systems Division, to become 3Coms president. Metcalfe retained the positions of chief executive officer and chairperson and assumed the additional title of vice-president of engineering. Bill Krause also was given a nine percent share in the company, second in size only to Metcalfes 21 percent. 3Com then had only nine employees, but Krause had visions of a much larger company. Also that month, 3Com began shipping its first hardware product, its first Ethernet transceiver and adapter. Krause soon hired a vice-president of sales and a vice-president of marketing, and, a few months later, he hired someone else to assume Metcalfes position of vice-president of engineering.

Krause had a conservative, risk-averse management style. When sales of 3Coms interim product were not as high as expected in the summer of 1981 and a cash flow problem loomed, Krause initiated a survival plan that involved a hiring freeze, a pay cut for all employees and officers, and a specific list of objectives. Even so, 3Com was not in serious difficulty. Sales for the year ending May 31, 1982 were $1.8 million. A second round of financing totaling $2.1 million came in January 1982. At the June 1982 board meeting, the board compelled Metcalfe to relinquish his title of CEO to Krause, who had really been in charge since he came to 3Com. Metcalfe then took on a new, more active role in the position of vice-president of sales and marketing.

3Coms sales took off in the summer months of 1982, not long after IBM introduced its 16-bit personal computer. The young company became profitable in 1983, and, in March 1984, 3Com went public, raising $10 million. By then it was expanding by approximately 300 percent annually, having grown from $4.7 million to $16.7 million in sales for the fiscal year ending May 1984. Earnings that year were $2.3 million, and the company had a 15 percent operating profit. Two years later, for the fiscal year ending May 31, 1986, revenues reached $64 million.

The company was doing well selling adapter cards to value-added resellers and to original equipment manufacturers, which were large computer manufacturing companies. The market was rapidly maturing, however, as computer manufacturers, including IBM and Digital Equipment, were beginning to integrate their own networking functions into their computers. In 1986, 3Com held eight percent of the LAN market, while computer manufacturer IBM had captured 28 percent of the market by including LAN hardware and software within its computers.

Mid-to-Late 1980s: Providing More Complete Computer Network Systems

In response to the trend, 3Com decided to move in the direction of providing more complete computer network systems. In 1984, Metcalfe had started a new software division to develop advanced network software, and the company shipped its first network operating system software, 3 +, two years later. Also during this time, 3Com began marketing its own computer called the 3 Server to function as a network server, a computer on a network whose data is accessed by multiple desktop computers in a configuration known as client-server. By the spring of 1986, servers accounted for 32 percent of 3Coms sales. To complete the system, 3Com also wanted to offer computers that functioned as clients. Therefore, in early 1986, it pursued a merger with Convergent Technologies Inc., which manufactured UNIX-based workstations. Two days before the scheduled shareholder approval in March 1986, however, 3Coms investment banker advised against being acquired by Convergent. On its own, 3Com then began selling systems that included modified personal computers, referred to as network stations, which operated only within its networks.

In 1987, 3Com began marketing itself more as a workgroups computing company that made and marketed PC-network systems. As such, it emphasized products that improved the productivity of workgroups. Several product introductions were made that year, including new network servers, software, and industry-standard network adapter cards. With this market strategy, however, 3Com was running into competition with Novell, Inc., which offered similar products. One important difference, however, was that 3Com targeted niche markets of more sophisticated users.

In September 1987, 3Com made a significant acquisition by purchasing Bridge Communications Inc. for $151 million. Bridge was a provider of internetwork gateways and multiple-protocol bridges, devices that link different networks together on a corporate level. Thus Bridges products complemented 3Coms, and the largest independent networking manufacturer at that time was formed.

Integration of the two companies, however, was not without difficulties. Bridge was completely merged into 3Com by March 1988, but it was not until the end of 1989 that its new internetworking products were introduced. Bridge cofounder William Carrico was appointed president of 3Com, with Krause remaining as CEO, but differences in management styles and corporate cultures prompted Carrico to resign in May 1988, and Krause regained the presidency. At the same time, Bridge Communications Division General Manager Judy Estrin, another cofounder of Bridge, also resigned.

Company Perspectives:

3Coms mission is to connect more people and organizations to information in more innovative, simple and reliable ways than any other networking company in the world. Our vision of pervasive networking is of a world where connections are simpler, more powerful, more affordable, more global and more available to all. Today, we re well on our way to realizing that vision. More than 300 million customers worldwide rely on us to connect with the customized, personalized information they need at home, at work or on the move.

The integration of the sales forces also caused problems, since 3Com had focused on value-added resellers, whereas Bridge was more involved in direct sales. Therefore, a Cooperative Selling Program was launched whereby sales representatives earned commissions on sales to value-added resellers just as they did for direct sales. The buildup of a direct sales force, however, angered some of 3Coms traditional dealers, and sales of LAN Manager suffered.

Also in 1987, 3Com had entered into a joint effort with Microsoft Corporation to develop and market LAN Manager network software for the OS-2 operating system. 3Com sold LAN Manager under a license agreement with Microsoft and, beginning in 1988, it also marketed 3 + Open, its own version of LAN Manager. LAN Manager, however, was a direct competitor of Novells product, NetWare, and OS-2 eventually proved less popular an operating system than expected.

3Coms sales for the year ending May 31, 1988 were $252 million, up from $156 million in the previous year, and earnings had risen from $16.2 million to $22.5 million. By 1988, 3Com was the leading company specializing in computer networks. As a provider of networks, it was second only to Digital Equipment and was ahead of IBM.

Then, in the summer of 1989, revenue growth began to slow seriously for the first time, in part due to the poor sales of LAN Manager. 3Com had its first annual drop in earnings for the year ending May 1990. The company also was losing in its battle against rival Novells NetWare, which by 1990 had 65 percent of the network operating system market share. In 1989, 3Com shipped 14,000 copies of its 3 + and 3 + Open software, whereas Novell shipped 181,000 copies of NetWare. Meanwhile, internetworking products, the specialty of the acquired Bridge Communications, were being neglected.

Early 1990s: Focusing on the Networks Themselves

Krause responded by implementing a New Renaissance Plan beginning in January 1990 to reorganize and refocus the company. 3Com began marketing itself as a network integrator and a network systems supplier, as a single source for network hardware and applications software compatible with multiple vendors systems. Client/server networking was de-emphasized, and the focus shifted to comprehensive networking and internetwork connections. 3Com thus gave up going head to head against Novell, and 3Coms hardware henceforth supported both LAN Manager and its former competitor, NetWare. The marketing of LAN Manager, meanwhile, was left to Microsoft.

Krause also centralized the company by reducing the number of divisions from five to three: product development, internal operations, and sales. New executive vice-presidents were named to head each division, replacing the authority of Metcalfes vice-presidency. Krause then removed himself from daily operations and began looking for someone else to replace him as CEO.

In April 1990, 3Com appointed Eric Benhamou, who had been the new executive vice-president of product development, as president and chief operating officer. Benhamou had been one of the cofounders of the acquired Bridge Communications company. A month later, founder Metcalfe resigned from his posts as vice-president of marketing and board member, after being passed over for the position of president. In August 1990, Krause himself resigned as CEO of 3Com, and Benhamou assumed that post as well. Krause remained only as chairman of the board, leaving management satisfied with his accomplishments in building 3Com into a significant company of 2,000 employees.

Benhamou continued the process of refocusing the company along the lines of Krauses Renaissance plan. 3Com began investing more in technically innovative products such as network adapters, software, network management, and internetworking. Increasing emphasis was put on the cohesiveness of its products. To that end, in November 1990 two new divisions were created to replace four previous product-oriented groups. A Network Adapter Division was created to sell the companys Ethernet cards, replacing the former Transmission Systems Division, and a Network Systems Division, headed directly by Benhamou, assumed the responsibilities of the former Enterprise Systems Division, Distributed Systems Division, and the Management, Messaging and Connectivity Division. Some mid-level managers were removed in the process.

Key Dates:

1979:
3Com Corporation is founded by Robert M. Metcalfe as a consulting firm for computer network technology.
1981:
Company ships its first hardware product, an Ethernet transceiver and adapter.
1984:
3Com goes public, raising $10 million, and introduces its first network operating system.
1986:
Revenues reach $64 million.
1987:
Bridge Communications Inc. is acquired for $151 million.
1990:
Implementation of a New Renaissance Plan begins, in effort to refocus the company away from client-server networking; Eric Benhamou is named president and COO.
1994:
Company acquires Synernetics Inc., Centrum Communications Inc., and NiceCom Ltd.
1995:
3Com acquires Chipcom Corporation, a maker of high-speed switches, for $775 million.
1997:
3Com acquires U.S. Robotics Corporationmaker of modems, remote access devices, and handheld computing productsfor $8.5 billion.
2000:
Spinoff of Palm, Inc. begins with an $874 million IPO, which includes about five percent of Palm stock.

In January 1991, 3Com further redefined its business objectives. The company completely gave up the network operating system software business, which had been providing the software packages LAN Manager, 3 +, and 3 + Open, since the LAN Manager royalty contract with Microsoft had become a financial burden. Under the contract, 3Com had to pay Microsoft royalties even if the computer servers it sold did not include LAN Manager but 3Coms 3 + Open instead. Moreover, when LAN Manager was sold independently, not bundled with 3Com hardware, 3Com still had to pay the expense of customer support for LAN Manager and thus was losing money. 3Coms exit from the network operating system business freed the company from its royalty contract with Microsoft, and all marketing and support of LAN Manager was turned over to Microsoft. 3Coms LAN operating system, which had been losing market share to Novells NetWare for the past three years, held only 14 percent of the market when the company dropped out.

The restructuring also involved steering away from providing client and server computers in order to focus on the networks themselves. Benhamous redirection and reorganization of the company also involved putting two businesses up for sale. Communications Solutions Inc., a manufacturer of connectivity products beyond LANs that had been acquired in 1988, was sold to Attachmate Corporation. The workgroup business, that which sold servers and workstations, however, could not find a buyer and was gradually eliminated. Whereas workgroup-related hardware and software had contributed $113 million, almost one quarter of 3Coms revenues, in 1990, this figure had dropped to 11 percent in 1991. The reorganization also involved laying off 234 employees, or 12 percent of the workforce, and a $67 million restructuring charge.

Thereafter, the company refocused on its successful LAN adapter line and internetworking products, such as bridges, hubs, adapters, and routers. 3Com had begun to depend increasingly on sales from its internetworking business, that of the acquired Bridge Communications company, after neglecting it for three years. 3Com had seen its market share in bridges and routers fall from 29 percent in 1988 to 19 percent in 1990, although it was still the third ranking company in the field, following Cisco Systems, Inc. and Vitalink Communications Corporation Network adapters, meanwhile, came to account for 72 percent of sales in the second half of 1991. 3Com further concentrated on improving its core adapter product line with the development of adapters for wireless notebook computers and adapters for higher speed network systems.

The initial results of the restructuring included lower revenues due to fewer product lines. For calendar year 1991, sales declined 15 percent to $370 million, and the company suffered a loss of $33 million, compared with a $24 million profit the previous year. Lower profits also were caused in part by the more competitive nature of the LAN adapter market that had emerged in the early 1990s. By the end of 1991, 14 percent of the companys workforce had been laid off, leaving a total of 1,676 employees. By 1992, however, the company was back on track, with sales rebounding to $423.8 million for the fiscal year ending May 31, 1992 and earnings becoming positive at $7.96 million.

For its other LAN components, 3Com came to rely increasingly on licensing or acquiring third-party technology. The company bolstered its hub business by acquiring the Data Networks business of U.K.-based BICC PLC, one of Europes largest hub manufacturers, in January 1992. This gave 3Com the LinkBuilder ECS, an Ethernet chassis hub. In September 1992, 3Com introduced LinkBuilder 3GH, a high-end switching hub licensed from Synernetics Inc., a manufacturer of LAN switches. In a move to expand beyond Ethernet LAN structures, in 1993 3Com acquired Star-Tek Inc., which produced hubs for the Token-Ring network architecture. 3Com introduced a multifunction hub, LinkBuilder MSH, which could support both Ethernet and Token-Ring LANs in the spring of 1993. In December of that year, 3Com purchased wireless communications technology from Pacific Monolothics Inc. Early in 1994,3Com acquired Synernetics, a manufacturer of LAN switches, and Centrum Communications Inc., which provided products for remote network access. In September 1994, 3Com purchased ATM innovator NiceCom Ltd., a subsidiary of Nice Systems based in Tel Aviv, Israel. 3Com rounded out its acquisitions spree in late 1995 with the $775 million purchase of Chipcom Corporation, a maker of multifunction high-speed switches for large computer networks. This acquisition not only gave 3Com its first presence in the large corporate systems segment, it also propelled 3Com into second place among the worlds networking companies, behind only Cisco Systems. 3Coms product strategy and acquisitions under Benhamou helped the company reach $2.33 billion in sales for the fiscal year ending in May 1996, nearly six times that of four years prior. Reflecting its rising stature, while at the same time representing an attempt to make the company better known to the general public, 3Com paid $3.9 million to the city of San Francisco to change the name of Candlestick Park, where the Giants played major league baseball, to 3Com Park, a move that angered many baseball fans.

Late 1990s: U.S. Robotics and Palm

Despite its diversification efforts, 3Com remained primarily a maker of network adapters in the mid-1990s, a period in which the emergence of the Internet heightened demand for networking products of all sorts. While market leader Cisco Systems concentrated mainly on the devices that formed the backbone of the Internet, 3Com focused on the Internet edge with its products that connected personal computers to networksboth LANs and WANs and to the Internet, and those that welded together local area networks. 3Coms key acquisition in its emerging Internet strategy was that of U.S. Robotics Corporation, which was completed in June 1997. Dallas-based U.S. Robotics was the leading maker of low-cost modems, which were used to connect personal computers to the Internet and to other remote networks. The company also had a leading presence on the other end of the modem, that is in the remote access devices that were the entry points into Internet service providers and corporate networks for users dialing in through a modem. U.S. Robotics was particularly strong in the area of corporate remote access devices. In 1995 the company also had acquired Palm Computing, a pioneer in the field of handheld computing devices.

Following the acquisition of U.S. Robotics, 3Com derived more than half of its revenues from the low end of the networking segment, that which included network adapters and modems. Overall revenues reached $5.42 billion for the 1998 fiscal year but the company was barely profitable thanks to merger-related and other charges totaling $253.7 million. Integrating U.S. Robotics into 3Com proved more difficult than anticipated, in part because of the geographic and cultural divide between Silicon Valley and Texas oil country. An inventory backlog also developed for U.S. Robotics modems for a time while an industry standard was being adopted for another increase in analog modem speed, this time to 56 kilobits per second. In fact, with faster alternative access technologiessuch as cable modems and digital subscriber lines (DSL)being developed, many analysts were predicting the demise of the analog modem and questioned the wisdom of the U.S. Robotics acquisition. Although the analog modem proved longer lasting than anticipated, and new access technologies were slow to be adopted, 3Com was forced to contend with a number of shareholder lawsuits stemming from the U.S. Robotics purchase and the companys plummeting market value.

For the 1999 fiscal year, 3Com posted net income of $403.9 million on sales of $5.77 billion, representing a vast improvement in profitability but only a slight revenue gain. The company was suffering from intense competition and sagging prices, particularly in its core network adapters and modems segment, where revenues were actually on the decline. The brightest spot was Palm Computers, which had captured 70 percent of the handheld computer market. But by late 1999 3Com management had concluded that Palm had become a distraction away from the companys networking core. 3Com, therefore, announced that it would spin off Palm during 2000. In early March of that year 3Com sold about five percent of the common stock of the newly named Palm, Inc. in an initial public offering that raised $874 millionan IPO conducted in the midst of a technology stock frenzy on Wall Street. 3Com next planned to distribute the remaining Palm stake to 3Com shareholders later in 2000.

As the 21st century began, speculation continued that 3Com would itself become an acquisition target or would be broken up through further spinoffs. But Benhamou was insisting that the company would remain independent and had the right mix of networking products. 3Com was counting on being a key player in such emerging areas as home networks, wireless products, broadband cable, DSL services, and Internet telephony. To facilitate this, the company was forging alliances, such as a partnership with Microsoft to develop home networking products. In addition, 3Com continued to make strategic acquisitions, such as the March 1999 $87.8 million purchase of NBX Corporation, a company specializing in Internet telephony systems that integrated voice and data communications over small business LANs and WANs.

Principal Subsidiaries

Palm, Inc. (95%); 3Com Asia Limited (Hong Kong); 3Com Asia Pacific Rim Limited (Singapore); 3Com Australia Pty. Ltd.; 3Com (Austria) GesmbH; 3Com Benelux B.V. (Netherlands); 3Com Bilgisayer Ticaret A.S. (Turkey); 3Com Bulgaria EOOD; 3Com Canada Inc.; 3Com Corporation Zagreb (Croatia); 3Com Costa Rica S.A.; 3Com Credit Corporation; 3Com do Brasil Services Ltda. (Brazil); 3Com de Chile S.A.; 3Com de Mexico, S.A. de C.V.; 3Com Denmark AS; 3Com Development Corporation; 3Com Engineering Limited (U.K.); 3Com Europe Limited (U.K.); 3Com Far East Limited (Cayman Islands); 3Com GmbH (Germany); 3Com Holdings Limited (Cayman Islands); 3Com Hungary Kft; 3Com Iberia S.A. (Spain); 3Com International, Inc.; 3Com International (New Zealand) Limited; 3Com IFSC (Ireland); 3Com India Pte. Ltd.; 3Com Ireland Technology Limited (Cayman Islands); 3Com Israel Limited; 3Com Japan K.K. (Japan); 3Com Korea Limited; 3Com Limited (U.K.); 3Com Mediteraneo S.r.l. (Italy); 3Com Nordic AB (Sweden); 3Com Pension Scheme (1996) Trustees Limited (U.K.); 3Com Philippines Inc.; 3Com Polska sp. z.o.o. (Poland); 3Com Russia OOO; 3Com S.A. (France); 3Com (Schweiz) A.G. (Switzerland); 3Com Slovakia s.r.o.; 3Com South Asia PTE. Ltd. (Singapore); 3Com Technologies (Cayman Islands); 3Com (Thailand) Co. Ltd.

Principal Competitors

Casio Computer Co., Ltd.; Cisco Systems, Inc.; Compaq Computer Corporation; Com21, Inc.; Conexant Systems, Inc.; General Electric Company; General Instrument Corporation; Hewlett-Packard Company; Intel Corporation; Koninklijke Philips Electronics N.V.; Lucent Technologies Inc.; Microsoft Corporation; Motorola, Inc.; Nortel Networks Corporation; Olivetti S.p.A.; Psion PLC; Sharp Corporation; Siemens AG; Sony Corporation; Xircom, Inc.

Further Reading

Alpert, Bill, The Future Is 3Com, Barrons, December 1, 1997, pp. 15-16.

Barney, Cliff, Sales and Profit Gains Ease the Pain of the 3Com/Bridge Merger, Electronic Business, November, 15, 1988, pp. 54-56.

Bransten, Lisa, and Scott Thurm, For Palm Computers, an IPO and a Flashy Rival, Wall Street Journal, September 14, 1999, p. Bl.

Burke, Steven, 3Com Recharts Networking Course, PC Week, January 14, 1991, pp. 1, 8.

Burrows, Peter, 3Com Is Showing a Lot of Hustle, Business Week, October 2, 1995, pp. 130, 132.

Doler, Kathleen, Eric Benhamou, Chairman and CEO of 3Com Corp., Upside, May 1999, pp. 106-12, 114, 116 +.

Duffy, Jim, 3Com Captain Remains Calm Despite Stormy Forecasts, Network World, July 5, 1999, pp. 1, 57.

Epstein, Joseph, Showtime: 3Com Has Finally Made It into the Big Leagues, Financial World, October 24, 1995, p. 29.

Flynn, Laurie, As Networks of Computers Grow, 3Com Stock Surges, New York Times, August 31, 1994, pp. CI, C4.

Franson, Paul, Challenging Perceptions, Electronic Business, June 1999, pp. 74-80 +.

Goldstein, Mark L., Bill Krause Changes Course, Industry Week, June 1, 1987, p. 55.

Gomes, Lee, and Evan Ramstad, 3Com Agrees to Acquire U.S. Robotics, Wall Street Journal, February 27, 1997, p. A3.

Hill, G. Christian, and William M. Bulkeley, 3Com to Buy Chipcom for $775 Million, Wall Street Journal, July 28, 1995, p. A3.

Kerr, Susan, Com Corp., Datamation, June 15, 1992, p. 141.

Lewis, Jamie, 3Coms Pulse Strong After Years of Change, PC Week, January 25, 1993, p. 64.

Moad, Jeff, On the Road Again, Datamation, May 1, 1986, pp.31-37.

Ould, Andrew, 3Com Reorganizes Divisions; Key Executive Departs, PC Week, November 5, 1990, p. 181.

Reinhardt, Andy, Palmy Days for 3Com?, Business Week, March 16, 1998, p. 104.

, Why 3Com Is Handing Off Palm, Business Week, September 27, 1999, p. 48.

Richman, Tom, Growing Steady, Inc., September 1984, pp. 69-81.

, Whos in Charge Here?, Inc., June 1989, pp. 36-46.

Roth, Daniel, 3Com Tries to Solve Its Palm Problem, Fortune, October 11, 1999, pp. 167-68.

Schonfeld, Erick, The Avis of Networking, Fortune, May 11, 1998, pp. 164, 168.

Shao, Maria, 3Coms New Renaissance Hasnt Ended Its Dark Ages, Business Week, April 23, 1990, pp. 118-19.

Thurm, Scott, 3Com Faces Challenges in Developing New Lines, Wall Street Journal, March 25, 1999, p. B6.

, 3Com Tops Expectations But Warns on Growth, Wall Street Journal, December 22, 1999, p. B6.

Young, Jeffrey, Underdog Strategy, Forbes, November 3, 1997, pp.364 +.

Heather Behn Hedden

updated by David E. Salamie

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3Com Corp.

3Com Corp.

5400 Bayfront Plaza
Santa Clara, California 95052-8145
U.S.A.
(408) 764-5000
Fax: (408) 764-5001

Public Company
Incorporated:
1979
Employees: 2,300
Sales: $1,013.7 million
Stock Exchanges: NASDAQ
SICs: 3577 Computer Peripheral Equipment, Not Elsewhere
Classified

3Com Corp. is the worlds leading provider of Ethernet network adapters, circuit boards added to personal computers that permit them to operate on local area networks. The company holds a 29 percent share in the $1.8 billion Ethernet network adapter business, which it pioneered. 3Com is also a significant provider of other network equipment, such as network hubs (central switching devices for network communication lines), internetworking routers (devices that automatically select the most effective routes for data being transmitted between networks), and access servers that foster teleworking. Thus 3Com, unlike its competitors, offers its clients complete network or internetworking systems.

3Com Corp. was founded in 1979 by Robert M. Metcalfe as a consulting firm for computer network technology. The name 3Com was derived from its focus on the computer, communication, and compatibility. Bob Metcalfe, an M.I.T.-educated engineer, originally established the firm as a consultancy because the market for computer network products had not yet emerged. Six years earlier at Xeroxs Palo Alto Research Center, Metcalfe had led a team that invented Ethernet, one of the first local area network (LAN) systems for linking computers and peripherals (printers, scanners, modems, etc.) within a building. In 1979, after attending an M.I.T. alumni seminar on starting ones own business, the 32-year-old Metcalfe quit Xerox to start his own consulting firm. Later that year, he incorporated 3Com, with the participation of college friend Howard Charney, an engineer-turned-patent attorney, and two others as co-founders.

In 1980, the group of four decided the time was ripe to convert their company into a LAN equipment manufacturing business using the Ethernet technology. It was at this time, following Metcalfes encouragement, that Xerox had decided to share its Ethernet patent with minicomputer manufacturer Digital Equipment Corp. and microprocessor manufacturer Intel Corp. in order to establish Ethernet as a LAN industry standard. As a manufacturer, 3Com was still a little ahead of its time; although there were very few enterprises that had multiple computers, most having only one mainframe or at most a couple of minicomputers, Metcalfe foresaw that personal computers would someday become commonplace.

The group began approaching California venture capital firms in October 1980 for financing in order to begin developing products. 3Coms business plan emphasized a strategy of letting market demand determine its rate of growth, taking the risk that the market might run away, and focusing on long-term growth, rather than short-term market share. Despite the initial slow growth predications, three venture capitalists contributed a total of $1.1 million in the first round of financing, largely on the strength of its founders reputations.

In March 1981, Metcalfe recruited L. William Krause, who then was general manager of Hewlett-Packards General Systems Division, to become 3Coms president. Metcalfe retained the positions of chief executive officer and chairperson and assumed the additional title of vice-president of engineering. Bill Krause was also given a nine percent share in the company, second in size only to Metcalfes 21 percent. 3Com then had only nine employees, but Krause had visions of a much larger company. Also that month, 3Com began shipping its first hardware product, its first Ethernet transceiver and adapter. Krause soon hired a vice-president of sales and a vice-president of marketing, and, a few months later, he hired someone else to assume Metcalfes position of vice-president of engineering.

Krause had a conservative, risk-averse management style. When sales of 3Coms interim product were not as high as expected in summer 1981 and a cash flow problem loomed, Krause initiated a survival plan that involved a hiring freeze, a pay cut for all employees and officers, and a specific list of objectives. Even so, 3Com was not in serious difficulty. Sales for the year ending May 31, 1982 were $1.8 million. A second round of financing totaling $2.1 million came in January 1982. At the June 1982 board meeting, the board compelled Metcalfe to relinquish his title of CEO to Krause, who had really been in charge since he came to 3Com. Metcalfe then took on a new, more active role in the position of vice-president of sales and marketing.

3Coms sales took off in the summer months of 1982, not long after IBM introduced its 16-bit personal computer. The young company became profitable in 1983, and, in March 1984, 3Com went public, raising $10 million. By then it was expanding by approximately 300 percent annually, having grown from $4.7 million to $16.7 million in sales for the fiscal year ending May 1984. Earnings that year were $2.3 million, and the company had a 15 percent operating profit. Two years later, for fiscal year ending May 31, 1986, revenues reached $64 million.

The company was doing well selling adapter cards to value-added resellers and to original equipment manufacturers, which were large computer manufacturing companies. However, the market was rapidly maturing, as computer manufacturers, including IBM and Digital Equipment Corp., were beginning to integrate their own networking functions into their computers. In 1986, 3Com held eight percent of the LAN market, while computer manufacturer IBM had captured 28 percent of the market by including LAN hardware and software within its computers.

In response to the trend, 3Com decided to move in the direction of providing more complete computer network systems. In 1984, Metcalfe had started a new software division to develop advanced network software, and the company shipped its first network operating system software, 3 +, two years later. Also during this time, 3Com began marketing its own computer called the 3Server to function as a network server, a computer on a network whose data is accessed by multiple desktop computers in a configuration known as client-server. By spring 1986, servers accounted for 32 percent of 3Coms sales. To complete the system, 3Com also wanted to offer computers that functioned as clients. Therefore, in early 1986, it pursued a merger with Convergent Technologies Inc., which manufactured UNIX-based workstations. However, two days before the scheduled shareholder approval in March 1986, 3Coms investment banker advised against being acquired by Convergent. On its own, 3Com then began selling systems that included modified personal computers, referred to as network stations, which operated only within its networks.

In 1987, 3Com began marketing itself more as a workgroups computing company that made and marketed PC-network systems. As such, it emphasized products that improved the productivity of workgroups. Several product introductions were made that year, including new network servers, software, and industry-standard network adapter cards. With this market strategy, however, 3Com was running into competition with Novell, Inc., which offered similar products. One important difference, however, was that 3Com targeted niche markets of more sophisticated users.

In September 1987, 3Com made a significant acquisition by purchasing Bridge Communications Inc. for $151 million. Bridge was a provider of internetwork gateways and multiple-protocol bridges, devices that link different networks together on a corporate level. Thus Bridges products complemented 3Coms, and the largest independent networking manufacturer at that time was formed.

Integration of the two companies, however, was not without difficulties. Bridge was completely merged into 3Com by March 1988, but it was not until the end of 1989 that its new internetworking products were introduced. Bridge co-founder William Carrico was appointed president of 3Com, with Krause remaining as CEO, but differences in management styles and corporate cultures prompted Carrico to resign in May 1988, and Krause regained the presidency. At the same time, Bridge Communications Division General Manager Judy Estrin, another co-founder of Bridge, also resigned.

The integration of the sales forces also caused problems, since 3Com had focused on value-added resellers, whereas Bridge was more involved in direct sales. Therefore, a Cooperative Selling Program was launched whereby sales representatives earned commissions on sales to value-added resellers just as they did for direct sales. However, the buildup of a direct sales force angered some of 3Coms traditional dealers, and sales of LAN Manager suffered.

Also in 1987, 3Com had entered into a joint effort with Microsoft Corp. to develop and market LAN Manager network software for the OS/2 operating system. 3Com sold LAN Manager under a license agreement with Microsoft, and, beginning in 1988, it also marketed 3 +Open, its own version of LAN Manager. However, LAN Manager was a direct competitor of Novells product, NetWare, and OS/2 eventually proved less popular an operating system than expected.

3Coms sales for the year ending May 31, 1988 were $252 million, up from $156 million in the previous year, and earnings had risen from $16.2 million to $22.5 million. By 1988, 3Com was the leading company specializing in computer networks. As a provider of networks, it was second only to Digital Equipment Corp., and was ahead of IBM.

Then, in the summer of 1989, revenue growth began to slow seriously for the first time, partly due to the poor sales of LAN Manager. 3Com had its first annual drop in earnings for the year ending May 1990. The company was also losing in its battle against rival Novells NetWare, which by 1990 had 65 percent of the network operating system market share. In 1989, 3Com shipped 14,000 copies of its 3+ and 3 +Open software, whereas Novell shipped 181,000 copies of NetWare. Meanwhile, internetworking products, the specialty of the acquired Bridge Communications, were being neglected.

Krause responded by implementing a New Renaissance Plan beginning in January 1990 to reorganize and refocus the company. 3Com began marketing itself as a network integrator and a network systems supplier, as a single source for network hardware and applications software compatible with multiple vendors systems. Client/server networking was de-emphasized, and the focus shifted to comprehensive networking and inter-network connections. 3Com thus gave up going head-to-head against Novell, and 3Coms hardware henceforth supported both LAN Manager and its former competitor, NetWare. The marketing of LAN Manager, meanwhile, was left to Microsoft.

Krause also centralized the company by reducing the number of divisions from five to three: product development, internal operations, and sales. New executive vice-presidents were named to head each division, replacing the authority of Metcalfes vice-presidency. Krause then removed himself from daily operations and began looking for someone else to replace him as CEO.

In April 1990, 3Com appointed Eric Benhamou, who had been the new executive vice-president of product development, as president and chief operating officer. Benhamou had been one of the cofounders of the acquired Bridge Communications company. A month later, founder Metcalfe resigned from his posts as vice-president of marketing and boardmember, after being passed over for the position of president. In August 1990, Krause himself resigned as both chairperson and CEO of 3Com, and Benhamou assumed those posts as well. Krause remained only as chairman of the board, leaving management satisfied with his accomplishments in building 3Com into a significant company of 2,000 employees.

Benhamou continued the process of refocusing the company along the lines of Krauses Renaissance plan. 3Com began investing more in technically innovative products such as network adapters, software, network-management, and internetworking. Increasing emphasis was also put on the cohesiveness of its products. To that end, in November 1990, two new divisions were created to replace four previous product-oriented groups. A Network Adapter Division was created to sell the companys Ethernet cards, replacing the former Transmission Systems Division, and a Network Systems Division, headed directly by Benhamou, assumed the responsibilities of the former Enterprise Systems Division, distributed Systems Division, and the Management, Messaging and Connectivity Division. Some mid-level mangers were also removed in the process.

In January 1991, 3Com further redefined its business objectives. The company completely gave up the network operating system software business, which had been providing the software packages LAN Manager, 3 +, and 3 + Open, since the LAN Manager royalty contract with Microsoft had become a financial burden. Under the contract, 3Com had to pay Microsoft royalties even if the computer servers it sold did not include LAN Manager but 3Coms 3 + Open instead. Moreover, when LAN Manager was sold independently, not bundled with 3Com hardware, 3Com still had to pay the expense of customer support for LAN Manager, and thus was losing money. 3Coms exit from the network operating system business freed the company from its royalty contract with Microsoft, and all marketing and support of LAN Manager was turned over to Microsoft. 3Coms LAN operating system, which had been losing market share to Novells NetWare for the past three years, held only 14 percent of the market when the company dropped out.

The restructuring also involved steering away from providing client and server computers in order to focus on the networks themselves. Benhamous redirection and reorganization of the company also involved putting two businesses up for sale. Communications Solutions Inc., a manufacturer of connectivity products beyond LANs which had been acquired in 1988, was sold to Attachmate Corp. The workgroup business, that which sold servers and workstations, however, could not find a buyer, and was gradually eliminated. While workgroup-related hardware and software had contributed $113 million, almost one quarter, of 3Coms revenues in 1990, this figure had dropped to 11 percent in 1991. The reorganization also involved laying off of 234 employees, or 12 percent of the work force, and a $67 million restructuring charge.

Thereafter, the company refocused on its successful LAN adapter line and internetworking products, such as bridges, hubs, adapters, and routers. 3Com had begun to depend increasingly on sales from its internetworking business, that of the acquired Bridge Communications company, after neglecting it for three years. 3Com had seen its market share in bridges and routers fall from 29 percent in 1988 to 19 percent in 1990, although it was still the third ranking company in the field, following Cisco Systems Inc. and Vitalink Communications Corp. Network adapters, meanwhile, came to account for 72 percent of sales in the second half of 1991. 3Com further concentrated on improving its core adapter product line with the development of adapters for wireless notebook computers and adapters for higher speed network systems.

The initial results of the restructuring included lower revenues due to fewer product lines. For calendar year 1991, sales declined 15 percent to $370 million, and the company suffered a loss of $33 million, compared to a $24 million profit the previous year. Lower profits were also partly due to the more competitive nature of the LAN adapter market that had emerged in the early 1990s. By the end of 1991, 14 percent of the companys work force had been laid off, leaving a total of 1,676 employees. However, by 1992, the company was back on track, with sales rebounding to $423.8 million for the fiscal year ending May 31, 1992 and earnings becoming positive at $7.96 million.

For its other LAN components, 3Com came to rely increasingly on licensing or acquiring third party technology. The company bolstered its hub business by acquiring the Data Networks business of U.K.-based BICC PLC, one of Europes largest hub manufacturers, in January 1992. This gave 3Com the Link-Builder ECS, an Ethernet chassis hub. In September 1992, 3Com introduced LinkBuilder 3GH, a high-end switching hub licensed from Synernetics Inc., a manufacturer of LAN switches. In a move to expand beyond Ethernet LAN structures, in 1993 3Com acquired Star-Tek Inc., which produced hubs for the Token-Ring network architecture. 3Com introduced a multifunction hub, LinkBuilder MSH, which could support both Ethernet and Token-Ring LANs in spring 1993. In December of that year, 3Com purchased wireless communications technology from Pacific Monolothics Inc. Early in 1994, 3Com acquired Synernetics, a manufacter of LAN switches, and Centrum Communications Inc., which provided products for remote network access. In September 1994, 3Com purchased ATM innovator NiceCom Ltd., a subsidiary of Nice Systems based in Tel Aviv, Israel.

3Coms product strategy and acquisitions under Benhamou helped the company reach $827 million in sales in fiscal 1994, nearly double that of two years prior. Optimism in the company resulted in a record high stock price of $68.25 per share in August 1994, compared with a low of under $6 in 1990. By the mid-1990s 3Com was facing more challenging competition from the 1994 merger of the largest hub provider Synoptics with the second largest router provider Wellfleet and from the entry of chip-maker Intel into the adapter business. As long as 3Com was prepared to meet its challenges, however, it could look forward to continued growth in the ever-expanding network market.

Principal Subsidiaries

3Com Asia Limited (Hong Kong); 3Com Canada Inc.; 3Com China Ltd.; 3Com Europe Limited (United Kingdom); 3Com GmbH (Germany); 3Com Ireland; 3Com Asia Ltd.

Further Reading

Barney, Cliff, Sales and Profit Gains Ease the Pain of the 3Com/Bridge Merger, Electronic Business, November, 15, 1988, pp. 54-56.

Burke, Steven, 3Com Recharts Networking Course, PC Week, January 14, 1991, pp. 1, 8.

Flynn, Laurie, As Networks of Computers Grow, 3Com Stock Surges, New York Times, August 31, 1994, pp. Cl, C4.

Goldstein, Mark L., Bill Krause Changes Course, Industry Week, June 1, 1987, p. 55.

Kerr, Susan, 3Com Corp., Datamation, June 15, 1992, p. 141.

Lewis, Jamie, 3Coms Pulse Strong After Years of Change, PC Week, January 25, 1993, p. 64.

Moad, Jeff, On the Road Again, Datamation, May 1, 1986, pp.31-37.

Ould, Andrew, 3Com Reorganizes Divisions; Key Executive Departs, PC Week, November 5, 1990, p. 181.

Richman, Tom, Growing Steady, Inc., September 1984, pp. 69-81.

Richman, Tom, Whos in Charge Here?, Inc., June 1989, pp. 36-46.

Shao, Maria, 3Coms New Renaissance Hasnt Ended its Dark Ages, Business Week, April 23, 1990, pp. 118-19.

Heather Behn Hedden

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