3Com’s announcement of its intention to spin off subsidiary TippingPoint has thrust the networking vendor, known to those with long memories for previously spinning off US Robotics and Palm, back into the spotlight.
Aside from those spin-offs, there is a perception in the industry that 3Com has been somewhat overshadowed in recent years by its larger rivals, as evidenced by its patchy financial performance.
Back in 2002, 3Com was achieving annual sales of $2.8bn, but since then the company steadily declined until 2006 when it managed to start growing sales once more. For this current year ending 1 June, 3Com recorded annual sales of $1.26bn, up 59 percent from the $795m it made back in 2006.
Unfortunately, 3Com had been deep in the red for the last five years, but to be fair it has managed to post a reduced net loss for the current year. The results also reveal a sizeable loss in its fourth quarter, after 3Com was hit with $91m in charges relating to its H3C acquisition (see below).
Liquidity at the network vendor remains strong, after it ended the most recent quarter with $559m in cash, cash equivalents and short-term investments, although this is pretty low compared to the two previous years. Overall however, the financial results are moving in the right direction after a torrid five years.
So how does the latest financial loss at 3Com affect the IT manager looking to invest in 3Com equipment? Is it a safe bet for a responsible network administrator? And does the decision to spin off TippingPoint make sense?
To some the decision to spin off TippingPoint may seem curious at first, especially as it has been one of 3Com’s most visible units in recent years, certainly media-wise, as it provides network-based intrusion prevention systems (IPS) and digital vaccine attack filter services.
Indeed, 3Com paid rather a lot of money to get involved in this sector, after it acquired TippingPoint back in 2004 for a cool $430m. In a sign of how important this unit has become to 3Com, the company said it would retain majority ownership in TippingPoint “for the foreseeable future” after the floatation, which should take place sometime this year.
And it seems the market agrees with this decision. An equity analyst told Techworld that he believed the spin off is a good idea, although a sale would be just as good. Certainly, there are a number of larger players who would want to broaden their security product portfolio.
The analyst believes that TippingPoint could achieve a market valuation between $400m to $500m, and he had little doubt that the unit would be more valuable as a standalone entity rather than as part of the 3Com group.
For comparison purposes TippingPoint’s rival, Sourcefire, currently has a market capitalisation of $337m. In its last quarter Sourcefire posted a net loss of $2.5m on revenues of $10.4m (TippingPoint’s figures are not broken out separately at the moment.)
Another potential reason for a floatation of TippingPoint is the attitude of its customers. According to an IDC survey of security platforms in December, the majority of enterprises still prefer to purchase security as stand-alone products, “and the preference for that in intrusion prevention is very high,” said Charles Kolodgy, research director at IDC’s secure content and threat management products team.
Indeed, respondents to the IDC survey felt that the advantage of keeping the network and security functionality separate, was much better overall security.
There is little doubt that any proceeds from a TippingPoint float will help replenish 3Com’s financial reserves, which were impacted when it purchased Huawei Technologies’ 49 percent stake in a joint venture known as H3C Technologies Co Ltd (H3C) for $882m back in 2006. To finance that deal, 3Com used approximately $470m of cash from its balance sheet and approximately $430m from a senior secured bank loan at its H3C segment.
This H3C unit does give 3Com a strong position in one of the world’s major growth markets, allowing it to win some impressive accounts in the Chinese market. Yet China is hugely attractive, and competition from larger rivals is fierce.
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