3Com OKs $2.2B buyout; Boston-based Bain is buyer.

Byline: Martin Luttrell

MARLBORO - Struggling computer networking equipment company 3Com Corp. agreed yesterday to be purchased for $2.2 billion by Boston-based Bain Capital Partners LLC, surprising some analysts and giving shareholders a 44 percent premium on the company's stock.

3Com, which has not posted an annual profit in seven years, has 6,300 employees, including 400 at its headquarters in Marlboro. What impact, if any, the sale might have on employee levels, was unknown yesterday.

Taking the company private will provide 3Com flexibility to execute its business plan and to focus on long-term strategies, rather than the short-term quarterly focus required of publicly-traded companies, Chief Executive Edgar Masri said on a conference call.

The deal, slated to be closed by April 1, will pay shareholders $5.30 a share, 44 percent over Thursday's closing price of $3.68.

3Com spokesman John R. Vincenzo said it is too early to say what changes might result from the takeover, and emphasized that Bain will help 3Com grow.

"This is a great deal for our employees and customers," he said. "It says a lot for 3Com that Bain recognizes our potential. This is a positive story. It's about reaching that potential."

Huawei Technologies Co., which once shared a joint venture with 3Com in China, will take a minority stake. More than half of 3Com's revenues from sales were generated by 3Com's Chinese unit. Last year 3Com bought out Huawei's stake for $882 million.

3Com's directors approved the cash deal and recommended shareholders endorse the transaction, the sixth-largest buyout of a technology company this year. 3Com, one of the founding companies in the networking industry, sells data networking equipment such as local-area network switches, DSL routers and security software to small- and medium-sized businesses.

The company has been unprofitable this decade and last week reported a net loss of $18.7 million, or 5 cents per diluted share, for the quarter ended Aug. 31, compared with a net loss of $14.1 million, or 4 cents per diluted share in the same period last year.

The deal gives Huawei and Bain a Chinese business that has been the most profitable division of 3Com, garnering more than 50 percent of its revenues.

A spokesperson for Bain did not return telephone calls seeking comment yesterday.

Also yesterday, shareholder Lawrence Fisk filed suit in Delaware Chancery Court on behalf of public stockholders seeking to block the sale and order the company be auctioned. Mr. Fisk contends the sale price undervalues shares.

Bain has participated in other technology buyouts, including last year's $4.83 billion acquisition of Royal Philips Electronics NV's semiconductor unit and the $3 billion takeover of Texas Instruments Inc.'s sensors and controls division.

Kaufman Brothers LP analyst Manuel Recarey had set a price target of $4.50 for shares of 3Com and was surprised at Bain's offer.

"I think it caught 3Com investors by surprise," he said. "I didn't think there would be such a large premium. The shareholders should be happy with the price. They should take the money and run."

Mr. Recarey said he expected business as usual at 3Com in Marlboro.

"A private equity group is buying them, and I don't think there will be any changes at 3Com from that perspective," he said. "I don't see layoffs."

Mr. Recarey said the most valuable parts of 3Com are its Chinese unit and its TippingPoint network security division. Mr. Masri said 3Com will continue previously announced plans to make TippingPoint an autonomous entity, although it would be up to the new owners on how to best separate the division from 3Com.

In June, 3Com said it would file to sell shares of TippingPoint in an initial public offering.

Some analysts on yesterday's conference call referred to ongoing speculation of a possible 3Com sale but others did not predict a sale anytime soon.

A 3Com report by Morningstar, updated Wednesday, said the prospect of a private-equity buyout was remote, because of uncertainty as to how long it would take 3Com to achieve profitability and what it termed an "uncomfortably low $32 million in net cash."

"Given the company's weak balance sheet and the recently tightening credit markets, we believe that private-equity investors would be hard-pressed to make a takeover work," the Morningstar report said.

3Com shares rose $1.26 yesterday, closing at $4.94 in trading on the Nasdaq stock market.