3Com struggles amid industry boom

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Although Claflin was hired to handle the daily operations, analysts note the company stumbled in the second quarter, raising questions about Claflin's effectiveness. "They've been plagued with some product development problems," said Hambrecht & Quist's Suppiger.

During an interview following 3Com's latest earnings, Claflin said the company is hopeful and its strategy is ready to pay dividends.

"Over the last year and year and a half, we have refined our strategy, got more focused and have a simple, compelling unified strategy going forward," Claflin said.

Claflin said he believes the company's focus on emerging markets, such as home and wireless networking, Internet telephony and high-speed modems, will boost revenue in the coming year.

"They are our future. It's growing extremely rapidly now," Claflin said.

Analysts and former executives say 3Com's recent troubles began as early as 1997. First, the company entered a price war with Intel over network adapter cards, a key 3Com product. That battle resulted in 3Com taking a hit to its earnings, while investors bailed out of the company's stock, sending the share price down more than half in a matter of weeks.

And following 3Com's $6.6 billion acquisition of modem maker US Robotics (USR), the firm found itself with an unexpectedly large inventory of analog modems that temporarily forced it to discontinue sales. In general, the market for analog modems has slowed.

"Benhamou did a good job building the company with acquisitions,

By the numbers Revenue for the past three years has largely been stagnant, while profit growth has slowed.
Year	Revenue	Net income (loss)
1999	$5.8 billion	$403.9 million
1998	$5.4 billion	$30.2 million*
1997	$5.6 billion	$500.5 million
1996	$4.3 billion	$347.9 million
1995	$2.5 billion	$210.5 million
1994	$1 billion	($11.9 million)
1993	$723.2 million	$45 million
1992	$423.8 million	$8 million
1991	$413.2 million	($23.8 million)
1990	$430.3 million	$23.2 million
* Includes $253.7 million charge for US Robotics acquisition Source: 3Com annual reports

but the key thing is it fell apart with the US Robotics acquisition. It was really then when the wheels started coming off," Tucker Anthony Cleary Gull analyst Christin Armacost said. "They were misled on the health of USR and have been distracted with managing USR and getting [the company] back to health."

Benhamou has launched a number of different strategies to get the company back on track, but none has proved to be sustainable.

First the company attacked Cisco by pushing sales of high-end equipment to telecommunications carriers. When that effort failed, 3Com focused on its sales to businesses.

"They tried to be in the service provider market and move products upstream, where Cisco was, and down to the consumer level. And they were stretching themselves too thin," Armacost said.

Earlier this year, 3Com briefly announced it would enter the market for storage area networks, but then quickly backpedaled.

Last May, Benhamou declared the popular Palm handheld device--which 3Com inherited with the US Robotics acquisition and which has served as an unexpected growth engine for the company--as central to 3Com's overall strategy.

But this fall, Benhamou switched gears and said the company will spin off the Palm Computing unit so 3Com can concentrate on its networking roots. Investors have warmly received the spin-off plans, as shares have gained in the past few months.

The number of twists and turns has left industry analysts as well as some former 3Com employees baffled.

"[Benhamou's] scrambling. It's a company that doesn't have a clear sense of who it is, what market it's in, and who its customers are," a former 3Com executive said. "He had a great first few years, but he has been floundering the last few."

And that also had translated into confusion among analysts on Wall Street.

"They became less articulate about their strategy to the Street. They hid from the investment community when things started going wrong and they started losing investor confidence," Armacost said.

But many believe the latest plans for a Palm spin-off and the company's renewed focus on networking are smart moves.

Benhamou, as early as 1998, advocated spinning off the Palm Computing unit. But when Palm founder Jeff Hawkins, along with Donna Dubinsky, Palm Computing vice president and general manager, left the company those plans were put on hold, said the source close to the board.

"The feeling was that the timing wasn't right in order to maximize shareholder value for 3Com shareholders," the source said.

Despite the travails of the past two years, former executives say Benhamou has had a significant impact on 3Com. For example, revenue reached $5.8 billion in 1999, up from $430 million in 1990.

Benhamou joined 3Com in 1987 as vice president of products, and then in 1990 took the helm of the company that was "near death," said Bob Finocchio, the former 3Com president who worked with Benhamou for nearly a decade before leaving in 1997 to become the head of database software firm Informix.

"It was a big jump for him and he was totally untested, having previously been an engineering manager at Bridge," Finocchio said. "But there was total support for him throughout the company for his vision and desire."

The recent turmoil isn't the first time Benhamou has seen problems at 3Com. The firm at one time had a division that built network operating systems and servers, but wasn't profitable. Benhamou killed the division so the company could focus on networking, a technology he believed to be the future.

"He put a bullet in that whole business," said another former 3Com executive who worked in the network operating system and server business. "We were bleeding money, spending too much on development and not gaining market share."

The move saved the company, the former executive said. "That got 3Com started on the right path. The share price was in the tank. Profitability and growth had flattened out. And Eric believed the next big thing was networking, not a network computer."

Nonetheless, opinions differ on Benhamou's ability to provide the company with great vision.

"He's really analytical. He's an engineer. He's not a visionary," a former executive said. "Whenever I had meetings, he drilled down to the product detail. He understood product things. Because of that background, he's not someone who got people to rally behind him and feel like he understands what the business was--and going with it."

But Finocchio casts Benhamou in a different light.

"He was born to be a CEO. He has a natural talent to lead people, get them excited, has great vision, and the guts to make tough decisions," he said.

"My impression of this guy is that through the ups and downs of this company, he remains unflappable," Dataquest analyst John Armstrong said. "It's been to his credit that least outwardly, he has maintained the loyalty of his employees and staff."