3Com Reports Net Loss Amid Bain Buyout Bust

Masri said 3Com's less than stellar results can likely be traced to uncertainty surrounding the potential acquisition by Bain Capital Partners, a Boston-based investment firm that in September offered to buy 3Com for $2.2 billion. The deal would've made Chinese networking equipment vendor Huawei Technologies minority shareholder with a 16 percent stake. Huawei's reported ties to the communist government had many U.S. companies concerned about security.

Masri also said that address declining sales, the company will undergo restructuring efforts that include moving research and development functions to China and India.

In a conference call announcing its third quarter earnings for fiscal year 2008, Marlborough, Mass.-based 3Com's president and CEO Edgar Masri said its net loss in the third quarter increased to $7.8 million, or $0.02 cents a share, from $4.8 million, or $0.01 per share in the third quarter of 2007. He said the net loss increase was affected by $6.1 million non-cash deferred tax liability provision, which will likely be reversed in coming quarters.

Despite the drop, revenue rose four percent from $323.4 million to $336.4 million.

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Bain terminated the deal last week, noting that it and 3Com could not reach an agreement and that the Committee on Foreign Investment in the U.S., a government agency that reviews and can block international transactions based on national security, would likely refuse the merger. 3Com shareholders, however, voted in favor of the transaction the following day, with nearly 70 percent of shareholders approving the merger. The approval opens the door for 3Com to pursue a $66 million break-up fee.

"We believe both parties continue to have obligations under the agreement," Masri said on Monday, later adding "Beyond these comments we won't be saying anything more about this transaction."

Despite the Bain deal falling through, Masri said 3Com's H3C segment continued to perform well in the third quarter, posting $213 million in sales, an increase over $195 million in sales in the same quarter last year. The vendor's TippingPoint security arm saw a sales decline, however, dipping from $24.5 million last year to $23.6 million this year. Masri said the drop in TippingPoint sales is based mostly on federal deals falling through because of the Bain acquisition talks and the possibility that Huawei would hold a minority stake in the company.

Masri said 3Com struggled mostly in North America where sales dropped from $58.5 million in the third quarter of 2007 to $42.9 million in this year's third quarter. He said several 3Com customers in the U.S. delayed purchasing decisions because economic uncertainty and the pending Bain buyout.

"In North America we were the most affected by the merger announcement," he said.

As for specific product categories, 3Com posted small growth in networking sales, rising from $259 million to just under $280 million and a small rise in services sales growing from $9.8 million to $10.3. Security and voice sales, however, dropped. Security slipped from $30.6 million to $30.5 million and voice sales trailed from $18.7 million to $15 million.

To combat slipping sales, Masri said 3Com will undergo restructuring efforts, one that has the potential to save $15 million annually by moving research and development and engineering functions to China and India, and another that could save $50 million or more. Masri wouldn't comment further on the second restructuring effort.

Based on those efforts, 3Com projected its fourth quarter revenues would fall between $310 million and $315 million. But Masri said he expects to see continued softness in the North American markets.

"We're taking a cautious approach to North America," he said.