3Com Corp (COMS)

3Com Corporation founded way back in 1979 has been one of the initial companies of networking industry. It provides products and solutions that enable to manage efficient networking environment. The company’s product offerings are divided in five segments i.e. Networking, Security, Voice, Services and Connectivity Products. The Networking products are the major contributor, generating around 80% to the over all tally. 3Com has a global presence, however the Chinese market provides half of company’s revenue through the 3Com-Huawei joint venture where company holds 51% stake.

The company was one of the leading company in networking in the late 90’s, but series of strategic failures and growing dominance of the competitors has bought a huge drop in its revenues. The inflows have fallen by more than 80%. However, in the recent second quarter results one can see some positive signs. Although company is still making losses the cash burn rate has decreased significantly, revenues were up by 81% year on year, while margins have also shown improvement.

3Com now has made a very bold move with its decision to acquire the rest 49% stake of Huawei Technologies in their Huawei-3Com venture, which has lead to the company’s stock facing a downslide by around 8% due to concerns over management changes. While looking at the deal closely this might prove to be a move in the right direction. The Chinese market has been the fastest growing market in the world. 3Com’s almost all growth in revenues and margin can be attributed to its operations in China, and as company holds sufficient cash balance, it won’t have to go for additional leverage to conduct this acquisition. Adding to it, company’s ongoing cost cutting measures, its renewed focus on the core products Ethernet switches and IP telephony, along with the robust potential of Chinese market, make 3Com a decent investment for 2007.