Monday, December 13, 2004

3COM thinks it can buy growth (expensive growth)

COMS announced that it intends to buy TPTI for $430M in cash. CASH! that's 34% of the cash COMS has, what are they thinking? Keeping acquired companys' management in the game is tough when you hand out cash to them. The risk of this acquisition of not working out is high. The $430M purchase price works out to be over 10x sales (who said the bubble is over). I cannot see how COMS sustains its valuation with its base of cash much lower and higher operating expenses eating into what is left. Cash per share is reduced from $3.25 to $2.14, imagine what happens to the value oriented buyers as the "floor" on the stock is lowered.

TPTI which makes Intrusion Prevention systems is one of the young enterants in the hot security market. SYMC, ISSX, CSCO, MFE all play in this arena. Security and enterprise markets provide few synergies to COMS. Security decisions are made by IT not by network administrators and selling to two different set of decision makers is a very tough task. Cost synergies or vendor rationalization are not great arguments to present to these decision makers.

Security products are sold through speciality security resellers where COMS has no traction currently. TPTI products sells for much higher price points then COMS products which are directed toward price conscious lower-end of the enterprise switching market. COMS has little success in building a strong channel into the enterprise market as witnessed by COMS recent miss. You can ask JNPR how tough it is to enter the enterprise security channel even with great products as JNPR has missed security revenues for last three quarters.


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