3Com Wins Approval for its Huawei J-V Acquisition (and reports earnings)

3Com (COMS-NASDAQ) announced the receipt of final approval from the People’s Republic of China for 3Com to acquire Huawei Technologies’ 49 percent stake in H3C for $882 million. 3Com, which won the right to acquire the remaining stake in H3C through a bidding process that ended on November 28, 2006, anticipates the deal will officially close on or about March 29, 2007. 3Com intends to use approximately $470 million of cash from its balance sheet and approximately $430 million from a senior secured bank loan at its H3C segment.

3Com ended the quarter with $956M in cash and equivalents. The net increase of $88M from the balance at the end of the previous quarter was driven by positive cash from operations.  So teh good news is that the company is NOT going to Zero Out its cash balance, which gives investors extra hope.  It is also lightly growing its TippingPoint security revenues up 10% sequentially to $25 million.

Revenues hit $323 million; GAAP loss was -$0.01 EPS (-$9M) and non-GAAP was actually positive income for the second quarter at $10M. Revenue estimates were $329 million.

There is still some mixed news and this one is still going to be a battleground.  The Bad: The revenues were a tad light on the surface.  The Good: revenues weren’t so light that the doomsday crowd can point to an imminent death and the company can probably account for some of its other revenue wind downs as part of it.  The other good news is that the company is showing that it won’t really zero out their cash, and that was actually a concern that the bears could point to.

This was one we previously noted where management might not be able to fix the company.  Unfortunately it is still an unknown, and will probably be that way for a while longer.  If they announce a new partner or get a big infusion after the H3C deal closes then they have that much more to go on. 

COMS closed Down 2% to $3.79 today, and shares are at $3.82 atfer-hours.  This report and approval is not the sort of news that will run a stock very much on the surface, but there is enough here that the optimists could make a case to run the shares up.  Unfortunately, we already said the verdict is going to be out for a while.

Jon C. Ogg
March 22, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.