U.S. Robotics

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U.S. Robotics

also known as: 3com corporation founded: 1976

Contact Information:

headquarters: 5400 bayfront plz.
santa clara, ca 95052-8145 phone: (408)326-5000 fax: (408)326-5001 email: [email protected] url: http://www.3com.com

OVERVIEW

U.S. Robotics (USR) is the world's leading network access company. It is the largest provider of computer modems in the United States, and its Sportster products are the best-selling desktop modems in the world. USR has manufacturing facilities in Mount Prospect and Morton Grove, Illinois, and Salt Lake City, Utah, and a distribution center in Lesquin, France. All components in the company's products are acquired from third parties; in particular, most of its modem products are designed and manufactured using DSPs (digital signal processors) from Texas Instruments.

Internet access more than doubled between 1995 and 1997, and it is estimated that over 66 million households will be online by the year 2000. U.S. Robotics has had a significant impact on Internet usage through their innovative technology. In particular, the development of x2 technology enables modems to receive information at about twice the previously established standard high speed. USR introduced the Pilot organizer, a popular hand-held computer that stores addresses, schedules, and similar information and can be hooked into a desktop or laptop computer for uploads or downloads; its Megahertz PC cards are the most popular brand in the mobile communications market.

In 1997 USR was acquired by 3Com, a manufacturer of networking equipment such as servers and data network switches. The $8.5-billion transaction was the largest networking industry merger in history and resulted in a unified company that provides the links necessary for computers to be networked—3Com's specialty—and the connection of those networks by telephone lines—U.S. Robotics' expertise. The combined company calls itself 3Com and is second in the networking equipment industry behind Cisco Systems. It has 160 offices located in 45 countries on 6 continents. Its primary objective is to provide data and voice communications capabilities through technology at both the corporate and individual levels.

COMPANY FINANCES

Current figures specific to U.S. Robotics are no longer available; subsequent to the merger, such information is incorporated into the parent company's financial data. However, for the fiscal year ended September 1996, U.S. Robotics had revenues of $1.98 billion, representing an increase of 122 percent over the $889 million reported for 1995. 3Com, for its fiscal year ending May 31, 1997, reported sales of $5.6 billion; of that amount, $2.5 billion, or 44.5 percent, was attributed to USR.

For the fiscal year ending May 31, 1998, 3Com reported sales of $5.42 billion, a decline of 3 percent, reflecting lower sales of client access products, such as adapter cards and v.90 modems, which are based on the new 56kbps standard. Actual 1998 net income of $30.2 million, or $.08 per share, included a net charge of $253.7 million primarily related to the merger. For 1997, actual net income was $500.5 million, or $1.42 a share. Over 52 weeks, 3 Com stock ranged from a high of $59 to a low of $22.

ANALYSTS' OPINIONS

In the view of Forbes magazine writer, Jeffrey Young, 3Com needed to strengthen its resources, products, and marketing to remain competitive against the industry leader for networking capabilities, Cisco Systems. Although the companies are similar in revenues (about $6 billion each annually), 3Com is in Cisco's shadow where high-margin equipment used for large networks is concerned. That industry grows at a rate of about 100 percent a year, compared with low-margin, end-user networks, which sustain about a 25-percent growth rate. Acquiring U.S. Robotics ensconced 3Com in the end-user segment of the market. 3Com's position was that it was a deliberate strategy, intended to strengthen a market in which it had a chance, rather than go up against Cisco on Cisco's territory—the high-margin equipment market that it dominates. Young contended that the market for modems is high-growth but not necessarily profitable.

By purchasing U.S. Robotics, 3Com relied on having more than half of its revenues derive from the sale of modems and network cards (cards which connect computers to a network wire extending from the wall). Although 3Com provides more of these network cards than any company in the world, the cards are relatively easy to manufacture, according to Young in the Forbes piece, and more cheaply priced cards should work as effectively as the higher-priced 3Com product. Also, Intel reduced its network card price by 40 percent in 1997 and caused a $2-billion drop in 3Com's market value in only two days. Erick Schonfeld, writing in the May 11, 1998 issue of Fortune, said that since the merger, "the company has reported nothing but bad news." And Robert Riselhueber in "Toxic Accounting," an article in Electronic Business, wrote that "lax sales accounting methods . . . may have caused an unwary 3Com Corp . . . to pay too much . . . for U.S. Robotics."

FAST FACTS: About U.S. Robotics

Ownership: U.S. Robotics is owned by the 3Com Corporation, which is a publicly held company traded on NASDAQ.

Ticker symbol: COMS, formerly USRX

Officers: Eric A. Benhamou, Chmn. & CEO, 42, 1997 base salary $817,508; Bruce L. Claflin, Pres. & COO, 46; Christopher B. Paisley, Sr. VP-Finance & CFO, 46, $419,768

Employees: U.S. Robotics, approximately 5,800 worldwide; 3Com, 7,100

Principal Subsidiary Companies: 3Com Corp. is the parent company of U.S. Robotics. U.S. Robotics in turn has a number of subsidiaries including: Megahertz; Amber Wave Systems; ISDN (Integrated Service Digital Network) Systems; Palm Computing; PNB (France); and Scorpio Communications (United Kingdom).

Chief Competitors: U.S. Robotics competes with a number of companies in two general categories—systems products, and personal computer-related products. Some primary competitors include: Lu-cent; Rockwell; Boca Research; CiscoSystems; Casio; Motorola; Hayes Microcomputer Products; ZoomTelephonics; Diamond Multimedia Systems; and Boca Research.

Zacks Investment Research in mid-August 1998 found 3Com ranked twenty-second of 61 companies within the industry. Wall Street brokers gave 3Com a rating of 1.9 (1 indicating a strong "buy" recommendation, 5 meaning a strong "sell"). Of 35 brokers, 25 gave a strong or moderate buy signal, while 10 ranked holding 3Com stock; none recommended selling. Paul Johnson, a Robertson Stephens analyst, speculated in May 1998 that 3Com's price per share could steadily increase over the next year even if 3Com focused on solidifying its position.

3Com's consumer market leadership was recognized with five top awards for its U.S. Robotics modem line and the Palm Computing platform handhelds from Windows Magazine, PC World, and PC/Computing. The awards were announced at PC Expo 1998.

Tests by Henderson Communications Laboratories, an independent testing organization, compared the brands of V.90 modems available. The results showed that USR's 56kbps modem outperformed the other tested brands in both connect speed and reliability. In another comparison, the March 1998 issue of Boardwatch magazine reported the results of testing Rockwell and U.S. Robotics 56kbps modems over real-world phone lines. The USR modems completed 90.4 percent of all call attempts, compared to 79 percent completion of call attempts with various brands using the Rockwell K56flex technology. U.S. Robotics' modems are almost always found at the top of listings such as "High-Speed Modems Ratings," in Byte magazine, "CNET Recommends," "Speed Demons" in Popular Mechanics, and "Top 10 Modems" in PC World.

HISTORY

3Com got its start by manufacturing network cards. The cards still account for about 20 percent of the company's revenues and are sold more than any other network cards worldwide. In 1997 3Com acquired U.S. Robotics, a worldwide leader in modem technology. U.S. Robotics was founded in 1976, getting its name from the fictional company U.S. Robot and Mechanical Men, Inc. from Isaac Asimov's I, Robot. Both 3Com and U.S. Robotics have a history of expansion through acquisition and technological advances. As Casey Cowell, then chairman and CEO of U.S. Robotics, said in 1997, "Whether we have developed or acquired it, the technology we control succeeds in the marketplace." U.S. Robotics acquisitions included Amber Wave Systems and Scorpio Communications, the latter for its capability in ATM (asynchronous transfer mode) switching.

STRATEGY

Each acquisition by U.S. Robotics was a strategic move to cover gaps in the market or to expand its existing product lines. For instance, Megahertz had a strong mobile communications presence. By combining it with U.S. Robotics' LAN access and WAN (wide area network) modems, the company strengthened its existing product lines. Acquiring PNB in France afforded USR a strategic location from which to expand business not only in France, but in Europe overall. PNB has been innovative in the development of a particular modem, a PCMCIA card modem, for which the market is extremely competitive. By acquiring PNB, U.S. Robotics gained an advantage over the competition.

U.S. Robotics reorganized its major operations prior to the merger with 3Com. Instead of domestic and international divisions, the company formed "global business units," which concentrate on a particular product line or lines. In addition, U.S. Robotics was the first company to advertise modems on television.

CHRONOLOGY: Key Dates for U.S. Robotics

1976:: U.S. Robotics founded as a distributor and maker of an acoustic coupler
1979:: 3Com is founded; U.S. Robotics launches its first modem
1980:: 3Com focuses on becoming a manufacturer of local area network (LAN) applications
1987:: 3Com acquires Bridge Communications, an internetwork gateway provider; forms joint venture with Microsoft to market LAN Manager software for Microsoft's OS/2 operating system
1989:: U.S. Robotics acquires Miracom Technology, Ltd. to expand into foreign markets
1990:: Novell takes over 3Com as leader in LAN network sales
1994:: U.S. Robotics introduces a modem that runs over cell phone networks
1997:: 3Com and U.S. Robotics merge creating the largest business combination within the computer networking industry

Because of Cisco's dominance in the network market, 3Com is concentrating on new product development to make it a more viable competitor. For instance, 3Com developed a "layer 3" switch that is a combination of switch and router; consumers are replacing existing routers in their company's computer networks with 3Com's layer 3.

Incompatibility in modem technology has at times been a problem for 3Com. The new x2 technology, which enables modems to download information at 56 kilobits per second (nearly double the former high speed of 28.8 kbps), required new technology on the receiving end. U.S. Robotics held the lead in the new high speed 56kbps modem until Rockwell International began manufacturing a similar product, one incompatible with the U.S. Robotics modem. While the International Telecommunications Union (ITU), a United Nations agency, was attempting to develop a joint modem standard to head off a competitive war over the two proprietary protocols, 3Com strategically offered its customers a guaranteed free software upgrade to whatever standard ITU put forth. The conflict was resolved in February 1998 when the big modem vendors, 3Com, Rockwell, Motorola, and Lu-cent, agreed to a compromise proposed by Intel. As reported by PC World and on the TechWeb web site, the new standard was adopted by ITU, meeting in Geneva in January 1998. After intensive testing, 3Com and Rockwell announced interoperability between their V.90 modems.

INFLUENCES

3Com frequently makes its strategic decisions with its biggest competitor, Cisco Systems, in mind. 3Com chairman Eric Benhamou said he avoids attacking Cisco on Cisco's territory and instead focuses on "surround and conquer." This was one reason for the development of the layer 3 switch. It is new technology that may be able to successfully infiltrate the grasp that Cisco has on corporate network business. "Every customer win is against Cisco, every single one," Benhamou said.

One facet of the chairman's strategy to avoid direct competition with Cisco is its campaign to attain popular brand recognition in the consumer market, and, in effect, making 3Com a household word. In an interview with Luc Hatlestad of Red Herring magazine, Benhamou revealed that this was the motive behind 3Com's decision to pay $5 million in 1995 to attach its name to San Francisco's Candlestick Park.

Cisco tends to have the market cornered where large Internet service providers (ISPs) and corporate clients are concerned, whereas 3Com controls the fringes by selling modems, network cards, and handheld computers. At a networking industry conference for financial analysts in August 1998, 3Com, which was the first company to address the unique networking needs of small- to mediumsized enterprises (SME), outlined its strategy for continuing to lead in providing networking and Internet access solutions for that sector. The SME segment of the networking market, including workgroup hubs, switches, remote access services, and boundary routers, is estimated to be approximately $8 million per year, growing to $25 billion by 2005 in the view of some industry analysts.

3Com is improving its inventory control processes because of a problem that occurred during the U.S. Robotics merger, a problem that wasn't discovered until after 3Com had purchased the modem leader. Securities analyst Paul Johnson said he observed U.S. Robotics' modem inventory rising just prior to the 3Com merger. In addition, accounts receivables went to a 105-day period instead of the usual 45 days. Dave Raezer, analyst with NationsBank Montgomery Securities, said U.S. Robotics "were overstating their revenue." He also observed that 3Com "sped through the due diligence portion . . . they were a little quick to do the merger for strategic reasons, and they're paying for it now." 3Com's CEO Benhamou turned his attention to the problem by issuing "a sweeping correction of inventory levels and management practices."

CURRENT TRENDS

In 1996, U.S. Robotics said it expected that 50 percent of revenues would derive from international sales in the future. The company acquired PNB not only to fortify its presence in France but to gain a better foothold in the European market. It also aimed to grow in the Asia-Pacific region, and purchased Amber Waves to help achieve that goal.

U.S. Robotics also began selling its cable modems by way of a new venue, retail stores. As of June 1998, the cable modems were available in selected retail stores in addition to direct sales by toll-free numbers, the Internet, and cable operators.

U.S. Robotics aimed to set the standard for a wide range of communications products including voice, video, wireless, digital access, and cable products. Michael Seedman, vice president and general manager of the pre-merger company's personal communications division said, "Whether it's analog or digital, we're working on new access methods that deliver the higher bandwidths our markets demand. Our strategy is to provide equipment that gives users the best performance possible today and that readily adapts to future changes. We're not committed to any single technology. We're committed to connecting people to the world."

PRODUCTS

USR's product lines include dial-up modems, ISDN terminal adapters, flexible and scalable remote access servers and concentrators, LAN access and switching products, telephony products, and hand-held electronic organizers. Probably the most newsworthy product to originate from USR in recent years was the x2 technology enabling modems to download information twice as fast as they had previously. USR also launched the PalmPilot, and in 1996 introduced integrated NT server remote access technology. This was the first time that remote access and server technology had been incorporated. The product was developed with Microsoft, and integrates, within a remote access server, various applications such as mail servers, database servers, and Internet or intranet servers.

Products are sold under the corporate brand name U.S. Robotics, and under the product line brand names Courier, Megahertz, Sportster, Total Control, Edge-Server, TOTALswitch, TOTALcell, NetServer, LAN-Linker, ConferenceLink, PalmPilot, and WorldPort.

CORPORATE CITIZENSHIP

In August 1998, 3Com donated U.S. Robotics 56kbps modems for installation at more than 140 SeniorNet Learning Centers located in senior centers, school and college campuses, libraries, hospitals and retirement communities around the country. Addressing the critical technology skills gap, 3Com developed the Net-Prep program in partnership with WestNet Learning Technologies and Digital Education Systems. More than 70 high school and community college instructors from across the United States and Canada have completed three one-week training sessions, held in Arvada, Colorado, and in the Boston area, for the comprehensive platform-neutral networking curriculum. The NetPrep program requires high school students to complete four semesters of course work in networking fundamentals, LANs, WANs, and network architectures.

In 1996 U.S. Robotics sponsored a golf outing to raise money for the Berkshire Autistic Society. Each participating team was given a Pilot hand-held computer with GolfTrac software to keep score. In addition, 3Com donates annually to the Alzheimer's Association, the American Cancer Society, American Diabetes Association, American Heart Association, American Red Cross, Earthshare, Nature Conservancy, Santa Clara University, Second Harvest Food Bank, and the United Way through its "Share Our Success" drive. 3Com employees may contribute to a charity of their choice and the company will match each contribution at 100 percent, to a maximum of $1,000. 3Com employees also give their time to various institutions, for example, the Junior Achievement program, which helps students through grade 12 attain hands-on experience in business.

3Com has a proactive policy where the environment is concerned. The company eliminated the use of CFCs (chlorofluorocarbons) in its U.S. manufacturing operations in 1992, long before the issue of mandates requiring it. 3Com also uses a "no-clean" solder in the manufacture of its printed circuit boards, which eliminates the use of thousands of gallons of water each year. In addition, packing material consists of a non-CFC based material. About 90 percent of office paper is recycled, plus 98 percent of the company's laser printer toner cartridges, and 3Com recycles several hundred tons of aluminum, cardboard, and precious metals. 3Com also supports carand van-pooling and initiated a telecommuting program enabling employees to work from home. As a result of these efforts, 3Com received the President's Environment and Conservation Challenge Award.

GLOBAL PRESENCE

U.S. Robotics reported in 1996 that international sales, which grew by 125 percent over the previous year, still represented only 26 percent of total sales, although in the future it could reach as much as half of total revenues. As an example, a major market development effort established Sportster as the largest-selling modem in Europe, and laid the groundwork for equally dramatic growth in the Middle East, Australia, and Japan. These international sales represented 45 percent of 3Com's total revenues in 1997-98, up from 40 percent in 1996.

With 160 offices in 45 countries on 6 continents, 3Com has expanded its global presence. The company has manufacturing facilities in Boxborough, Massachusetts; Chicago; Salt Lake City; Santa Clara, California; Ireland; Israel; and Singapore. It also has service and support centers in the Asia-Pacific Rim, Chicago, Europe, Latin America, and Santa Clara. The company announced in July 1998 the launch of two joint ventures in China. A venture with the China Academy of Sciences will research possible uses for network technology. The other, with Beijing Kuanguang Telecommunications and others, will manufacture network technology products such as modems and switching equipment. These ventures, expected to amount to $33 million, plus other investments in China, will reach $100 million by the year 2000.

EMPLOYMENT

3Com encourages employees to telecommute some or even 100 percent of the time, if their duties permit. Flex-time is given new meaning, in that employees can largely schedule their own hours if the work can be performed, and the employee's manager agrees. In addition to traditional time-off benefits, 3Com offers a paid sabbatical to employees with four years of continuous service.

SOURCES OF INFORMATION

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