March 5, 2003
3Com Corp. (Nasdaq: COMS) finally exited the carrier market this week as it announced the sale of most of its CommWorks division to UTStarcom Inc. (Nasdaq: UTSI) for $100 million in cash (see UTStarcom Buys CommWorks).
3Com has long played second fiddle to other companies, such as Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), and Sonus Networks Inc. (Nasdaq: SONS), in the carrier market. It will now focus on the enterprise networking market, where it will need to play catchup with Cisco Systems Inc. (Nasdaq: CSCO) and others.
More importantly, the sale gives UTStarcom a much needed entrée to several North American carriers with which it previously did not have relationships. All of UTStarcom's $981.8 million in 2002 revenues came from outside North America. Most came from China and about 17 percent from Japan, Taiwan, and India (see UTStarcom Scores $100M Deal).
With the CommWorks products, UTStarcom now has a link to carriers such as AT&T Corp. (NYSE: T), BellSouth Corp. (NYSE: BLS), and Bell Canada (NYSE/Toronto: BCE).
The products and services involved in the acquisition include wireline and wireless access gear, such as remote access servers (RAS) and CDMA 2000 Packet Data Serving Nodes (PDSNs). Also involved are Class 4 softswitches, media gateways, and a professional services group that accounts for between 40 percent and 50 percent of CommWorks' annual revenues (see Softswitches Head for a Shakeout).
It should be noted that UTStarcom is not buying all of CommWorks. It is buying certain assets -- its equipment, contracts, agreements, licenses, leases related to its business, patents, and intellectual property rights. The deal, which will likely close next quarter, excludes CommWorks' real estate, many of its employees, and its financial assets, such as its accounts receivable and accounts payable.
UTStarcom says the deal will create about $20 million to $30 million worth of intangible assets, which will be amortized over four years. The company expects to take a one-time charge of between $8 million and $12 million to write off the in-process research and development during the quarter that the deal closes.
Hong Lu, UTStarcom's president and CEO, says CommWorks will add about $25 million to $30 million in revenue in each quarter for the balance of 2003 and about $30 million to $35 million per quarter during 2004.
CommWorks' sales in fiscal 2002 were $219 million, a 45 percent drop from fiscal 2001. In fiscal 2002, CommWorks represented 15 percent of 3Com's total sales.
UTStarcom and CommWorks are geographically close together, but the companies say they have very few overlapping products and few overlapping customers.
RAS, for instance, is very complementary to UTStarcom's DSLAM business, according to Hong Lu. However, Lu knows that not all of the CommWorks products will be homerun hitters. "We do not see that RAS is going to grow very extensively, but RAS is a very captive market, we have a very high market share, and existing customers will continue to buy, so it's something we value as a very important product," he says.
Bottom line: While 3Com gets rid of a slowing product area to sharpen its focus, UTStarcom gets some new carrier relationships and established product lines with higher margins.
"The very important part is we are now able to sell into AT&T and Verizon Communications Inc. (NYSE: VZ) -- a part of the market which we have had a very difficult time penetrating before, so we will be adding a lot more cross-selling opportunities," Lu says.
— Phil Harvey, Senior Editor, Light Reading
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