3Com to Buy Force10, Riverstone?
The two leading candidates are metro-Ethernet switching and routing vendor Riverstone Networks Inc. (Nasdaq: RSTN) and 10-Gigabit Ethernet startup Force10 Networks Inc., says a source close to the company. A deal with either company is far from being final, but it appears that 3Com is getting serious about its talks.
It all makes sense. Earlier this month, 3Com announced it was selling its telecom-focused CommWorks business, which included some soft switching and remote access aggregation technology, to UTStarcom Inc. (Nasdaq: UTSI) for $100 million in cash (see UTStarcom Cops CommWorks). At the time the news was released, Bruce Claflin, president and CEO of the company, reiterated that 3Com would be looking to return to the enterprise market.
"Upon completion of this sale, 3Com will be a dedicated enterprise networking company, with a laser-like focus on meeting the needs of the enterprise customer," he said in a statement. “The sale of CommWorks for $100 million bolsters our already strong balance sheet; a balance sheet that will be put to work in support of expanding our enterprise strategy."
The company also stated in the press release that part of its strategy would be to enter new markets such as IP storage, Layer 4-7 switching, 10-Gigabit switching, and modular switching, as well as expand its offerings in technologies such as IP telephony, security, wireless, Gigabit switching, and Layer 3 switching.
So it's no surprise that the company would be looking for a potential acquisition or maybe even two. After selling off several product lines over the past few years, the company has whittled its current offering to a group of low-end, stackable Ethernet LAN switches that it sells primarily to small and medium-sized businesses. With about $1.4 billion in cash, it certainly has the money to buy what it needs.
“3Com has clearly stated it wants to focus on the enterprise market,” says Erik Suppiger, an equities analyst with Pacific Growth Equities Inc. “So the company either has to develop the technology internally or go out and buy something.”
But what about these two choices: Force10 and Rivestone?
Force10 has focused on building highly dense 10-Gigabit Ethernet switches. This is definitely a product area that 3Com might want. Force10 would be a solid choice here, given it is the only company that is currently shipping a product that forwards at line rate. Cisco Systems Inc. (Nasdaq: CSCO), Extreme Networks Inc. (Nasdaq: EXTR), and Foundry Networks Inc. (Nasdaq: FDRY) are all expected to announce line-rate 10-Gbit/s Ethernet products later this year.
While 3Com would likely get a good team of developers and engineers from Force10, the 10-Gbit/s product is far from a hot seller. The market for 10-Gbit/s Ethernet is still small with most of the traction so far being seen among researchers, very large data centers, and some metro Ethernet providers in Asia.
Riverstone offers a wider range of products that could fit into 3Com’s current portfolio. It offers an array of Layer 2 and Layer 3 fixed and chassis-based products. Even though Riverstone has recently begun targeting high-end enterprise customers like governments, universities, and hospitals, it is still considered a service provider supplier. 3Com would be forced to remarket the product for the enterprise.
Still, some analysts say the combination of one or even both of these companies with 3Com could be a good fit. Michael Howard, cofounder and principal analyst at Infonetics Research Inc., says he doesn’t have first-hand knowledge of these talks, but he believes it makes sense.
"Riverstone and Force10 could provide a solution set that would go from the high-end enterprise through the metro,” he writes in an email. “It would be an easy extension of technology for the Riverstone engineers to develop a set of enterprise products. The Force10 products represent the next generation of 10GE products, with traction in the very high-end grid computing space.”
But can 3Com succeed in the enterprise market? The company has tried it before and failed. Under the leadership of fomer VP David Tolwinski, most recently CEO of Tenor Networks, the company grew its high-function Ethernet switching product line from a $27-million-a-year division in 1994 to a unit that generated more than $400 million in 1998. But by 2000 the company was losing marketshare and decided to exit that market entirely, discontinuing the CoreBuilder, its Gigabit Ethernet chassis product.
The company eventually handed over its CoreBuilder accounts to Extreme, which also hired roughly 200 former 3Com sales and marketing staff. Extreme then began selling its Black Diamond product into those accounts.
“When you pull out of a market, it’s difficult to go back in and say ‘just kidding, we are really committed to the enterprise now,’ ” says one industry observer, who didn’t want his name used.
3Com and and Riverstone both declined to comment for this story, and Force10 did not return phone calls.
— Marguerite Reardon, Senior Editor, Light Reading