3Com Execs Were Smart, But Not Smart Enough To Win

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3comThey’ve pinned down 10 deals–and a reputation as M&A champions–by buying technology and talent, not companies. Let Janice Roberts and John Boyle show you the ropes.

They don’t go by names like The Mortician or Macho Man. They don’t bellow threats. And they don’t fling themselves around the ropes. But don’t let that fool you. Janice Roberts and John Boyle are the industry’s championship tag team in the arena of mergers and acquisitions. Wearing 3Com’s corporate colors, they’ve pinned down 10 new companies in the past 18 months. Along the way, they’ve muscled 3Com into a $1.13 billion company.

Last month, 3Com’s tag team did it again–announcing the simultaneous additions of Sonix Communications and Primary Access. It was the quintessence of 3Com’s M&A strategy: scoping out untapped markets, identifying key players, and leveraging each new company’s technical strengths. In the process, Roberts, vice president of marketing, and Boyle, vice president of business development, criss-crossed the Atlantic, divvied up negotiations in San Diego and southern England, and tagged in members of 3Com’s leg al, human-resources, tax, and finance departments. At every stage, the team adhered to one guiding principle: “At the end of the day, you’re really buying people,” says Roberts.

It’s a principle that others attempting to purchase growth forget, at their peril. The reason: An acquisition’s success ultimately boils down to the new staff’s ability to fit in. 3Com learned that lesson through cruel experience. Now its M&A team weighs executive personalities as assiduously as it considers a candidate company’s financial and technical holdings. As a result, “3Com is unmatched at acquiring, inculcating, and assimilating the talents of other companies,” says Charles Robbins, senior analyst with Aberdeen Group, in Boston.

The proof is in the numbers. In 1991, before CEO Eric Benhamou oversaw his first acquisition, 3Com reported annual sales of just over $413 million. But beginning in 1992, 3Com set out to build, collaborate with, or buy every technology it thought the market would demand. Most of the time, it was buying–starting with BICC Data Networks, which added hubs to 3Com’s roster of Ethernet adapter cards. From there, 3Com’s radar picked up the need for LAN switching, remote-access servers, and ATM, and filled tho se needs by buying Synernetics, Centrum Communications, and NiceCom.

The result of this expansion: Annual revenues shot up 46 percent in 1993, then another 34 percent last year. This past March, 3Com reported its fiscal ’95 third-quarter results: Net income of $45.3 million on record sales of $338.7 million, a 55 percent jump over the same period last year. This hasn’t been lost on Wall Street, which has shown its approval by driving 3Com’s market capitalization from $385 million to nearly $3 billion in two years. Yet Benhamou, who’s soft-spoken to the point of whispering, downplays the deal making as an end-all: “We are not doing acquisitions because we see it as the principal road to success,” he says. “We do it only when it makes more sense than developing the technology ourselves. But along the way, we realized that understanding the acquisition process is a strategic skill to have.”

Radar: It’s not a skill that comes out of the box–involving as it does relationship building and gut feelings. Even so, 3Com has developed a decidedly different process. Its M&A group does not report directly to finance, nor does it focus exclusively on acquisitions. Instead, the boyish-looking Boyle, 39, heads a group responsible for corporate technology marketing. That’s important for two reasons: First, it identifies technology gaps in 3Com’s announced corporate strategy. Last year, for example, analy sts beefed that the company didn’t have much in the way of ATM. Buying NiceCom quelled those complaints. “You can view that role as problem solving,” says Boyle. The other role? Finding whole new markets in which to compete. That’s why Centrum Communications, of San Jose, Calif., came into the 3Com family. Centrum’s remote-access server paved new inroads into the telecommuter market.

Think of Boyle as the radar monitor–using market intelligence, friendships in the venture-capital community, and engineering feedback to find the next on-screen blip. In every case, he looks for the technology pieces that fit into 3Com’s rich connectivity puzzle, going after the home, the enterprise, and now–with Primary Access–the telephone carriers. With each new market or technology he homes in on, Boyle also turns up three or four players that can all be considered best of class. This is his l ist of potential acquirees, which 3Com will court simultaneously.

Tag: It’s Roberts’ turn. As vice president of marketing, Roberts, also 39, has a lot more on her shoulders than just mergers and acquisitions. She’s also general manager of the Personal Office Division and oversees all of 3Com’s general marketing, industry marketing, corporate communications, and business-development activities. That makes her a member of the executive committee–and the liaison between Boyle’s recommendations and the committee’s go-ahead. “We want companies that are either leaders alread y or have the potential to be,” says Roberts. “And we look at how well they can fit in 3Com, and how we can make them more successful.”

Roberts isn’t chanting platitudes. Before she ever joined the Santa Clara, Calif., company, 3Com learned how to muck up an acquisition. That acquisition was Bridge Communications, co-founded by Benhamou. And to Benhamou, 3Com’s executive staff in 1987 seemed more intent on burning rather than building bridges–no common vision, no overarching strategy to meld the two, no complementary distribution channels, not even a shared definition of the customer. The experience was traumatic. “That merger showed me how quickly you can destroy all the good things you ever created,” says Benhamou.

Human Touch: So although 3Com does the usual due diligence of examining potential candidates’ financial performance and technical strengths, it also does considerably more. It analyzes the human side of the equation. Take last year’s deal with Centrum. At the time of the negotiations, 3Com was also carrying on conversations with Shiva, DCA, and Telebit–companies that “were stronger in other areas,” says Roberts. “Sometimes you can sense that people are in this for the short term. We wanted whoever we picked to continue to run their divisions and to contribute to 3Com as a company.” Roberts says the people at Centrum just seemed to fit in better.

The same can be said for all of the other deals that Roberts and Boyle have engineered. To be sure, every company that 3Com eventually absorbed also boasted a leadership position of one kind or another: Synernetics held 35 percent of its LAN switching market, Primary Access is the No. 1 supplier of remote-access products to the nation’s telephone carriers, and Sonix holds most of the home ISDN market in the United Kingdom. But they also wanted to join 3Com because 3Com could provide something of mutual ben efit–a new channel, manufacturing expertise, and distribution.

Finding that mutual benefit takes all of the interpersonal skills that 3Com’s tag team can muster. Sometimes that person is Roberts, sometimes it’s Boyle. Take the most recent announcement. After looking at their schedules, Boyle opted to handle the Primary Access side of negotiations, in San Diego. Roberts, who grew up in Wilshire, England, chose Sonix in Cirencester in Gloucestershire, England. As Boyle and Roberts sat before their respective negotiating tables, each had at the ready the rest of 3Com’s t ag team, handling legal, finance, human resources, and tax advice. “As you’re negotiating, you have to make some trade-offs,” says Boyle. “And since you never want your talks to stall, you constantly call in your experts to work out those issues right there.”

What kinds of issues? Well, in San Diego, Primary Access was voicing reservations about the deal that Boyle hadn’t anticipated. The way he heard it, Primary’s senior managers wanted a “golden severance” built into the agreement–indicating a desire to take the money and run. It could have been the deal killer, because a key tenet of 3Com’s M&A philosophy is retaining the executive team. “We got into a stalemate because of the way the investment bankers had described the issue,” says Boyle. “As it turned out, they just wanted an equitable financial arrangement for all of their employees.” Meanwhile, Roberts was in negotiation with Sonix, trying to learn what it wanted from 3Com.

Timing: All told, the talks, counter-talks, term sheets (preliminary contract), and definitive agreements required two months of midnight phone calls, frequent-flyer miles, and videoconferencing. Because 3Com felt that twin announcement would carry more weight, timing was critical. At the wire, both Roberts and Boyle closed the term sheet with Primary Access on a Sunday, boarded a plane, then headed to England. There, it took another 10 days to hash out that term sheet with Sonix. Tagged off, Boyle flew bac k to San Diego to close the Primary Access deal, while Roberts stayed on to tag in 3Com’s financial honchos. Four days later, she had the definitive contract. Like other acquired companies, both will offer 3Com-branded products, and remain separate entities.

But they also share another important attribute with 3Com’s expanding tribe: In both cases, the deal came down to people. “There are a half a dozen companies like Sonix, but Sonix has a good team running the business,” says Benhamou. Besides, it didn’t hurt that Roberts and the Sonix director of marketing were old school chums. And at Primary Access? “I knew enough of the managers there to know we could get along,” says Benhamou.

With the latest deal completed, chances are good that the killing pace will finally slow down. The reason: Roberts thinks 3Com has plugged all the gaps in its strategic armor. Which doesn’t mean its M&A effort will stop. In 3Com’s internetworking market, the road to growth is through well-timed acquisition, says Paul Callahan, director of network strategies at Forrester Research. If that’s the case, then the Roberts-Boyle tag team promises to have 3Com wearing a championship belt for a good long time.

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