Shareholders sue 3Com directors over HP merger

3Com's board of directors is facing a lawsuit over the proposed acquisition by Hewlett Packard Development Company, but a financial analyst who studies Ethernet switching argued if approved, both vendors would benefit from the deal.

Two 3Com shareholders - Nick Bernhardt and Shane Kadlec -- filed a class action lawsuit in the Wilmington, Delaware-based Court of Chancery, which adjudicates equity disputes.

The suit came within days of HP's announcement it agreed to pay US$2.7 billion to acquire Marlborough, Mass.-based 3Com. The deal values 3Com at $7.90 per share. This is 39 per cent higher than 3Com's share price before the agreement was announced but the plaintiffs say the 3Com board of directors should have tried to get a better offer.

"I don't see too many legs upon which such a suit can stand," said Paul Mansky, San Francisco-based principal of equity research for data centre infrastructure at Vancouver, Canada-based Cannacord Adams. "3Com has been a bit longer on promise than delivery for a number of years."

Mansky noted 3Com has cut costs in research and development and alluded to the manufacturer's focus on Chinese customers with its H3C unit, originally formed in a partnership with Huawei Technologies of Shenzhen, China.

"They've done a decent job in international markets, however the market in North America is still dramatically under penetrated," Mansky said. "They re-entered that market for the third time in Ethernet switching."

But Bernhardt and Kadlec allege in their statement of claim the 3Com directors failed to "take all necessary steps to ensure that 3Com stockholders would receive the maximum value realizable for their shares of Company stock reasonably available on the market in any transaction effecting the change of corporate control of the company."

3Com officials did not immediately respond to a request for comment. The allegations have not been proven in court.

Named as defendants are former 3Com CEO Eric Benhamou, currently chairman of board, and president Ron Sege.

The plaintiffs, who are represented by New York law firm Harwood Feffer, claim financial analysts believe that 3Com is undervalued.

But financial statements 3Com released to the press indicate quarterly revenues and profits are dropping. During the three months ending May 29, 2009, 3Com made $20 million on revenues of $295 million. But during the quarter ending Aug. 31, net earnings were $7.46 million, or 63 per cent lower. Revenues for the latest quarter were $290.5 million, 1.5 per cent lower than in the previous quarter.

3Com's net income for the year ending May 29, 2009 was $115 million, on revenues of $1.317 billion. 3Com lost $229 million the previous year on revenues of $1.295 billion. The loss in the previous year included a writedown of goodwill of US$158 million.

The lawsuit alleges the directors "failed to implement an adequate bidding mechanism to foster a fair auction of the company to the highest bidder or to sufficiently explore strategic alternatives ..."

As of Tuesday morning 3Com shares were trading at US$7.50.

Mansky noted when Cisco Systems offered to acquire Tandberg in October, it was offering "much more modest premium" than HP did when it offered 39 per cent premium.

According to Cannacord Adams, its investment banking clients do not include Cisco, 3Com or HP, nor does it own one per cent or more of any of those vendors.

San Jose, Calif.-based Cisco announced Oct. 2 it was offering 153.5 Norwegian Kroner per share of Oslo-based Tandberg, which was 11 per cent higher than the most recent market value. However Cisco recently increased its offer.

If the merger between HP and 3Com is approved, it would be a "win-win" for both companies, Mansky argued.

3Com has "decent products but an inferior channel" and would be "married with a company with a superior channel but absent the product portfolio," Mansky said.