3COM CORP. (COMS) Analysis.pdf2007: Huawei-3Com ($160 MM + $28MM + $882MM = $1.07 BN) 3Com’s...

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3COM CORP. (COMS):BUYER BE WHERE?

JULY 2008 / $1.94


SynopsisIf some investors “follow” certain companies, it’s more accurate to say that I stalk them. Because attractive companiesseldom sell at attractive prices, most of my investments consist of entities that I have shadowed for years beforeevents conspire to create that rare buying opportunity. Pre-existing intimacy with the asset is a pivotal advantagebecause it enables one to both immediately gauge the impact of an event – whether market-wide or company-specific– and, if advisable, aggressively exploit it. [Investors interested in a more expansive description of this approach areinvited to read The Sunny Side of Stalking, featured on the Desiderata page of my website, www.greyvm.com.]

I first took note of 3Com Corporation (“3Com,” “COMS” or the “Company”) in the mid-1990s because it seemed to beeverything that most other internet companies were not: A real business providing an integral product. As a provider ofthe technological plumbing that local networks relied on to function, 3Com might have been surrounded by the dot-comfroth, but it wasn’t of it. However many internet start-ups might go the way of Pets.com, 3Com’s future was a functionof the expanding demand for bandwidth and interconnectivity, which was no mania – it was inevitable. As fate wouldhave it, the Company’s success was not.

By 2007 3Com was a splintered, dysfunctional fraction of its former glory. No longer credible as a tech growth story, itwas drawing the attention of value and activist investors more interested in salvaging its existing worth thanspeculating on its future performance.

The window of investment opportunity opened in early 2008 when ostensibly irresolvable national security concernsfinally compelled Bain Capital to abandon the $2.2 BN bid they had made in conjunction with Huawei Technology inSeptember 2007. The collective impact of that aborted transaction, discredited management, and malfunctioningfinancial markets drove COMS to trade at such a steep discount to its intrinsic value – on several occasions during2008 breaking $2 – that it proved irresistible. It was scarcely a year later in November 2009 when Hewlett-PackardCo. announced it would acquire 3Com for $2.7 billion in cash, or $7.90/share. Even a buyer who paid as much as$2.50 earned a 216% gross return, a phenomenal outcome given the margin of safety and risk/reward at that purchaseprice. Like many good investments, 3Com was an exercise in restraint. But patient pursuit was well rewarded.

DisclosureThis document summarizes a much longer analysis originally generated in 2009 and 2010.Excluding historical stock price data, it has not been updated to reflect subsequent developments.

Book Value: ~ $2.48

11/09: HP Bids$7.90/share

1/08: Bainabandons bid

$4

$2

$3

$8

5/07: Citadelacquires 10%

6/07: Tipping PointSpinoff Announced

9/07: Bain/HuaweiBid $5.30/share

8/5/08: Raised guidance for 1Q

$7.90 HP Purchase

FYE 5/08 Book Value: $2.47

$5.30 Bain/Huawei Bid


Business Overview3Com was founded in 1979 by Robert Metcalfe, Howard Charney, Bruce Borden, and Greg Shaw subsequent toMetcalfe inventing Ethernet, a computer networking technology for local area networks (LAN), at Xerox’s fabled PARCresearch facility. An extension of Metcalfe’s PhD thesis, Ethernet enabled computers grouped within the same space(such as an office) to physically interconnect and communicate with one another quickly and safely.

Launched with the intention of focusing on computers, communication and compatibility (the 3 “coms” of 3Com), theCompany came to provide much of the hardware central to operating a local network, including Ethernet switches;wide area network routers; wireless access points, adapters, and connectivity products; internet access gateways andfirewalls; network management applications; network security platforms, including the TippingPoint IntrusionPrevention System, IP Telephony applications; LAN interface cards; and IP video surveillance and network storage.

A significant portion of its product portfolio was obtained by acquisition, which included:1

1987: Bridge Communications ($151 MM)1992: BICC Data Networks ($25 MM / 500,000 shares)1993: Star-Tek and Synernetics ($104 MM)1994: Centrum and NiceCom ($53 MM)1995: AccessWorks, Chipcom ($775 MM), Primary Access ($170 MM), and Sonix Communications ($70 MM)1996: Axon and OnStream Networks ($65 MM)1997: US Robotics merger/acquisition ($6.6 BN / 1.75 COMS: 1 USR)1999: NBX ($90 MM)2000: Kerbango ($73.5 MM)2001: Gigabit Ethernet network interface card (NIC) business of Alteon WebSystems ($122 MM)2001: Nomadic ($31.8 MM)2005: TippingPoint ($430 MM)2007: Huawei-3Com ($160 MM + $28MM + $882MM = $1.07 BN)

3Com’s efforts to build upon its earlier organic success through acquisition fared poorly; in several cases the Companypursued technology either flirting with obsolescence or already at the cusp of extinction. Its 1997 merger with USRobotics gave 3Com a major presence in dial-up modems, a hardware already headed for the technology tar pits, andPalm, a business it was spinning off only three years later (along with US Robotics in 2000). Unrelenting competitionfrom Cisco and others eventually pressed 3Com to exit the high end router space, while pressure from Intel eventuallysnuffed out what was at one time a key source of cash flow for the Company, its network interface card (NIC)business.

3Com’s strategic alliances didn’t fare much better. In an apparent attempt to accelerate its expansion into the GigabitEthernet space, in December 2000 3Com entered into an alliance with Broadcom Corp. The two weren’t strangers;3Com held performance warrants attached to a purchase agreement it had struck with Altima Communications in July2000, so when Broadcom acquired Altima shortly thereafter, the Altima warrants became warrants to purchase992,000 shares of Broadcom.

2Ultimately the arrangement faltered, and along with it any hope that 3Com had of

establishing a material, successful presence in the Gigabit Ethernet market. Another expensive misstep bymanagement…

Whatever foresight it lacked with respect to technology 3Com exercised in excess when it came to geography. InNovember 2003 the Company contributed $160 MM in cash to launch “H3C,” a Hong Kong-domiciled joint venture inChina, with the Chinese company Huawei Technologies (“Huawei”). At the time COMS cited three goals: to establisha substantial presence in China, to create a resource capable of building enterprise-class, cutting-edge switching androuting products faster than COMS could deliver on its own, and to capitalize on a rapidly growing pool of engineeringtalent. It was a master stroke that, however poorly negotiated (as we’ll discuss later), appeared to succeed on all threecounts. In late 2006, after spending an additional $28MM to raise its stake to 51% earlier that year, the Companyexercised its right to bid for and acquire Huawei’s share of the JV, purchasing the latter’s 49% stake in H3C for $882MM.

1The prices paid, shown in parentheses, are approximations; in many cases the subject companies were acquired using 3Com

shares as currency, and thus their cost fluctuated with the share price.2

As an aside, those warrants were valued at $244 MM but, because they were linked to purchases, were recorded as a credit tocost of sales as purchases were made.


When it consolidated H3C during 4Q06 3Com organized itself around two operating business segments:

(1) The Secure, Converged Networking (SCN) segment, comprising security, networking, and voice productofferings (other than H3C offerings in these areas), and

(2) The H3C segment.

H3C was the core of its engineering and development of networking solutions and sold into the China market. Inaddition to marketing networking products to developed markets,3Com’s DVBU division sold H3C’s products and H3C-sourcednetworking gear on a worldwide basis. In addition, its TippingPointsecurity division (“TippingPoint” or “TPTI”) sold purpose-builtappliance security solutions through intrusion prevention systems(“IPS”), technology and related virus protection services called“Digital Vaccine.” Per the figures at right, networking comprisedthe bulk of their business.

In fiscal 2008 COMS recast its segment reporting to more closely reflect how they were internally managing theirbusiness, breaking the SCN segment into the Data and Voice business unit (“DVBU”), TippingPoint, and corporateexpenses (“Corp”). As reported for the quarter ending February 2008, 3Com’s overall results were as follows:

Although margins in DVBU were low relative to H3C and TPTI, over 70% of 3Com revenue enjoyed gross marginsover 57% (see annual margins for 2007 and 2008 below).

Any analysis of the underlying segments was somewhat hampered by the fact that the actual split between productand service revenue wasn’t completely clear. Close readers of the filings noted that the SEC raised this issue with theCompany directly in their correspondence dated April 23, 2007.

3In its response, 3Com asserted that they were not

required to distinguish between the two because the amounts concerned are below the 10% “sub-caption” thresholdimposed by the applicable accounting rules. In advancing this argument they noted that consolidated service revenuefor the 2006 fiscal period was $45.6 MM, a not insignificant sum but nonetheless a small percentage of total revenue of$794 MM for the same period.

3In reference to management’s breakdown of product categories in COMS’ 10-K for FYE 6/06 and 10-Q for QE12/06, the SEC

observes that “certain categories may include both product and services (e.g. TippingPoint maintenance included in the Securitycategory).”


With consummation of the H3C transaction in 2006 3Com in many respects became as much a China play as atechnology investment. By 2008 the Company was generating approx. half its revenue in China.

Unfortunately, largely as a result of self-inflicted wounds 3Com’s success in China was more short-lived than mosthouse pets. From 41% as of the quarter ending November 2006, Huawei’s percentage of H3C’s revenue had beensteadily declining. By the end of FY08 (5/08), Huawei comprised 29% of H3C’s revenue and approx. 17% of 3Com’sconsolidated revenue. 3Com saw the fall-off coming – it was all but inevitable, not least because the originalagreement they’d struck with Huawei provided that:

1. 3Com’s existing OEM agreement with Huawei didn’t include any minimum purchase requirements, and

2. That OEM agreement, what little it was worth without mandatory purchase minimums, expired in November2008.

As a result, the Company ran the risk that Huawei would either source products from another vendor or develop themitself – which it apparently proceeded to do, until it decided to team up with Bain and devour its former partner.Anyone missing the agonizing irony of this endgame need only review the events that led up to it, which read like abusiness school case study drafted by Aesop.

Recall that the H3C JV was launched in 2003 with $160 MM of 3Com’s cash. Then, in early 2006, the Company spentanother $28 MM to raise its stake in the JV from 49% to 51%. Finally, in late 2006 COMS expended an additional$882 MM to acquire the remaining 49% it didn’t already own – for a grand total of $1.07 BN. Immediately 3Com’ssales to Huawei began to nosedive, ultimately declining by approx. half over the ensuing 18 months. In June 2007,with multi-billion-dollar fund Citadel LLC having acquired a 10% stake and agitating for change, managementannounced the spin-off of TippingPoint, a business it had acquired only 2 years earlier in 2005 for approx. $430 MM.However, before management could execute the spinoff, Huawei – again, whom 3Com had just paid $882 MM –turned around and with Bain offered to buy the entire Company, H3C included, for $2.2 BN (or 2½ times what Huaweihad received for only 49% of H3C in 2006). Ouch…

It all had a very pre-meditated, Machiavellian feel about it. Huawei effectively ensured 3Com would decline in value bydramatically reducing the amount it purchased from its former partner, and then used the $882 MM 3Com had paidthem just 2 years earlier for only 49% of H3C to fund a low-ball bid for the whole company.

The math was too damning for even the bulge bracket to hold its tongue. During the investor conference call held onSeptember 28, 2007, John Marchetti, an analyst from Morgan Stanley, provided this brief but withering assessment(paraphrased here): If the price 3Com paid for the last 49% of H3C implied that the JV alone had to be worth $1.8 BN,or about $4.50/share, management had either dramatically overpaid for H3C or the rest of 3Com was being sold toBain for about 75 cents a share.

4Who let that guy on the call?

Whether or not they embraced the irony, the SEC’s correspondence with 3Com indicated they had their own set ofconcerns. The government was particularly interested in what information Huawei had provided Bain with respect toH3C’s and 3Com’s operations.5 Although such attention could only be unwelcome, the SEC’s probing proved nothingcompared to the crucible they faced on Capitol Hill.

4DEFA14A filed 9-28-07.

5Mail Stop 4561 November 30, 2007: “Please explain in greater detail the history of Huawei's interactions with Bain Capital beginning with the

discussions in August 2006. For instance, explain what information, if any, Huawei provided to Bain Capital with respect to the operations of H3Cand/or 3Com. To the extent projections or written analyses were provided, please include copies with your response. Please describe the terms ofthe expanded OEM arrangements, the terms of the "strategic alliance" with Bain Capital, the level of Huawei's ownership interest in the survivingentity and any role to be played by Huawei or its representatives in the management of the surviving entity.”


TippingPoint: Huawei Plays Hide and CFIUS, and LosesLooking from the outside in, it was easy to underestimate the importance of TippingPoint to the value of 3Com; itcomprised only 10% of revenue. But anyone who followed Bain/Huawei’s struggle to close the deal understood whythe national security concerns arising from TippingPoint’s product lineup and government customer roster constituted amaterial obstacle to realizing 3Com’s intrinsic value.

The TippingPoint IPS product was designed to serve essentially one purpose: Provide computer systems with fast,accurate, and reliable protection from internal and external cyber attacks. In terms of specifics, TippingPoint is a lineof hardware-based intrusion prevention systems utilizing high-speed network processors and Field ProgrammableGate Arrays (FPGAs, which are simply integrated circuits capable of being configured after manufacturing – i.e.,programmable in the field). When mated to a robust security-oriented operating system and suite of vulnerability filterscapable of being updated at any time, the TippingPoint IPS provides application protection, performance protectionand infrastructure protection through total packet inspection, reviewing all data processed through it for viruses andother malicious traffic.

With the Pentagon and Department of Defense among TPTI’s customers, it was inevitable that the Bain/Huawei bidwould become the subject of a national security review by the Committee on Foreign Investment in the United States(“CFIUS” – pronounced see-fee-us). At the time, the US government had what it felt was irrefutable proof thatChinese entities were mounting daily assaults on the American government’s computer network, so the last thing theyneeded was the system they were utilizing to thwart those hack attacks being sold to the same parties potentiallyresponsible for many of them. It didn’t help that Ren Zhengfei, Huawei’s founder and chief executive, was a formerofficer of the People’s Liberation Army, and that the PLA was one of Huawei’s customers.

For those unfamiliar, CFIUS is an acutely potent but rarely-exercised tool of the US federal government. Providedcertain steps are abided, enabling legislation authorizes the President of the United States to impose conditions uponor even prohibit a transaction entirely, and once exercised the decision is not subject to judicial review. Specifically,Section 721 of the Defense Production Act of 1950, as amended (the "Exon-Florio Amendment") authorizes thePresident or his designee to make an investigation to determine the effects on national security of mergers,acquisitions and takeovers by or with foreign persons which could result in foreign control of persons engaged ininterstate commerce in the United States. The President typically delegates authority to investigate proposedtransactions to CFIUS, which is chaired by the Treasury secretary and comprised of members from the FBI andNational Security Council; it can also include representatives from the Department of Defense and State andCommerce departments. The purpose of CFIUS is to investigate business deals that might adversely affect nationalsecurity and recommend to the President what course of action to take.

In order for the President to exercise his authority to suspend or prohibit an acquisition, two findings must occur:

1. That there is credible evidence that leads the President to believe that the foreign interest exercising controlmight take action that threatens to impair national security and

2. That provisions of law other than the Exon-Florio Amendment and the International Emergency EconomicPowers Act do not provide adequate and appropriate authority for the President to protect the national securityin connection with the acquisition.

Under the terms of the acquisition Huawei was entitled to a 16.5% stake in 3Com as well as board seats, but in aneffort to pre-empt possible political objections it was to have no management control. Even further, Bain was preparedto divest the TippingPoint unit in its entirety. That these measures proved inadequate only confirmed the extremeseriousness of US national security concerns, notwithstanding other political dynamics. It also indicated the potentialextent to which 3Com’s IPS expertise permeated 3Com as a whole; if that weren’t the case, preemptively carving outTippingPoint would have satisfied CFIUS.

This last point was integral to the valuation question.

If chronic mismanagement meant that 3Com’s intrinsic value as a business was only going to be realized via a changeof control, US national security concerns narrowed the pool of potential bidders substantially. Bain/Huawei might havebeen willing to pay $5.30/share, but that was only one datapoint, and no longer relevant. What was COMS worth?


The Intrinsic Value Question: Channeling the Ghost of Benjamin Graham, To No AvailWithout getting too academic, most investment valuation comes down to 2 questions: What are the business assetsworth in isolation, and what are they worth relative to the earnings or cash flow they’re capable of generating? Theformer focuses on the net value of the assets on the balance sheet and the latter speaks to the cash or earningscreated by operating those same assets as a going concern.

If anything caught investors’ attention in early 2008, it was the prospect of buying 3Com shares at a discount to theirstated net value on the balance sheet (a.k.a., book value). Traditional value investors of the Graham-and-Dodd straincouldn’t help but be at least intrigued by the apparent bargain, especially when COMS’ balance sheet included over$500 MM of cash and equivalents against approx. $250 MM of debt (FYE5/08). That translated to a book value roughlyequivalent to the share price at the time, ~ $2.50 per share,. Many investors, and particularly those of the valuepersuasion, took the price proximity to book value as conclusive evidence of the investment bargain. But how robustwas book value as a backstop to the share price?

In order to be relevant for investment purposes, a valuation metricmust be meaningful to the probable future of the company.

For book value to be material as an investment tool, three criteria must be fulfilled:

1. It must be net positive (i.e., assets naturally must exceed liabilities),

2. The assets must be susceptible to monetization, and

3. Management must be committed to monetizing them.

The traditional calculation of book value – assets minus liabilities – doesn’t distinguish between tangible and intangibleassets; it simply nets one against the other. But the nature of the individual components is critical, because eventangible book value is often at best an illusory safety net. Non-monetary assets are frequently liquidated for much lessthan might be inferred, and excess cash on the balance sheet is of no value to shareholders if management decides tospend rather than distribute it.

Hence, unless the CEO is committed to winding up the company (an option most chief executives embrace as avidlyas ritual suicide), the liquidation value of the assets is almost irrelevant relative to the entity’s value as a going concern.Put another way, the intangible value of a company – how effectively management utilizes the assets they control – isgenerally much more important than the value of its tangible assets. That said, the accounting value of the intangibleassets carried on the balance sheet may bear little relationship to the intangible, going-concern value of the company.Consider 3Com’s intangible assets (excluding goodwill6):

6As many investors are aware, one of the reasons that goodwill is treated separately from other intangibles is because as of January 2005, under

GAAP FAS 142 goodwill can only be impaired; it is no longer amortized like other intangibles. If goodwill represents the ongoing operation of theother assets this makes sense; if management is succeeding in increasing the value of the enterprise, reducing the value of goodwill by amortizing iton a fixed schedule (formerly a maximum of 40 years) makes no sense.


If the estimates of weighted average remaining life were remotely accurate, by management’s own best estimate mostof the intangibles on the balance sheet would be worth zero in less than 4 years. This made sense; like mosttechnology companies, 3Com had to innovate to survive. Not only the Company’s value, but its very existence as agoing concern depended upon its ability to replenish rapidly dissolving intellectual assets.

That ability to keep a going concern going is usually represented on the balance sheet by the “other” intangible,goodwill. Which is why when a business is threatened with insolvency investors deduct goodwill from any calculationof residual equity – goodwill has no value if what was once a going concern is reduced to its constituent assets.

The accounting fair value of goodwill is calculated based on the present value of future cash flow, which would seem tomake it a reasonable proxy for the value of a company as an ongoing enterprise. Although goodwill isn’t amortized likeother intangibles, it can be impaired, which is determined by comparing the present value of future cash flow to theircarrying value (book value of assets plus goodwill minus liabilities). In an event of an impairment, the loss is reportedas a separate line item on the income statement, and the new, adjusted value of goodwill is reported on the balancesheet. But the accounting test for impairment of goodwill can lead to some funky results.

As of FYE 5/08 3Com estimated its goodwill at $609 MM (approx. $1.51/share), including the prior year’s write-down of$157 MM. Without that write-down, which was triggered by a decline in the stock price, the goodwill would have been26% higher (~ $1.91/share), a not insignificant difference. The question is this: What did the stock price have to dowith future cash flows, or management’s ability to manage the Company? Arguably, nothing…

If book value alone didn’t suffice as a basis for buying 3Com shares, the only other rationale would have to be basedon earnings or cash flow. But calculating what “normalized” performance might look like, even in historical terms, wascomplicated by several factors:

On a fundamental level 3Com had been poorly managed; past performance was no indication of its financialpotential in more competent hands

The dramatic contraction in H3C’s revenue in particular made past performance useless as a reference forestimating future results

Its historical performance was also muddled by the large number of acquisitions made (even if many of themweren’t very large) as well as other one-off events, such as sales of patents; what constituted going-forwardorganic performance was anyone’s guess

The spin-off of TippingPoint would unlock the value thereof for existing shareholders, but required investors toestimate what both companies might be worth independently, and if TippingPoint’s security expertise was sointegral to 3Com that divesting it wouldn’t satisfy CFIUS, how could one estimate what COMS might be worthwithout it?

Taken altogether, the above factors (among others) made it very difficult to generate a valuation based on projectionsof a hypothetical “new normal.” That said, the key to grasping the opportunity of 3Com where it was trading in 2008was understanding that the investment question was much simpler.

Discerning an Intrinsic MinimumIt may seem like a subtle distinction, but calculating what an asset is worth can be a very different process thanassessing what it must at minimum be worth. Whether a perfectly intact, low-mileage Ferrari is worth $250,000, or$450,000, or even $30,000, may require considerable research and/or expertise to determine. But if you can buy it for$5,000 you do so, because regardless of what it’s ultimately worth, if it’s in perfect running order it has to be more than$5,000. Applying the same logic to 3Com, even if it was impossible to project with any confidence what its financialfuture might look like,

Assuming the worst, what were the odds that 3Com wasn’t worth materially more than $2.50/share?

At $2.50/share, 3Com’s market capitalization approximated $1 BN, but its cash net of debt lowered that “purchaseprice” to approximately $750 MM. We know that the Company purchased TippingPoint in 2005 for $430 MM, asubstantial premium to the range of its value as a publicly-traded company:


(The above figures don’t of course take into account $1.5 MM of long-term debt or approx. $30 MMin cash and near-cash, but those amounts aren’t really material to the total enterprise value.)

To the shareholder looking at 3Com in 2008, the passage of time might have mitigated the importance of whatTippingPoint had traded for as a public firm in 2004, as well as what 3Com paid for the firm in early 2005. But thosedatapoints weren’t utterly irrelevant. Both TPTI’s own business and the segment within which it operated wereexperiencing dramatic growth that, given escalating cyber security concerns, were unlikely to abate. That being thecase, and notwithstanding incumbent management’s questionable judgment in general,

Even if 3Com paid a premium to acquire TippingPoint, how likely was itthat TPTI alone was worth significantly less in 2008 than the $430 MM paid in 2005?

CFIUS obviously wasn’t raising objections about TippingPoint because it was a mediocre or generic product, subject toeasy replacement. Whatever the price originally paid, it would seem very unlikely that TPTI had declined in valuesince being acquired; revenue and profits were rising, not falling. The TippingPoint gross margins reported by 3Com –approx. 67% in 2008 and 2007 – certainly implied the business was doing well. If its strong interim performanceserved to confirm that TippingPoint must at least be worth what it was purchased for 3 years earlier, at $2.50 per share3Com buyers were getting all of COMS ex-TPTI for $320 MM. Recall the revenue and profit breakdown:

Per the above figures, if TPTI was worth at least $430 MM, buyers of 3Com at $2.50 were purchasing approx. 90% ofthe Company’s gross profits, or about $163 MM per quarter, for $320 MM. Even if it was impossible to project forwardperformance with anything remotely resembling reliability, how could this not be an attractive risk/reward?

However suspect, COMS management had in fact supplied estimates of how they expected their three businesssegments to perform going forward. Buried in the DEFA14A filed on February 19, 2008, they provided a “Supplementto Projected Financial Information” which presented annual performance projections (non-GAAP) through 2010,summarized below:


Was TippingPoint worth 2½ times 2010 revenue, or 3.6 times gross profits? Easily – if it indeed achieved thoseresults. If management’s opinion wasn’t exactly credible, that didn’t mean the projections weren’t plausible.

There were many other facts which, however minor in isolation, merited consideration in the valuation process. Forexample, it was entirely possible that, as a result of Bain abandoning its bid, 3Com was entitled to a termination fee of$66 MM.

7Whether COMS would prevail was open to question, but the possibility represented $66 MM of positive

optionality.

Additionally, 3Com had accumulated substantial tax loss carryforwards – $2.6 BN as of May 31, 2007.8

What was theultimate economic cost of acquiring 3Com to a buyer who could fully utilize that $2.6 BN tax shield?

Investors who took a moment to analyze the $430 MM Credit and Guaranty Agreement financing 3Com’s 2007purchase of the 49% of H3C it didn’t own might also have cast a glance at the amortization terms (below, right).

9

Although the Company held substantial cash at the time, the 5½ year amortization schedule was quite aggressive.

With respect to meeting those amortization demands, 3Com ended thepreceding quarter (3/07) with $956 MM in cash, cash equivalents andshort-term investments and only nominal long-term obligations. The termsstipulate that the required payments were “generally expected to beserviced by cash flows from the H3C Group and the loan is secured byassets at the H3C level, as well as the parental guarantees (which areexpected to be released after H3C effects a successful capital reduction)”(italics mine).

Those “parental guarantees” were there for a reason – the lenders weren’tinterested in relying exclusively on management’s forecast of H3C’s future cash flow. Needless to say, a “successfulcapital reduction” without tapping the parent’s balance sheet would only be possible if H3C was spinning off seriousquantities of cash. Either (1) 3Com management was hallucinating, and they’d have to meet those capital calls withexisting cash and other resources, (2) the Company would have to renegotiate their obligations, or (3) H3C was,despite Huawei’s flanking maneuvers, going to generate substantial cash flow. Now that the Company hasdisappeared into the hoary depths of HP, we’ll never know.

7See Item 1.01 of the DEFA14A filed 9-28-07 for the relevant language.

810-Q for quarter ended 2-29-08, page 26.

98-K filed 3-23-07.


In ConclusionBased on a close analysis, 3Com was a bargain at $4/share and became outright theft at $2.50. But as the precedingcommentary demonstrates, one didn’t arrive at that conclusion via the path of conventional analysis. The Company’ssubstantial book value was more siren song than safety net, and the volatility of both its composition and its financialperformance made basing an investment rationale on earnings or cash flow projections pointless as well asimpossible. Ultimately the answer culminated from the weight of the evidence, which taken in its totality indicated thatwhatever 3Com might be worth going forward, it had to be significantly more than it was trading for through most of2008. That much was obvious, at least following a deep dive into the details. And that was all one needed to know.

Steven R. Grey (2010)

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The information set forth in this synopsis has been obtained from publicly-available sources. It is provided forinformational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned orto invest in any investment product. The information has not been independently verified by Grey Value Managementor any of its affiliates. Neither Grey Value Management nor any of its affiliates makes any representations orwarranties regarding, nor do they assume any responsibility for the accuracy, reliability, completeness or applicabilityof, any information, calculations, estimates or projections contained or reflected herein.

The information in this synopsis is provided as of the date hereof and is subject to change at any time thereafter.

Grey Value Management may have a position in any of the securities discussed in this presentation. Grey ValueManagement may reevaluate its holdings thereof and purchase, sell or cover certain positions.

3Com (COMS) Balance Sheet

Fiscal Year Ending May 31

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1994

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1996

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1997

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1998

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1999

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2000

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2001

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2002

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dollars in thousands

ASSETS

Current Assets:Cash and cash equivalents 66,284$ 139,176$ 216,759$ 351,237$ 528,981$ 952,249$ 1,700,420$ 897,797$ 679,055$ 515,848$ 575,824$ 268,535$ 501,097$ 559,217$ 503,644$ 545,818$Short-term investments 63,413 184,338 282,578 538,706 547,097 709,365 1,369,520 742,414 702,993 968,740 807,532 575,569 363,250 - - 98,357Notes receivable - - - - - - - - - - - - 63,224 77,367 65,116 40,590Accounts receivable, net 118,653 197,099 359,182 523,501 849,640 925,598 355,540 286,813 147,113 90,290 66,372 61,664 115,120 102,952 116,281 112,771Inventories, net 71,352 122,129 241,018 228,754 644,771 354,272 285,942 200,146 61,777 27,068 27,679 29,311 148,819 107,988 90,831 90,395Net assets of discontinued operations - - - - - - 1,058,237 - - - - - - - - -

- - - - - - - - - - - - - - - -Other current assets 10,134 20,888 60,915 80,725 564,183 478,368 655,772 207,652 72,106 51,234 42,270 42,430 57,835 50,157 34,033 56,982

Total current assets 329,836 663,630 1,160,452 1,722,923 3,134,672 3,419,852 5,425,431 2,334,822 1,663,044 1,653,180 1,519,677 977,509 1,249,345 897,681 809,905 944,913

Property and equipment, net 67,001 108,194 246,652 377,349 858,779 831,557 705,824 609,679 676,154 350,073 114,599 69,535 89,109 76,460 54,314 40,012Goodwill - - - - - - - - - 899 899 310,367 354,259 766,444 609,297 609,297Intangibles - - - - - - - - - 12,035 5,009 65,882 111,845 371,289 278,385 198,624Investment in joint venture - - - - - - - - - - 142,891 135,969 - - - -Deferred income taxes 31,236 43,922 79,259 108,360 - - - 163,349 6,192 2,211 2,937 - - - - -

- - - - - - - - - - - - - - - -Deposits and other assets 16,270 23,930 38,754 57,643 87,069 243,980 361,699 344,952 181,402 43,962 34,806 33,705 56,803 39,217 23,229 22,511

Total assets 444,343 839,676 1,525,117 2,266,275 4,080,520 4,495,389 6,492,954 3,452,802 2,526,792 2,062,360 1,820,818 1,592,967 1,861,361 2,151,091 1,775,130 1,815,357

LIABILITIES

Current liabilities:Accounts payable 51,827 89,059 120,211 148,846 332,992 336,503 363,497 279,181 125,903 105,583 80,408 99,632 153,245 110,430 90,280 68,350Current portion of long-term debt 482 197 - - 12,008 14,568 14,459 328 101,354 346 - - - 94,000 48,000 48,000Deferred income taxes - - - - - - 27,317 80,485 - - - - - - - -Income taxes payable 19,090 52,430 82,690 168,942 177,612 173,116 169,887 - - - - - - - - -

- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -

Accrued liabilities and other 91,130 122,008 211,620 279,263 661,303 674,375 607,316 576,851 275,965 233,239 226,161 209,928 318,036 435,638 366,181 394,103Total current liabilities 162,529 263,694 414,521 597,051 1,183,915 1,198,562 1,182,476 936,845 503,222 339,168 306,569 309,560 471,281 640,068 504,461 510,453

Deferred taxes and long-term obligations 1,058 1,094 21,791 41,714 53,232 64,492 78,713 8,151 4,961 4,595 15,135 8,484 13,788 23,725 22,367 40,729Long-term debt - 110,000 110,000 110,000 35,878 30,405 14,740 2,385 68,404 - - - - 336,000 253,000 152,000

- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -

Total liabilities 163,587 374,788 546,312 748,765 1,273,025 1,293,459 1,275,929 947,381 576,587 343,763 321,704 318,044 485,069 999,793 779,828 703,182

Minority Interest - - - - - 5,475 1,173,961 - - - - - 173,930 - - -

SHAREHOLDERS' EQUITY

Preferred stock, $0.01 par value - - - - - - - - - - - - - - - -Common stock, $0.01 par value 219,937 298,873 597,452 784,685 1,730,676 1,954,204 2,101,242 2,127,803 2,126,583 2,138,016 2,262,223 2,302,190 2,300,396 2,323,356 2,353,688 2,336,961Retained earnings (deficit) 61,326 168,037 379,358 736,881 1,079,775 1,403,709 1,982,079 771,639 35,814 (405,981) (755,244) (967,952) (1,087,512) (1,176,406) (1,405,247) (1,290,522)Notes receivable from sale of warrants - - - - - - - (21,052) (21,052) (8,421) - - - - - -Treasury stock, at cost - - - - - (197,064) (312,428) (373,661) (182,341) - - (39,821) - - - -Unamortized stock-based compensation (202) (1,853) 2,672 (2,845) (3,330) (5,303) (6,450) (9,820) (5,030) (1,474) (2,577) (14,011) (7,565) - - -Accumulated other comprehensive income (305) (169) (677) (1,211) 374 40,909 278,621 10,512 (3,769) (3,543) (5,288) (5,483) (2,957) 4,349 46,861 65,736

Total shareholders' equity 280,756 464,888 978,805 1,517,510 2,807,495 3,196,455 4,043,064 2,505,421 1,950,205 1,718,597 1,499,114 1,274,923 1,202,362 1,151,299 995,302 1,112,175Total liabilities, minority interest, and

shareholders' equity 444,343 839,676 1,525,117 2,266,275 4,080,520 4,495,389 6,492,954 3,452,802 2,526,792 2,062,360 1,820,818 1,592,967 1,861,361 2,151,092 1,775,130 1,815,357

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3Com (COMS) Income Statement

Fiscal Year Ending May 31Fiscal Year

1994

Fiscal Year

1995

Fiscal Year

1996

Fiscal Year

1997

Fiscal Year

1998

Fiscal Year

1999

Fiscal Year

2000

Fiscal Year

2001

Fiscal Year

2002

Fiscal Year

2003

Fiscal Year

2004

Fiscal Year

2005

Fiscal Year

2006

Fiscal Year

2007

Fiscal Year

2008

Fiscal Year

2009

dollars in thousands

Sales 826,995$ 1,593,469$ 2,327,101$ 3,147,106$ 5,420,367$ 5,772,149$ 4,333,942$ 2,820,881$ 1,477,932$ 932,866$ 698,884$ 651,244$ 794,807$ 1,267,481$ 1,294,879$ 1,316,978$Cost of sales 405,927 738,093 1,096,846 1,452,350 2,961,164 3,088,121 2,484,883 2,287,250 999,731 511,140 455,813 416,916 466,743 689,027 640,424 565,514Gross profit 421,068 855,376 1,230,255 1,694,756 2,459,203 2,684,028 1,849,059 533,631 478,201 421,726 243,071 234,328 328,064 578,454 654,455 751,464Operating expenses (income):

Sales and marketing 171,799 319,310 475,769 659,573 1,247,755 1,270,573 951,494 803,994 330,683 242,722 244,703 243,700 274,745 319,696 316,019 338,401Research and development 76,467 166,327 233,107 335,266 581,613 635,787 610,931 535,718 285,584 113,057 95,195 94,584 101,870 215,632 206,653 179,979General and administrative 35,379 66,462 97,395 129,952 268,115 256,267 213,290 182,090 130,552 94,535 74,245 59,833 72,596 93,875 129,116 113,900Amortization - - - - - - - 69,707 116,679 10,287 7,026 8,989 20,903 42,525 103,670 95,013Patent dispute resolution and patent sale - - - - - - - - - - - - - - - (85,200)Goodwill impairment - - - - - - - - - - - - - - 157,977 -In-process research and development 134,481 68,696 52,353 - 8,433 12,715 13,456 60,221 - - - 6,775 650 35,753 - -Restructuring (benefit) charges - 10,125 69,950 6,600 253,722 (21,751) 66,570 162,929 167,462 184,880 159,727 23,922 14,403 3,494 4,501 8,679

Operating expenses, net 418,126 630,920 928,574 1,131,391 2,359,638 2,153,591 1,855,741 1,814,659 1,030,960 645,481 580,896 437,803 485,167 710,975 917,936 650,772Operating income (loss) 2,942 224,456 301,681 563,365 99,565 530,437 (6,682) (1,281,028) (552,759) (223,755) (337,825) (203,475) (157,103) (132,521) (263,481) 100,692Net gains on land and facilities - - - - - - 25,483 178,844 - - - - - - - -Gain (loss) on investments, net 17,746 - - - - - 838,795 (18,614) (17,888) (36,131) (10,899) 1,580 4,333 1,143 460 -Interest (expense) income, net (1,150) 4,895 6,788 20,889 16,908 54,055 104,258 144,596 67,371 20,158 15,905 16,621 29,085 40,863 (13,087) (5,563)Other income, net - - - - - - - (250,000) (1,375) (887) - - 8,235 38,291 44,364 52,200Income (loss) from operations before income

taxes and minority interest in income of

consolidated joint venture 19,538 229,351 308,469 584,254 116,473 584,492 961,854 (1,226,202) (504,651) (240,615) (332,819) (185,274) (115,450) (52,224) (231,744) 147,329Income tax (provision) benefit (48,232) (84,792) (130,615) (210,304) (86,259) (181,719) (341,672) 257,641 - 10,522 6,044 (3,490) 14,833 (10,173) 2,903 (32,604)Equity interest of unconsolidated joint venture - - - - - - (5,647) (1,352) - - (17,179) - - - - -Minority interest in income of consolidated joint

venture - - - - - 1,101 1,028 - - - - (6,922) (58) (26,192) - -Net income before discontinued operations

and cumulative effect of change in accounting

principle (28,694) 144,559 177,854 373,950 30,214 403,874 615,563 (969,913) (504,651) (230,093) (343,954) (195,686) (100,675) (88,589) (228,841) 114,725Net Income from discontinued operations - - - - - - 58,740 4,537 (91,299) (8,214) (2,400) - - - - -Cumulative effect of change in accounting

principle - - - - - - - - - (45,447) - - - - - -NET INCOME / (LOSS) (28,694) 144,559 177,854 373,950 30,214 403,874 674,303 (965,376) (595,950) (283,754) (346,354) (195,686) (100,675) (88,589) (228,841) 114,725

EARNINGS PER SHAREDiluted (0.92) 0.84 1.00 2.01 0.08 1.09 1.88 (2.80) (1.71) (0.79) (0.92) (0.51) (0.26) (0.23) (0.57) 0.29

Weighted average number of common shares,

fully diluted: 31,310 171,079 176,972 186,019 360,262 369,361 357,883 345,027 349,489 360,520 379,766 382,309 386,801 393,894 399,524 394,207

Gross Margin 50.9% 53.7% 52.9% 53.9% 45.4% 46.5% 42.7% 18.9% 32.4% 45.2% 34.8% 36.0% 41.3% 45.6% 50.5% 57.1%

Net Margin -3.5% 9.1% 7.6% 11.9% 0.6% 7.0% 15.6% -34.2% -40.3% -30.4% -49.6% -30.0% -12.7% -7.0% -17.7% 8.7%

Sales & Marketing as a % of Sales 20.8% 20.0% 20.4% 21.0% 23.0% 22.0% 22.0% 28.5% 22.4% 26.0% 35.0% 37.4% 34.6% 25.2% 24.4% 25.7%

R&D as a % of Sales 9.2% 10.4% 10.0% 10.7% 10.7% 11.0% 14.1% 19.0% 19.3% 12.1% 13.6% 14.5% 12.8% 17.0% 16.0% 13.7%

G&A as a % of Sales: 4.3% 4.2% 4.2% 4.1% 4.9% 4.4% 4.9% 6.5% 8.8% 10.1% 10.6% 9.2% 9.1% 7.4% 10.0% 8.6%

Effective Tax Rate: 246.9% 37.0% 42.3% 36.0% 74.1% 31.1% 35.5% 21.0% 0.0% 4.4% 1.8% -1.9% 12.8% -19.5% 1.3% 22.1%

Litigation settlement

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3Com (COMS) Cash Flow Statement


1994

Fiscal Year

1995

Fiscal Year

1996

Fiscal Year

1997

Fiscal Year

1998

Fiscal Year

1999

Fiscal Year

2000

Fiscal Year

2001

Fiscal Year

2002

Fiscal Year

2003

Fiscal Year

2004

Fiscal Year

2005

Fiscal Year

2006

Fiscal Year

2007

Fiscal Year

2008

Fiscal Year

2009dollars in thousandsCash flows from operating activities:Net (loss) income (28,694)$ 125,706$ 177,854$ 373,950$ 30,214$ 403,874$ 615,563$ (969,913)$ (595,950)$ (275,540)$ (346,863)$ (195,686)$ (100,675)$ (88,589)$ (228,841)$ 114,725$Adjustments to reconcile net (loss) income to net cash

provided by (used in) operating activities:Depreciation and amortization 30,610 46,688 90,969 140,540 300,254 275,641 304,415 277,415 266,820 159,323 109,407 51,852 44,685 74,990 136,030 124,794Loss on property and equipment disposals - - - - - 20,103 37,149 (121,159) 74,442 129,067 41,034 (4,741) (646) (14,714) 2,224 2,407Stock-based compensation expense - - - - - - - - - 5,966 2,681 2,841 9,863 20,095 25,207 30,080Deferred income taxes (9,865) (24,175) (7,474) (4,498) (228,154) 95,074 188,692 (284,585) 78,396 3,959 (533) 3,044 121 (10,487) (8,206) (10,078)Gain on sale of business assets - - - - - - - - - (88,947) - - - - - (15,200)Goodwill and other intangible impairments - - - - - 13,748 - 59,738 70,093 73,251 2,307 1,404 - - 157,977 -(Gain) Loss on investments, net (17,746) (1,100) 41,272 - 253,722 (21,751) (841,092) 17,886 17,888 36,131 10,899 (1,580) (235) (1,417) (185) -Minority interest - - - - - - - - - - - - 11,074 26,192 - -Purchase of In-process research and development 134,481 60,796 52,353 4,850 8,433 12,715 13,456 60,221 - - - 6,775 650 35,753 - -Equity interest in (income) loss of unconsolidated jointventure - - - - - (1,101) 4,619 1,352 - - 17,179 6,922 (11,016) - - -Loss from discontinued operations - - - - - - 241,506 30,291 - (8,214) (2,400) - - - - -

- - - - - - - - - - - - - - - -Changes in assets and liabilities: - - - - - - - - - - - - - - - -

Accounts and notes receivable (30,045) (74,045) (124,753) (162,960) 109,502 (72,692) 469,426 82,425 143,770 56,823 23,918 4,708 5,913 (24,677) 7,895 35,747Inventories 1,637 (50,031) (71,852) 8,140 (156,535) 286,867 44,083 38,431 125,311 19,611 (12,999) (9,629) (23,047) 50,589 32,621 (3,342)Other assets 6,190 (10,205) (21,088) (29,741) (22,502) 40,855 (43,187) (79,503) 69,698 22,750 1,620 748 1,891 32,368 18,429 (9,945)Accounts payable 8,886 34,725 11,636 28,010 24,411 (2,047) 60,232 (42,497) (152,212) (20,320) (25,175) 19,224 3,430 (34,760) (22,926) (32,075)Other liabilities (2,461) 38,500 57,707 65,573 30,103 28,273 (23,110) (75,563) (313,794) (54,829) 802 (21,476) (28,172) 100,195 (65,348) 43,356Income taxes 34,927 73,646 103,719 177,009 276,735 81,516 131,145 42,657 76,176 20,751 2,803 - - - - -

- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -

Net cash provided by (used in) operating activities 127,920 220,505 310,343 600,873 626,183 1,161,075 1,202,897 (962,804) (139,362) 79,782 (175,320) (135,594) (86,164) 165,538 54,877 280,469Cash flows from investing activities:

Purchases of investments (76,841) (183,232) (301,960) (479,249) (367,784) (512,275) (1,201,169) (743,655) (757,979) (1,290,303) (908,874) (618,320) (421,279) (225,005) - -Proceeds from maturities and sales of investments 108,678 60,585 231,904 221,228 352,854 303,582 1,247,537 1,527,249 806,615 1,018,439 1,056,597 931,122 629,036 609,342 442 (98,235)Purchase of property and equipment (36,474) (76,235) (179,982) (247,803) (508,328) (262,234) (275,262) (191,101) (351,813) (25,381) (16,014) (21,121) (17,404) (28,331) (17,893) (16,587)Proceeds from sale of property and equipment - - - - 49,566 29,347 93,169 258,930 16,213 81,083 134,855 51,300 - 36,580 1,096 228Proceeds from business asset sale - - - - - - - - - 95,687 - - - - - 15,200

Business acquired in purchase transactions, net of cash (98,128) (65,832) (60,246) - - (114,595) (92,432) (197,712) - - - (355,686) 110,407 (898,529) - -Investment in Huawei-3Com joint venture - - - - - - - - - - (160,000) - - - - -Other (3,020) 4,008 (9,874) (26,654) (9,468) (19,059) (300) 4,304 - - - - - - - -

- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -

Net cash (used in) provided by investing activities (105,785) (260,706) (320,158) (532,478) (483,160) (575,234) (228,457) 658,015 (286,964) (120,475) 106,564 (12,705) 300,760 (505,943) (16,355) (99,394)Cash flows from financing activities:

Issuance of common stock 22,662 28,144 71,146 68,690 297,248 222,177 330,355 247,153 49,439 34,871 120,423 15,459 22,801 23,588 8,305 6,571Repurchases of common stock (16,644) (19,590) (975) - - (378,565) (540,780) (577,759) (3,660) (1,548) - (73,545) (7,076) (13,463) (3,180) (53,378)Repayments of borrowings (1,462) (2,996) (2,997) (1,740) (296,297) (14,777) (14,357) (26,458) (8,266) (99,326) (346) (1,308) - - (129,000) (101,000)Proceeds from long term debt - 107,330 - - 33,300 9,521 2,499 - 175,000 (70,000) - - - 415,811 - -Dividend paid to minority interest shareholder - - - - - - - - - - - - - (40,785) - -Other, net (453) 205 (508) (867) 470 (929) (3,508) (70) (4,929) 12,586 8,421 - - 2,787 - -Net cash settlement of put options - - - - - - - (140,700) - - - - - - - -

- - - - - - - - - - - - - - - -Net cash provided by (used in) financing activities 4,103 113,093 66,666 66,083 34,721 (162,573) (225,791) (497,834) 207,584 (123,417) 128,498 (59,394) 15,725 387,938 (123,875) (147,807)Effect of exchange rate changes on cash and cash

equivalents - - - - - - - - - 903 734 (46) 2,241 10,587 29,780 8,906

Net increase (decrease) in cash and cash equivalents 26,238 72,892 56,851 134,478 177,744 423,268 748,649 (802,623) (218,742) (163,207) 60,476 (207,739) 232,562 58,120 (55,573) 42,174Cash and cash equivalents at beginning of year 40,046 66,284 159,908 216,759 351,237 528,981 951,771 1,700,420 897,797 679,055 415,798 476,274 268,535 501,097 559,217 503,644Cash and cash equivalents at end of period 66,284 139,176 216,759 351,237 528,981 952,249 1,700,420 897,797 679,055 515,848 476,274 268,535 501,097 559,217 503,644 545,818

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3Com (COMS) Income Statement - Plausible Cost Savings Analysis


1994

Fiscal Year

1995

Fiscal Year

1996

Fiscal Year

1997

Fiscal Year

1998

Fiscal Year

1999

Fiscal Year

2000

Fiscal Year

2001

Fiscal Year

2002

Fiscal Year

2003

Fiscal Year

2004

Fiscal Year

2005

Fiscal Year

2006

Fiscal Year

2007

Fiscal Year

2008

Fiscal Year

2009dollars in thousands

Sales 826,995$ 1,593,469$ 2,327,101$ 3,147,106$ 5,420,367$ 5,772,149$ 4,333,942$ 2,820,881$ 1,477,932$ 932,866$ 698,884$ 651,244$ 794,807$ 1,267,481$ 1,294,879$ 1,316,978$Cost of sales 405,927 738,093 1,096,846 1,452,350 2,961,164 3,088,121 2,484,883 2,287,250 999,731 511,140 455,813 416,916 466,743 689,027 640,424 565,514Gross profit 421,068 855,376 1,230,255 1,694,756 2,459,203 2,684,028 1,849,059 533,631 478,201 421,726 243,071 234,328 328,064 578,454 654,455 751,464Operating expenses (income):

Sales and marketing 157,129 302,759 442,149 597,950 1,029,870 1,096,708 823,449 535,967 280,807 177,245 132,788 123,736 151,013 240,821 246,027 250,226Research and development 76,467 166,327 233,107 335,266 581,613 635,787 610,931 535,718 285,584 113,057 95,195 94,584 101,870 215,632 206,653 179,979General and administrative 43,004 82,860 121,009 163,650 281,859 300,152 225,365 146,686 76,852 48,509 36,342 33,865 41,330 65,909 67,334 68,483Amortization - - - - - - - 69,707 116,679 10,287 7,026 8,989 20,903 42,525 103,670 95,013Patent dispute resolution and patent sale - - - - - - - - - - - - - - - -Goodwill impairment - - - - - - - - - - - - - - - -In-process research and development 134,481 68,696 52,353 - 8,433 12,715 13,456 60,221 - - - 6,775 650 35,753 - -Restructuring (benefit) charges - 10,125 69,950 6,600 253,722 (21,751) 66,570 162,929 167,462 184,880 159,727 23,922 14,403 3,494 4,501 8,679

Operating expenses, net 411,081 630,767 918,568 1,103,466 2,155,497 2,023,611 1,739,771 1,511,228 927,385 533,978 431,078 291,871 330,169 604,134 628,185 602,380Operating income (loss) 9,987 224,609 311,687 591,290 303,706 660,417 109,288 (977,597) (449,184) (112,252) (188,007) (57,543) (2,105) (25,680) 26,270 149,084

Sales & Marketing as a % of Sales: 20.8% 20.0% 20.4% 21.0% 23.0% 22.0% 22.0% 28.5% 22.4% 26.0% 35.0% 37.4% 34.6% 25.2% 24.4% 25.7%

Sales & Marketing as a % of Sales, 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%post acquisition

G&A as a % of Sales: 4.3% 4.2% 4.2% 4.1% 4.9% 4.4% 4.9% 6.5% 8.8% 10.1% 10.6% 9.2% 9.1% 7.4% 10.0% 8.6%

G&A as a % of Sales, 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%post acquisition

Net gains on land and facilities - - - - - - 25,483 178,844 - - - - - - - -Gain (loss) on investments, net 17,746 - - - - - 838,795 (18,614) (17,888) (36,131) (10,899) 1,580 4,333 1,143 460 -Interest (expense) income, net (1,150) 4,895 6,788 20,889 16,908 54,055 104,258 144,596 67,371 20,158 15,905 16,621 29,085 40,863 (13,087) (5,563)Other income, net - - - - - - - (250,000) (1,375) (887) - - 8,235 38,291 44,364 52,200Income (loss) from operations before incometaxes and minority interest in income ofconsolidated joint venture 26,583 229,504 318,475 612,179 320,614 714,472 1,077,824 (922,771) (401,076) (129,112) (183,001) (39,342) 39,548 54,617 58,007 195,721Income tax (provision) benefit (48,232) (84,792) (130,615) (210,304) (86,259) (181,719) (341,672) 257,641 - 10,522 6,044 (3,490) 14,833 (10,173) 2,903 (32,604)Equity interest of unconsolidated joint venture - - - - - - (5,647) (1,352) - - (17,179) - - - - -Minority interest in income of consolidatedjoint venture - - - - - 1,101 1,028 - - - - (6,922) (58) (26,192) - -Net income before discontinued operationsand cumulative effect of change in accountingprinciple (21,649) 144,712 187,860 401,875 234,355 533,854 731,533 (666,482) (401,076) (118,590) (194,136) (49,754) 54,323 18,252 60,910 163,117Net Income from discontinued operations - - - - - - 58,740 4,537 (91,299) (8,214) (2,400) - - - - -Cumulative effect of change in accountingprinciple - - - - - - - - - (45,447) - - - - - -NET INCOME / (LOSS) (21,649) 144,712 187,860 401,875 234,355 533,854 790,273 (661,945) (492,375) (172,251) (196,536) (49,754) 54,323 18,252 60,910 163,117

Amortization - - - - - - - 69,707 116,679 10,287 7,026 8,989 20,903 42,525 103,670 95,013

Net Income + Amortization (592,238) (375,696) (161,964) (189,510) (40,765) 75,226 60,777 164,580 258,130

EARNINGS PER SHAREDiluted (0.69) 0.85 1.06 2.16 0.65 1.45 2.21 (1.92) (1.41) (0.48) (0.52) (0.13) 0.14 0.05 0.15 0.41

Weighted average number of commonshares, fully diluted: 31,310 171,079 176,972 186,019 360,262 369,361 357,883 345,027 349,489 360,520 379,766 382,309 386,801 393,894 399,524 394,207

Gross Margin 50.9% 53.7% 52.9% 53.9% 45.4% 46.5% 42.7% 18.9% 32.4% 45.2% 34.8% 36.0% 41.3% 45.6% 50.5% 57.1%

Net Margin -2.6% 9.1% 8.1% 12.8% 4.3% 9.2% 18.2% -23.5% -33.3% -18.5% -28.1% -7.6% 6.8% 1.4% 4.7% 12.4%

R&D as a % of Sales 9.2% 10.4% 10.0% 10.7% 10.7% 11.0% 14.1% 19.0% 19.3% 12.1% 13.6% 14.5% 12.8% 17.0% 16.0% 13.7%

Effective Tax Rate: 181.4% 36.9% 41.0% 34.4% 26.9% 25.4% 31.7% 27.9% 0.0% 8.1% 3.3% -8.9% -37.5% 18.6% -5.0% 16.7%

5.2%

Average 94-09

Average - 25%

Average 94-09

Average - 25%

25.5%

19.1%

7.0%

Litigation settlement

Reverse 2008 Goodwill Impairment of $157,977 Reverse 2009 Patent Resolution of ($85,200)

This spreadsheet takes a very simple approach to what 3Com's earnings performance mightresemble if the Company were in the hands of competent management that was also in a positionto impose modest cost savings.

Most revenue and cost items remain unchanged. However, in addition to reversing the goodwillimpairment and patent resolution, both Sales & Marketing and G & A expenses are conservativelyreduced to 75% of their long-term average. However simplistic, the resulting figures at leastprovide a glimpse into the Company's theoretical potential under different circumstances.


3COM CORP. (COMS) Analysis.pdf2007: Huawei-3Com ($160 MM + $28MM + $882MM = $1.07 BN) 3Com’s...

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