3Com Corp.'s shares fell 10% Thursday, erasing $660 million from its $6.6-billion offer for U.S. Robotics Corp., amid investor concern that the acquisition will hurt earnings in coming quarters.
3Com shares plunged $4 to $35 on Nasdaq, the lowest closing price since August 1995. 3Com's stock-swap offer now values U.S. Robotics at $61.25 a share--just 25 cents above the stock's price before Wednesday's offer. U.S. Robotics shares fell $1.875 to $59.125 on Nasdaq on Thursday.
The drop in 3Com's stock raises the possibility that the acquisition may not be acceptable to U.S. Robotics shareholders, said William Rabin, an analyst at J.P. Morgan Securities.
"If the 3Com stock price keeps falling, at some point the U.S. Robotics shareholders will feel there is not enough of a premium in it for them, and that could be a problem," Rabin said.
Investors are concerned about lower earnings at the combined company, which is aiming to take on computer networking leader Cisco Systems Inc. in the fast-growing industry. The relatively small premium 3Com offered in the first place also may indicate near-term trouble with U.S. Robotics' modem business, some said.
"Somebody's desperate," said Scott Vergin, money manager at Lutheran Brotherhood in Minneapolis. "Either 3Com or Robotics. It doesn't seem obvious that there's a ton of synergies."
Some investors agreed: Five U.S. Robotics shareholders filed suit in Delaware Chancery Court in connection with the takeover bid. The separate suits claim "breach of fiduciary duty in failing to maximize shareholder value." Four of the suits seek a preliminary injunction to stop the acquisition.
But 3Com said terms of the acquisition are fixed and have lockup provisions that prevent either company from pulling out. 3Com is offering 1.75 of its shares for each U.S. Robotics share.
The lockup provisions include cash fees of $75 million if either company withdraws from the transaction and an additional $75 million if the companies enter another alliance; options to acquire large portions of each other's stock should another company bid for either firm; and obligations on board members and executives at both companies to vote in favor of the transaction.
3Com shares have fallen more than 50% from their high on Dec. 9 because of weaker sales in the company's main business of adapter cards that link personal computers to networks, and growing competition from Intel Corp.
U.S. Robotics, the No. 1 seller of consumer computer modems, is in a head-to-head battle with Rockwell International Corp. over standards for the new 56-kilobit modem, the fastest in the market. Rockwell has many important alliances, while U.S. Robotics is pursuing the risky strategy of going it alone, analysts said.