Despite a recent period of stormy boardroom politics and a hail of bad press, 3Com Corp. has retained the support of most channel partners -- at least for now.
Yet the recent controversies and negative press bring into question just how long companies can withstand turmoil and negative coverage before partners sour and sales falter.
"I absolutely think that any sort of confusion in the marketplace affects partners. When you say, 'Here's this 3Com product,' they say, 'Didn't I just read about 3Com? Aren't they being sold to a Chinese company? All people heard was 'Chinese,' 'sold,' 'bad.' They only hear three or four things," said Andrew Plato, president of Anitian Enterprise Security, a Beaverton, Ore.-based 3Com partner. "Maybe it's not a huge hit, but it could be significant" eventually, he said.
3Com has been under scrutiny since it began talks in December to be acquired for $2.2 billion by private equity firm Bain Capital Partners and Chinese partner Huawei Technologies Co. Things really heated up March 20 when Bain and Huawei withdrew from the deal due to U.S. federal government security concerns. 3Com sells network security services to the U.S. military, raising questions about partial ownership by a Chinese company. Throughout the negotiations, news reports alleged that Huawei had ties to the Chinese government and military.
Viability concerns breed customer uncertainty
The day after Bain and Huawei officially withdrew, 3Com shareholders voted to approve the acquisition anyway so the company could capture a $66 million break-up fee from Bain.
Maybe it was just bad timing, but two days later, 3Com reported a third-quarter net loss of $7.8 million -- $3 million greater than the loss it posted for the same quarter a year earlier. The net loss was the major media focus, while the 4% rise in quarterly revenue to $336.4 million from $323.4 million was much less stressed. Net losses were apparently due to a tax liability that financial analysts and execs say will likely not affect next year's earnings.
While some believe rough times can make for rough sales, Neil Medwed, president of Richardson, Texas-based Preferred Technology Solutions, said his end users are not necessarily aware of, or are not worried by, business news.
"They know what they like. They are looking for a solid product," Medwed said, adding that 3Com's products perform well and hold a strong market share. "I'm not too concerned."
The solid product theory has also held true for Plato, who said that 3Com's TippingPoint security products are some of the strongest in the market, and sales have not faltered under bad press.
The problem is, according to Frank Orlando, outgoing president of Allcom Solutions, that not all of 3Com's products are that solid.
"I think it's not so much about Bain buying them or not. I personally think other things play out more -- there are better phone systems out there," Orlando said, adding that the company has been "migrating away" from 3Com for at least a year, with other reasons including corporate tumult and resulting uncertainty.
Other partners agree that the combination of bad press and heavy competition is troublesome. "We are taking a wait-and-see approach, but the problem is there is so much competition that if they don't continue to do what they are supposed to do, the competition is going to eat them up," said William "Beau" Sanders, president and CEO of Greenville, S.C.-based PM-Systems Inc., a small 3Com partner. "If they dropped off the face of the earth we'd be fine."
This is a crucial time for 3Com to show partners and customers that it is focused on stabilizing, said IDC analyst Christina Richmond. "Oftentimes, if it looks as though management is making changes, the partners can take that and use it with the end user -- but only for so long."
3Com's restructuring of channel management earlier this month could be seen as an attempt to send a message of change and sales focus -- or as further sign of upheaval.
3Com removed longtime worldwide channel chief Nick Tidd and his team, going instead with a "regional approach" to managing the channel.
Bob Dechant, 3Com's senior vice president of worldwide sales, said this new structure "pushes more of the decision-making capability down to the level of the regions." That, in turn, "drives accountability," he said.
Another major restructuring goal, Dechant said, is to show partners that 3Com is serious about offering support and not spreading resources too thin.
Partners range the gamut from highly supportive to seriously concerned about the restructuring. "I feel positive about where we're going," Medwed said. But Plato and Orlando are not so sure.
"Two weeks ago, we got an email from 3Com saying, 'We are changing our strategy.' My sales VP emails me and says, 'Guess who's changing their strategy again," Orlando joked, explaining that 3Com has changed focus too many times over the years.
Plato agreed, saying what 3Com needs to do is "clean up the channel program and have a focused message."
"For the last three years they have lacked a central defining mission or vision of the company. They have been flopping along selling mediocre products at low cost," he said.
Still others are willing to ride out the changes as long as the company stays open with partners. "I would say for them to keep communications open," said Jeffrey Schmidt, president of 3Com partner SOTA Technologies, based in Coshocton, Ohio. Schmidt said he is not concerned about recent bad press.
Dechant said communication is done best one on one instead of through large-scale marketing. So regional managers "are in front of their channel partners engaged in discussions with them, making sure they hear the proper message."
That message? "We keep reminding our partners, customers and prospective customers about what attracted Bain to this business: It wasn't that 3Com was a broke business, it was that 3Com was in the process of a good turnaround that was premised on a really exciting growth engine called H3C."
"I've not had to call them. We have a strong relationship with management as a whole," Medwed said. Meanwhile Sanders said he hadn't "seen anything of substance in a while" by way of communication from 3Com.
IDC's Richmond cautioned, "When something like this is going on, a vendor needs to get those partners close to the vest. They need to communicate, they need to listen twice as much, and they need to follow through on concerns. Actions speak louder than words."