3Com to settle $259 million class-action suit

In the two months before 3Com officially took control of U.S. Robotics in June 1997, the company's stock more than doubled in value. During this period, 3Com insiders sold a combined 4 million shares of stock, realizing gains of about $200 million, the suit said.

The suit, filed in San Jose federal court, contends that 3Com's stock wouldn't have soared -- and company executives wouldn't have prospered -- had management been more forthcoming about U.S. Robotics' financial condition.

In October 1997, 3Com revealed that U.S. Robotics had lost $160 million during April and May -- material information that the suit argues should have been disclosed before the acquisition closed.

After the revelation, 3Com's stock lapsed into a slump that cost shareholders covered in the complaint somewhere between $500 million and $700 million, estimated New York attorney Robert N. Kaplan, who led the class action.

The suit also alleges that 3Com management misled investors about the market demand for U.S. Robotics' computer modems.

"I believe 3Com now regrets that it didn't disclose this information about U.S. Robotics sooner," Kaplan said.

In agreeing to make the cash settlement, 3Com didn't acknowledge any wrongdoing.

"While we aren't exactly gleeful about having to pay this money, it feels great to get this off our books," 3Com spokesman Brian Johnson said.

The settlement will result in a charge against 3Com's current quarter ending Nov. 30, but won't affect the company's operating results. Johnson said the company still expects to meet Wall Street's expectations for the quarter. Analysts polled by First Call/Thomson Financial expect 3Com to lose 8 cents per share in the current quarter.

Kaplan called the settlement, which still requires court approval, one of the largest in a class-action securities suit.

Meanwhile, 3Com characterized the payment as a drop in the bucket. The company pointed out that it has $3 billion in cash and its stock has created about $26 billion in wealth since the U.S. Robotics acquisition.

3Com distributed one of its most valuable assets to shareholders earlier this year when it turned a subsidiary that makes the popular Palm hand-held computers into a separate company.

Palm Inc. is now far more valuable than its former parent company, with a market value of $37 billion compared with 3Com's $6 billion.

Once one of Silicon Valley's rising stars, 3Com has fallen out of favor in recent years as San Jose-based Cisco Systems Corp. established itself as the undisputed king of computer networking.

In September, 3Com's CEO since 1990, Eric Benhamou, disclosed he would step down at the end of the year. The company's chief operating officer, Bruce Claflin, is replacing him.

3Com's legal headaches aren't over yet. In February, another class-action securities lawsuit representing shareholders who bought stock between Sept. 24, 1996 and Feb. 10, 1997 is scheduled to go to trial in Santa Clara County Superior Court. The suit alleges that 3Com violated various securities laws during the class period.

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