3Com Takes the H3C Plunge

Craig Matsumoto
News Analysis
Craig Matsumoto, Editor-in-Chief, Light Reading
11/29/2006



Was $1.8 billion too much?

The figure marks the implied valuation of the H3C Technologies Co. Ltd. (H3C) joint venture now that 3Com Corp. (Nasdaq: COMS) has offered $882 million to acquire the 49 percent owned by Huawei Technologies Co. Ltd. , a bid the Chinese vendor has accepted. (See 3Com Takes H3C.)

And that valuation may have been too much for the private equity firms that were reportedly running their rulers over H3C for a possible buyout. Light Reading reported earlier this month that Juniper Networks Inc. (NYSE: JNPR) and Nortel Networks Ltd. may have been interested, too.

But instead of landing a deal with outside parties, 3Com announced on Nov. 15 that it would bid for Huawei's share of H3C. (See Suitors Eyeing 3Com/Huawei JV and 3Com to Bid for Huawei Assets.)

A valuation of $1.8 billion is within the range that sources were telling Light Reading; one noted that $2 billion wouldn't be unreasonable given that H3C could be generating $1 billion in revenues during the next 12 months.

Attention now turns to how 3Com plans to pay for the deal. Technically, the $882 million could come out of cash and short-term investments, but that would be tight -- 3Com finished its first quarter, which ended Sept. 1, with only $916 million in that department, including $197 million contributed by H3C.

On a conference call with analysts yesterday, 3Com officials wouldn't expound on the financing question. CFO Donald Halsted said only that 3Com had "many alternatives" available.

Other specifics, such as whether 3Com would continue using the H3C name, still haven't been decided and/or aren't being revealed. During the call, 3Com CEO Edgar Masri did indicate that the company is interested in retaining H3C employees, particularly the executive team.

As part of the original joint venture contract, Huawei would be forbidden from getting into the enterprise router market for 18 months after 3Com's purchase, Masri said.

The deal has to get approval from 3Com shareholders and the Chinese government. Masri guessed the process would take four to six weeks.

3Com stock fell 17 cents (3.8%) to $4.32 in after-hours trading last night.

— Craig Matsumoto, Senior Editor, Light Reading

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