According to the filing, 3Com, which currently owns 51 percent of H3C, intends to bid for the 49 percent stake it doesn't own, essentially buying out the unit from Huawei:
On August 8, 2006, we announced our intent to negotiate an agreement with Huawei Technologies, or Huawei, to increase our ownership stake in Huawei-3Com, our Chinese joint venture, or H3C. While we intend to continue to vigorously pursue negotiations with Huawei, on November 15, 2006 we initiated the bid process under the shareholders' agreement by submitting a bid to buy Huawei's entire ownership interest in H3C.
This morning 3Com shares sank $0.14 (2.72%) to $5.04 on the news, likely because takeover offers from third-party bidders have not yet emerged, and the two companies have been forced to start bidding between each other.
Light Reading reported a week ago that potential bidders for shares in H3C have included private equity players such as TPG Inc. , Bain Capital , and Silver Lake Partners , as well as equipment vendors like Juniper Networks Inc. (NYSE: JNPR) and Nortel Networks Ltd. . None of these companies has commented on the reports of any potential deal. (See Suitors Eyeing 3Com/Huawei JV .)
However, 3Com specified in the filing that this doesn't mean negotiations with other parties have ended -- in a sense, admitting that it's been talking to other folk.
"It is important to note that our initiation of the bid process does not in any way preclude the parties from reaching a negotiated agreement outside of that process," says the 3Com filing.
H3C was formed on November 17, 2003, and is located in Hong Kong, with its principal operating center in Hangzhou, China. It has recently been putting up some good numbers. In 3Com's earnings for the quarter ended August 31, filed on Oct. 11, 2006, the H3C venture generated $170 million in revenue and $18.2 million in net profits.
For comparison, 3Com's other business unit, the Secure Converged Networking (SCN), lost money -- it posted a $32.5 million loss on $156 million in revenue.
Potential bidders could negotiate with both parties to aquire the business in its entirety, or they could negotiate with 3Com or Huawei separately to buy out the majority or minority stakes. As detailed by 3Com itself, there are still numerous possible outcomes for a potential transaction:
As previously disclosed, under the terms of the shareholders agreement between Huawei and 3Com, beginning November 15, 2006 Huawei can bid to buy 3Com's entire 51 percent stake in H3C or 3Com can bid to buy Huawei's entire 49 percent stake in H3C. This process is solely between Huawei and 3Com. Upon the initiation of the bid process, the party receiving the bid has three business days to counter with its own offer that is at least two percent higher on a per share basis, or the received bid is deemed accepted. Unless the parties mutually agree otherwise, this process continues until a bidder prevails.
We believe it is in our interest to keep the current negotiations with Huawei confidential. Therefore, subject to applicable securities laws or unless we otherwise determine it is in our interest, we intend to refrain from further disclosures regarding the status of the negotiations or the bid process until a definitive agreement is executed or the bid process has ended or is deferred pursuant to the mutual agreement of the parties.
While we continue to seek to increase our ownership in H3C through a negotiated transaction or through the bid process, we cannot predict the outcome of either the negotiations or the bid process or assure you that any agreed transaction will be consummated. Further, the bid process may result in 3Com selling its entire interest in H3C to Huawei. If Huawei purchases our interest in H3C, we will need to implement successful alternatives to our current strategy of increasing our investment in H3C. We may also be limited in the types of investments we can make with the proceeds of any potential sale because of the Investment Company Act of 1940. In addition, while 3Com and Huawei, as shareholders of H3C, have agreed not to compete under certain circumstances with H3C for a period of 18 months after one party wins the bid process, if we are unable to reach a negotiated agreement with Huawei and instead win the bid process, Huawei may reduce its business with and operational assistance to H3C and we may face increased competition from Huawei.
— R. Scott Raynovich, Editor in Chief, Light Reading