Ethernet equipment

Suitors Eyeing 3Com/Huawei JV

Profit and revenue growth at the joint venture (JV) formed by Huawei Technologies Co. Ltd. and 3Com Corp. (Nasdaq: COMS) have caught investors' eyes, kicking up a potential bidding war among suitors for the business unit, Light Reading has learned.

Potential bidders for 3Com or the Huawei JV include a range of private equity players, Juniper Networks Inc. (NYSE: JNPR), and Nortel Networks Ltd. , say several Wall Street sources. The Wall Street Journal had previously reported that the private equity companies TPG Inc. , Bain Capital , and Silver Lake Partners were interested in the assets. But interest from equipment vendors such as Juniper and Nortel is a new development that could precipitate a bidding war, sources say.

"If you have Nortel bidding, Juniper bidding, and the private equity guys, I could see it getting stupid," says Fred Hickey, editor of the High Tech Strategist, who has followed the 3Com/Huawei partnership from the beginning.

Hickey says there are "all sorts of rumors," about the bidding process, and that valuations for the partnership have ranged from $1 billion to $2 billion. He said he once owned shares of 3Com but has sold all of them.

Why would Juniper and Nortel get involved? Quite simply, to beat Cisco Systems Inc. (Nasdaq: CSCO) to the punch. Cisco likely has the largest revenues of any North American telecom and networking equipment player in China. An acquisition of the Huawei/3Com venture, which is growing fast, would immediately vault somebody into second place in the hot Asian region.

The JV is referred to by 3Com and Huawei as "H-3C." It was formed on November 17, 2003, and appears to be exceeding expectations with steady revenue growth and juicy profit margins. According to 3Com's quarterly earnings for the quarter ended August 31, filed on Oct. 11, 2006, the H-3C 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.

H-3C is located in Hong Kong, and has its principal operating center in Hangzhou, China. This year, 3Com exercised an option to acquire a majority stake in the business, and it has the right to bid for more shares from Huawei, which analysts expect it to do.

With 3Com holding a majority 51 percent stake in the unit and Huawei holding another 49 percent of the business, bidding for the business could get complicated. Potential bidders could negotiate with both parties to aquire the business in entirety, or they could negotiate with 3Com or Huawei separately to buy out the majority or minority stakes. Another option would be to acquire the majority stake by acquiring all 3Com shares outright.

Several analysts think that because H-3C assets are buried within 3Com, its value has been heavily discounted.

Matt Shimao, an analyst with Bear Stearns & Co. Inc. , wrote in a report on October third that he valued the H-3C assets at $3.75 per 3Com share. Adding up the rest of 3Com's assets, including $1.75 per share in cash, Shimao thinks 3Com's share are worth $6. They recently traded hands at $4.

"H3C's success in China should continue due to rapid growth," wrote Shimao. "H3C's ability to leverage low-cost R&D is a key differentiator."

Others concur that 3Com's shares may be undervalued due to the growing value of the H-3C asset. One hedge fund manager who spoke to Light Reading points out that, on the current trajectory, H-3C could be generating revenues of $1 billion over the next 12 months. If you put a 2x revenue multiple on that, the business unit would be worth at least $2 billion, making 3Com's stake worth at least $1 billion.

Other 3Com assets of interest include its SCN revenue, the assets of Tipping Point (a security company it acquired), and the potential carryover of net operating losses (NOLs) -- tax losses that could be used by an acquiring company to offset taxes on profits.

"To a buyer, 3Com's NOLs could be worth $1 per share," wrote Shimao in his report.

To add intrigue to the deal, those familiar with the bidding say that outside buyers have a deadline to beat. According to the terms of the agreement between 3Com and Huawei, they can begin to bid for each other's shares starting November 15.

"Under the terms of our existing shareholders’ agreement, and as previously disclosed, we and Huawei each have the right, commencing on or after November 15, 2006, to initiate a bid process to purchase the equity interest in H-3C held by the other," says a recent 10-Q statement filed by 3Com.

Sources say that Huawei is interested in selling more of its stake to 3Com beginning November 15. That makes some people nervous.

"You have to ask yourself why Huawei is determined to sell it," says High Tech Strategist's Hickey. "The Chinese want to slow the economy. This makes me nervous. The value of the deal is having Huawei involved."

That doesn't appear to be slowing down the hungry bidders. With the November deadline approaching, several sources say the bidding action is "heating up."

So far, the vendors reportedly involved are keeping quiet. "We can't comment on rumor and speculation," says Jay Barta, a spokesman for Nortel. Juniper did not respond to a request for comment.

— R. Scott Raynovich, Editor in Chief, Light Reading

melao 12/5/2012 | 3:35:16 AM
re: Suitors Eyeing 3Com/Huawei JV It may be a dumb question but, as far as I know the H3C partnership is basically Huawei equipment with 3Com label in it.
Now, Huawei has a name outside China, specially in Africa, Latin America and Asia.
Why the hell do they need 3Com ?
materialgirl 12/5/2012 | 3:35:10 AM
re: Suitors Eyeing 3Com/Huawei JV They needed 3COM to learn what Westerners wanted, which has apparently improved Chinese sales too. In 2003, when this deal started, it was a dud. They had to basically re-design the whole box to get basic features and throughput. Once Huawei learned all they needed from COMS about product features, they are dumping them.
melao 12/5/2012 | 3:35:03 AM
re: Suitors Eyeing 3Com/Huawei JV By West you mean Western Europe and USA, right ? :)

For example Huawei is huge in Russia.
I am from Brazil, and Huawei made a name in the market before the H3C partnership.

For example in 2004 they had already deployed a massive ASON network in Brazilian carrier. The first in its class in Brazil.
chook0 12/5/2012 | 3:35:02 AM
re: Suitors Eyeing 3Com/Huawei JV It helps if you think in terms of Service Provider/Enterprise splits.

Huawei is successful only in SP biz outside of China.

Huawei/3Com is also pretty successful inside China, but the Huawei side of things has been a flop outside of China because of their relatively poor channel programme. Presumably 3Com can be of some help there.

Huawei needs to sell something because they are desperate for cash.

This article smells of rumour placement by Huawei to push up the price of the JV. I'd be amazed if JNPR or NT were really interested in H3Com. The last thing JNPR needs now is a shaky manufacturer of low-margin commodity products that only sell well in China, and then only because of the HW salesforce. NT doesn't have the cash to go buying this kind of thing, it has better products in its own stable that it can't sell effectively as it is, and it has its own R&D organisation in China with about 1000 people and access to equivalent manufacturing anyhow.

materialgirl 12/5/2012 | 3:35:00 AM
re: Suitors Eyeing 3Com/Huawei JV Yes, U.S. and Western Europe. The enhancements sounded like: put in chips that actually forward bits. It was a few years ago that this cropped up, but the original boxes sounded dreadful. They were so bad, it has taken them two years to complete the re-design. Huawei needed 3COM intelligence to figure out what to do.

Second note: Now that the CSCO CRS is sort of taking off, is the ripped-off version of IOS losing value in the SP space?
voipexpat 12/5/2012 | 3:34:56 AM
re: Suitors Eyeing 3Com/Huawei JV Material Girl - if you know nothing about a subject, why comment on it? You have no clue.
runnyme 12/5/2012 | 3:34:54 AM
re: Suitors Eyeing 3Com/Huawei JV Just want to get another banana, nothing else :-)

-- Materialgirl
quicktime2004 12/5/2012 | 3:34:47 AM
re: Suitors Eyeing 3Com/Huawei JV Why do people without some knowledge
comment their rivals?

Think about why Lucent was bought by Alcatel.

phwilson 12/5/2012 | 3:34:46 AM
re: Suitors Eyeing 3Com/Huawei JV Well, it looks like the the buyout bidding has officially started:

>Form 8-K for 3COM CORP


Other Events

ITEM 8.01 Other Events.
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. 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. 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.
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