Huawei Takes a Minority Stake in 3Com Acquisition: Forecast Calls for Hot Air

Posted on September 29, 2007
Filed Under China Business, Cyberespionage |

Computerworld reports:

3Com Corp. announced on Friday that it has agreed to be acquired by a unit of investment firm Bain Capital LLC in a $2.2 billion deal that will also result in an affiliate of former joint venture partner Huawei Technologies Co. taking a minority stake in 3Com.

In addition, 3Com said China-based Shenzhen Huawei Investment & Holding Co. will become “a commercial and strategic partner.” The networking equipment vendor didn’t specify how large the Huawei affiliate’s ownership position will be.

3Com formed a joint venture with Huawei (called H3C) in 2003 and it changed the company’s fortunes in China. They married their software with Huawei’s hardware and became competitive in China. In 2006 they took full control of the joint venture. H3C was widely seen as the only really valuable and market relevant 3Com operation.

The Financial Times gets to the heart of the latest news:

3Com is small compared with rivals such as Alcatel-Lucent, Nortel Networks and Cisco Systems. But the US government is believed to be concerned about foreign ownership of sensitive communications networks.

Among 3Com’s products is an “intrusion prevention” technology that helps clients, including the US defence department, protect themselves from hackers.

The Pentagon believes Chinese People’s Liberation Army hackers were responsible for a massive cyberattack on it this year. Bryan Whitman, a Pentagon spokesman, said he was “not aware of any concern” over Huawei taking a stake in 3Com.

But Sami Saydjari, a former Pentagon cybersecurity expert and currently chief executive of Cyber Defense Agency, said Huawei’s ownership of hardware and important network components would be “really worrisome”.

“Any Chinese-related deal that touches on government IT systems, even in a minority capacity, is going to be something that the Committee on Foreign Investment [Cfius] looks at closely,” said Christopher Simkins, an attorney at Covington & Burling and former US justice department official.

“Looks at closely”? That seems a bit of an understatement. In response to the CNOOC/Unocal and Dubai Ports/US ports imbroglios of 2005 and 2006, Congress this summer tightened the regulations governing oversight by the Committee on Foreign Investment. As the article by Bingham McCutchen notes:

The new legislation expands the jurisdiction of CFIUS and makes its procedures more transparent, particularly to Congress. Most significantly, it expands the concept of national security to include “homeland security” and “critical infrastructure” and presumptively requires CFIUS to conduct full investigations of transactions that affect critical infrastructure and acquisitions involving foreign government-controlled companies. As a result of these changes, as well as the requirement to notify Congress at the conclusion of a review and to prepare summary reports, transactions involving sectors that historically have not been scrutinized by CFIUS are likely to be reviewed more closely by CFIUS and by Congress.

In addition, the role of “mitigation agreements,” which have long been used by CFIUS to resolve national security concerns, is formalized. The expanded use of these agreements is potentially troubling as they have been used to impose requirements that exceed existing regulations and can discriminate against foreign investors.

The US Department of Defense is, quite understandably, very careful as to the origins of all software and hardware that they deploy. The country of origin of a vendor’s owners is a critical criteria. I don’t know if this will affect the actual acquisition, but it may impact 3Com’s access to the US government market in the future. Conversely, this move may be a positive for 3Com’s access to the Chinese government market.

This deal does provide an inroad for Huawei to the US market. Their efforts there haven’t been successful to date. While 3Com has had a poor performance record over the years of its long decline, it presumably can still provide sales and marketing. We’ll see if Bain’s blue suits can flog them into a credible performance.

An interesting footnote to all this is the source of the financing. With the sub-prime mortgage crisis in the US forcing banks and hedge fund to take a hard look at the value of the assets they have invested in, there isn’t as much money floating around to fund private equity buyouts. At least in the west. The Financial Times mentions that the “..debt financing for the deal will be raised through the Asian branches of Citigroup and UBS, as well as HSBC, ABN Amro and Bank of China.”

The forecast:

Comments

2 Responses to “Huawei Takes a Minority Stake in 3Com Acquisition: Forecast Calls for Hot Air”

  1. bob sanders on October 1st, 2007 8:03 pm

    Great collection and link to the election embers for Mit.

    What about this PLA Cyberattack and connection to China?

  2. Catching Mice in China - Technology and business in and around China » Roundup Ready: 3Com, Huawei, Bain, Republicans, and Romney on October 11th, 2007 11:15 am

    [...] Huawei Takes a Minority Stake in 3Com Acquisition: Forecast Calls for Hot Air [...]

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