3Com: Going, Going, Gone…

Posted on March 21, 2008
Filed Under Apparatchiks, China Business |

Computer Reseller News reports:

Bain Capital Partners on Thursday terminated its proposed $2.2 billion acquisition of networking equipment maker 3Com, saying merger talks between the parties had dissolved and that national and political security concerns stymied the deal.

3Com, however, said in a statement that it still plans to move forward with its shareholder meeting, set for Friday, to vote on the proposed merger and urged shareholders to vote in favor of the buyout plan. 3Com would not comment further.

According to Bain, a Boston-based investment firm, the Committee on Foreign Investment in the United States (CFIUS), was going to prohibit the deal, which would’ve given a 16 percent stake to Huawei Technologies, China’s largest networking equipment maker.

“Bain Capital made several alternative proposals to 3Com that we believe could have satisfied the concerns raised by CFIUS,” the firm said in a statement. “We regret that we were unable to agree upon an alternative transaction.”

Bain worked long and hard to satisfy CFIUS, but to no avail. The article goes on to quote Glenn Conley, a reseller. He describes 3Com as a floundering company desperate to make sales numbers:

“I’m looking for leadership and a good solid direction that makes sense,” Conley said. “Over the past year, two years, three years, five years it’s been one big slip and lacking a direction that makes sense. The Bain deal to us was a very good possibility to fix the things we thought were broken.”

Conley said he’s felt pressured to rush deals and make sales to satisfy quarterly numbers and the leadership of a private firm may have helped 3Com break out of that slump, presuming he said that “a privatized company clears the deck chairs.”

Conley said he foresaw some key changes “if Bain or another private investment firm were to come in and take a long hard look” at 3Com, its lineup of products and the way the company is run. He said he hoped Bain could’ve turned things around and expects 3Com to continue to seek out suitors for a possible acquisition.

“We hoped for that, we cried for that,” he said, adding that he thought the security concerns surrounding the merger were “silly” and likely an excuse by Bain to back out of the deal.

Silly security concerns? Most definitely. It was widely assumed that Bain was prepared to dump TippingPoint (the subsidiary that supplied the US government with security products) to satisfy CFIUS. An excuse for Bain to pull out of a deal that lost its luster in the face of a recession? Probably. 3Com has a grim future ahead as its only source of profits is sales to Huawei from its H3C subsidiary.

3Com is trying to put a good face on, but there isn’t enough lipstick for this pig:

“While we remain committed to exploring alternatives that would enable us to complete the merger transaction contemplated by our existing merger agreement, we also remain confident in our long-term prospects,” said 3Com President and Chief Executive Officer, Edgar Masri, in a statement. “The company and our strategy, which attracted Bain Capital to 3Com in the first place, have not changed.”

What has changed is the US economy. In the fall of ‘07 there were fears of a slowdown. In the spring of ‘08 the only question is how deep the recession will be. Where once CFIUS’ foot dragging must have frustrated Bain, it now provides a very convenient excuse to untangle itself from a questionable investment.

3Com stock fell about 10% yesterday. Expect them to stumble into sunset and for Huawei to digest H3C at its leisure.

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