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Issue Date: October 2006

3Com faces tough battle to retain holding in H-3C

1 October 2006

3Com has a fight on its hands to retain a stake in the Huawei-3Com, H-3C, joint venture, and will see its whole future in doubt if it fails to maintain an interest in its most successful operation.
Three private capital companies: Silver Lake Partners, Bain Capital, and Texas Pacific Group, have been invited by 3Com's Chinese partner Huawei Technologies to buy a majority interest in the venture, according to a report in the Wall Street Journal. This is possible under an agreement between 3Com and Huawei that either party can buy the other out from the H-3C joint venture in a bidding process that commences on 15 November.
Since it was set up in November 2003, H-3C has transformed struggling 3Com's operations and has enabled it to fight back in what had been a one-sided battle with market leader Cisco Systems. 3Com boasted that H-3C's growth in China has been mainly at the expense of Cisco, and it aimed to increase its 35% market share to be the number-one provider, toppling Cisco from that position.
By increasing its original 49% stake to 51%, 3Com has been able to consolidate H-3C results into its own, so that first-quarter sales leapt by 69% to $300,1m, though it was left nursing a $14m net loss.
3Com announced in August that it was to begin negotiations with Huawei to increase its stake in H-3C, and optimistically said it hoped for an agreement outside of the bid process.
Chairman Eric Benhamou said at the time: "Our joint venture in China is a growing and profitable enterprise that we believe can be an important cornerstone of 3Com's future. We intend to negotiate a mutually beneficial agreement that increases 3Com's stake in H-3C and promotes H-3C's continued success."
Though 3Com has cash and equivalents of $916m, the private equity companies have $1bn to $1.5bn at their disposal, a war chest that would enable them to top 3Com in any auction. H-3C accounts for half of 3Com's current revenue and without its contribution, 3Com would be left with a pile of cash and scant networking assets.
While its IDS/IPS security division TippingPoint enabled it to boost security sales by 51% in its last quarter, voice and services showed little growth and connectivity products were in decline. Even though it may launch products such as the recent Unified Switch with wireless and Wi-Fi ina single device for the SMB space, the risk now is that the slide may be irreversible, if resellers shun it for fear of an ever weakening position in the market.
When H-3C was set up, 3Com contributed $160m cash, its assets in China and Japan, and licenses related to intellectual property. For its part, Huawei contributed its enterprise networking business assets, including LAN switches and routers, engineering, sales, marketing resources and personnel, and licenses to its related intellectual property. These assets were valued at $178,2m.
While 3Com had approaching 2000 staff in total, H-3C employed 2000 engineers, the majority of whom have advanced degrees.
H-3C broadened 3Com's product line both at the low and high end of the market, and enabled it to offer a complete range of products from the edge to the core of the network.
3Com has been in decline for some time and revenue, which reached $5,48bn in 1997, has been in decline ever since though H-3C enabled it to rise 22% last year to $794,8m.
Source: Computergram

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