Monthly Archives: November 2006

3Com’s Acquisition of H-3C: Financing and Competition Questions Unanswered

After reading the official 3Com press release regarding the company’s acquisition of the 49-percent stake of Huawei-3Com that it didn’t previously own, I still don’t know the details of this deal.

Significant questions remain about how 3Com will finance the $882-million purchase of stake it bought from Huawei Technologies. 3Com says it "will communicate the details of its financing plans for the acquisition at a future date." The company is holding a conference call and webcast regarding the acquisition at 6pm EST today, and shareholders and analysts should take an aggressive tack in pursuing answers regarding the financial engineering of the transaction.

Another matter that requires further elaboration is the degree of collaboration and partnership that will continue between 3Com and Huawei now that the latter no longer holds an equity stake in what is now an erstwhile joint venture. 3Com’s provides the following paragraph in its press release:

Under the existing shareholders’ agreement, the parties have agreed that the selling shareholder in the bid process would, under certain circumstances, be subject to a non-compete provision for 18 months after the closing.

From that text, it isn’t clear whether "certain circumstances" were met in this instance. Shareholders and analyst should inquire as to whether Huawei will abide by the 18-month non-compete provision stipulated in the shareholders’ agreement. If not, 3Com has some explaining to do.

Here’s what Edgar Masri, 3Com’s president and CEO, has to say about the past and present of his company’s relationship with Huawei:

. . . . I want to personally thank Mr. Ren Zhengfei, CEO of Huawei, for his efforts and support, as well as recognize Huawei’s contributions to our successful partnership. We look forward to continuing our relationship with Huawei as a key customer of H3C.

In what sense will Huawei continue its relationship with 3Com as a key customer? Again, shareholders and analysts have a right to clear, precise answers.

3Com Buys Huawei’s Stake in H-3C

As reported by the Associated Press, 3Com Corporation has announced that it has purchased Huawei Technologies’ 49-percent stake in their joint venture, Huawei-3Com (H-3C), for $882 million. Prior to buying out Huawei’s stake, 3Com owned 51 percent of the joint venture.

Private-equity firms were aggressively trying to secure majority control of H-3C, but for now 3Com has claimed the prize, which reputedly carries an implied equity value of $1.8 billion.

Now we’ll have to see what this means. If Huawei abandons H-3C, it will lose valuable sales channels and operational capabilities that have enabled it to gain significant traction in China and beyond. It is not clear how or whether 3Com would be able to find substitutes for the benefits and value Huawei has provided.

I’ll report back after I learn more about the details behind this deal.

Fortune Speculates on Yahoo’s Next Move

CNN’s Money site runs an article from Fortune today that speculates on some big moves Yahoo might be considering.

Among the scenarios discussed: Yahoo buys AOL, Yahoo sells to Microsoft, Yahoo merges with eBay, and Yahoo stays the course. Also mentioned briefly is Yahoo’s pursuit of Facebook.

3Com Sends Message on H-3C

In a Form 8-K filing registered today with the SEC, 3Com disclosed that the mutually agreed bid process for the ownership of H-3C, its joint venture with Huawei Technologies, commenced today. Actually, 3Com disclosed more than that, even as it announced that it would be keeping quiet about the disposition of H-3C until it has something substantive to announce.

What follows is the text of 3Com’s 8-K filing. After you’ve reviewed it, I’ll provide my analysis of what I think it means.

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.

I think 3Com is sending some strong signals here. What I believe it is saying is that it is leaning toward selling its share of the H-3C joint venture to Huawei, which will then sell the entire joint venture — or a majority stake of it — to one of the private-equity firms avidly pursuing it.

Why would 3Com sell its 51-percent share of H-3C, especially after it signaled that it wanted to own the vast majority of the joint venture, if not all of it? 3Com appears to provide the answer by noting that Huawei, whose operations and sales teams have been largely responsible for the success of the joint venture, might choose to compete against whatever becomes of H-3C after the non-compete clause expires.

I believe 3Com knows it cannot make H-3C a success without the ongoing support of Huawei. I also believe that Huawei has indicated, firmly and unambiguously, that it no longer wishes to continue in its business partnership with 3Com. From the Chinese networking vendor’s standpoint, whatever value Huawei saw in working with 3Com has been fully derived or has passed. Huawei has made a decision to move on, and it will not change its mind.

What does that mean for 3Com? It means, I think, that 3Com is preparing its shareholders for the eventuality that it will sell its share of H-3C. That share could be worth as much as $1 billion, which 3Com could reinvest in its remaining business units, even though it has given notice that it might be materially circumscribed in the moves it would be permitted to make.

Considering the track record of 3Com in past years, shareholders should be skeptical of the company’s ability to successfully reinvest the proceeds that might be derived from a sale of its stake in H-3C. Perhaps, if the scenario I have sketched comes to fruition, 3Com shareholders should push 3Com to sell its remaining husk to a networking vendor in a better position to realize gains from 3Com’s assets.

If I were a betting man, I would take today’s filing as a sign that 3Com is preparing itself for a future without H-3C. The company’s shareholders should do likewise.

Microsoft Partners to Offer Hosted Business Apps to Indian SMBs

InfoWorld reported earlier today that Microsoft is partnering with Bharti Airtel, a large Indian telecommunications service provider, to offer hosted software and services for India’s small and medium businesses (SMBs).

The services, hosted and managed by Delhi-based Bharti Airtel, are expected to be available in January and will be targeted predominantly at companies with five or more employees.

At first, Microsoft and Bharti Airtel will offer basic hosted services such as e-mail, calendaring, and scheduling, but subsequently they also intend to roll out applications such as CRM (customer relationship management), accounting, ERP (enterprise resource planning), and some applications from Microsoft software partners.

Apparently, the pricing model for the services hasn’t been defined.

India and other parts of the developing world will present interesting opportunities for Google, if it can establish the right partnerships, to deliver web-based applications to small- and medium-size businesses. It’s no surprise the Microsoft is attempting to preclude the threat.

Yahoo on Verge of Major Acquisition?

I am hearing that Yahoo is on the verge of announcing a major acquisition.

The Wall Street Journal reported last month that Yahoo had acquisition talks with social-networking site Facebook, but it appeared those negotiations had reached an impasse. Reportedly, Facebook’s asking price was $1 billion. It’s also possible that Yahoo might acquire CNET, which has a market capitalization of $1.26 billion.

It is also possible, though less likely, that Yahoo might wish to acquire Dow Jones & Company or Time Warner’s AOL group. There are countless other possibilities, too, but it certainly seems that Yahoo is about to make an acquisitive move that many market watchers believe is long overdue.

Extreme Networks Stuck with Its Headquarters

In an indication that neither enterprise networking nor residential real estate in Silicon Valley is hitting on all cylinders, Extreme Networks has disclosed that Pulte Homes Inc. has withdrawn from a $70-million deal to buy the networking firm’s Santa Clara, Calif.-based headquarters.

During the company’s latest conference call, Extreme’s executives informed market analysts and investors that a contract to sell its 16-acre site to the homebuilder expired "under its own terms without the buyer proceeding forward."

Explained Mike Palu, Extreme’s acting chief financial officer:

We are in discussions regarding the possibility of entering into a new agreement, but will also explore other alternatives.

Well, good luck, Mike! Market readings indicate that a slowdown in national and regional home sales could have severe impact in Silicon Valley.