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.

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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.

Dubious Cisco Rumors Proliferate

Rumors are rife this week of impending technology acquisitions.

Some of these rumors are entirely spurious, started by stock promoters to help them move shares one way or the other. What’s always humorous, at least to me, is that Cisco Systems gets cast as the prospective buyer in so many of these scenarios.

Occasionally, the rumors have a patina of plausibility, which helps keeps them alive.

One of those rumors that seems at least remotely possible involves a Cisco acquisition of McAfee. The reasoning is that Cisco might want to enhance its content-security capabilities, which is at least within the realm of possibility. What Cisco wouldn’t want, however, are the slim margins and uncertain business prospects associated with McAfee’s heavy exposure to the antivirus marketplace. To a lesser extent, that’s also why Cisco has shied away from consummating an increasingly warm relationship with Trend Micro, another company that Cisco has been alleged to be on the cusp of acquiring for quite some time.

I would classify a Cisco acquisition of McAfee as extremely unlikely, and a Cisco acquisition of Trend as unlikely.

Cisco also has been said, in some quarters, to be interested in Check Point. I am not sure how this rumor got started or what sustains it, but it doesn’t make any sense. It’s not going to happen. Check Point doesn’t have anything that Cisco already doesn’t want to own. Cisco already is beating Check Point in most head-to-head competitive engagements in the field, so what’s the point of buying the former firewall pioneer?

Similarly, we hear recurring rumors of Cisco having designs on Nortel Networks. Such rumors have persisted intermittently for more than a few years, and they have never made sense. Cisco typically doesn’t make huge acquisitions.

Yes, it make an exception for Scientific Atlanta, but that was a special case with unusual circumstances. Whereas Scientific Atlanta brought Cisco into a dominant position in the set-top box market, helping Cisco solidify an end-to-end solution set for video-content delivery, what would Nortel bring to Cisco? Not enough to make it interesting, that’s for sure. Nortel has too many unattractive products in markets where it has less than 20-percent market share.

There also have been rumors about Cisco buying F5 Networks. If that were going to happen, it would have occurred several years back, when F5 left Cisco, Nortel and others in the load-balancing dust. Now Cisco is regrouping and taking renewed aim at the application-delivery and -optimization market with products of its own. F5 will continue to represent a solid competitor, but Cisco has concluded that it doesn’t have to own F5, and F5 probably wouldn’t sell to Cisco, anyway.

As the posturing and bidding intensifies around H-3C, the 3Com-Huawei joint venture based in Hong Kong, some have even suggested that Cisco might buy 3Com to gain 3Com’s 51-percent stake in H-3C. That’s preposterous. Cisco is extremely unlikely to be interested in 3Com or in 3Com’s joint venture with Huawei, a company that Cisco sued a few years back over intellectual-property issues.

Another rumor making the rounds is that Cisco might be interested in buying Riverbed Technology. That’s a possibility, but not yet. Cisco hasn’t given up on its own WAN-optimization products and technologies, which have been assembled through acquisitions and internal development, but it might consider a Plan B approach to Riverbed if that vendor continues to outdistance its rivals in a fast-growing space.

What’s Cisco likely to do? It will stick to the script that it has followed successfully for years, buying companies with compelling technologies that can be plugged into existing Cisco product sets in established or emerging markets. A good example was Cisco’s acquisition of VoD-server vendor Arroyo and its announced acquisition today of Ethernet semiconductor vendor Greenfield Networks.

Blue Coat Adds Client Software to WAN Application-Optimization Portfolio

In a move designed to differentiate it from other vendors in the fast-growing WAN-application optimization space, Blue Coat Networks announced today that it would add client-based application-acceleration and security software to its product portfolio.

Even though other vendors, such as Stampede Technologies and Intelligent Compression Technologies (ICT), offer client-side software for application acceleration, Blue Coat is marketing its SG Client software as the first to allow enterprise to provide application acceleration and security to all remote users, including those using managed and unmanaged clients.

Says Blue Coat:

The Blue Coat SG Client is being designed to accommodate the needs of any user, including mobile workers, teleworkers, branch offices of one or two people and even partners — using managed devices (such as desktops, laptops and PDAs) controlled by corporate IT — or unmanaged devices, such as employee’s home computers, Internet kiosks in airports or hotels and computers in partner organizations.

To control application performance and security on managed endpoints, Blue Coat SG Client loads as persistent, resident client software. For unmanaged endpoints, SG Client can be applied dynamically using an on-demand version of the software. The on-demand version is also appealing to organizations not wanting permanent client software.

The ability to deliver application acceleration and security to both managed and unmanaged endpoints extends control of application experience and security to all users regardless of location. It provides business continuity that could prove essential in the event of a disaster that prevents employees from coming to the office and helps organizations accommodate an increasingly mobile workforce.

Blue Coat says the client-side code will enable enterprise IT staff to provide remote employees with the sort of application acceleration they would receive if they were situated at a branch or remote office running one of Blue Coat’s SG appliances. The Blue Coat SG client will function as peers to Blue Coat SG appliances, and can be managed accordingly.

Similar software offerings are likely to come from Expand Networks and F5 Networks before long, but Blue Coat clearly was eager to claim early bragging rights. Despite the announcement, however, the actual client-side software won’t begin shipping commercially until the first quarter of 2007.

According to a report by Network World, Blue Coat officials indicated that the new software might be priced at about $100 per end-user machine, for both the persistent software license and the on-demand model. For new customers, Blue Coat’s SG appliances start at about $2,000 per box.

Wondering About the Machinations and Value of H-3C

LightReading published an article last week on the bidding war for the H-3C joint venture between Chinese networking company Huawei and the ever-changing 3Com Corporation.

That article raised more questions than answers, and it has me wondering about what’s really happening behind the scenes as executives from Huawei,  3Com, private-equity companies, and perhaps a few other networking vendors jockey for position.

Here’s an excerpt from the LightReading piece:

Potential bidders for 3Com or the Huawei JV include a range of private equity players, Juniper Networks Inc., and Nortel Networks Ltd., say several Wall Street sources. The Wall Street Journal had previously reported that the private equity companies Texas Pacific Group , 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.

Okay, who are these "sources," and just what is their interest, if any, in the bidding for the H-3C joint venture? Honestly, I cannot envision Juniper or Nortel getting involved in an auction that already has reached $1.5 billion to $2 billion, and could go much higher. Given all its other challenges and issues, Nortel is in no position to make such a move, and Juniper probably wouldn’t want to buy a company that sells such a high proportion of low-margin networking gear.

Then again, the LightReading article provides a rationale for the reputed interest of Juniper and Nortel in the H-3C joint venture:

Why would Juniper and Nortel get involved? Quite simply, to beat Cisco Systems Inc. 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.

Make no mistake, the H-3C joint venture is exhibiting robust revenue growth. It’s also profitable, unlike nearly any other group within 3Com. H-3C’s products are selling in China and elsewhere in Asia, and, if future growth were assured, it would make an excellent acquisition candidate for a player willing to compromise on profit margins for top-line growth. I just don’t think Nortel or Juniper matches the profile.

The article makes a case, probably constructed by one of the "sources," that one way to buy into the H-3C joint venture is to buy 3Com. I think that’s a stretch. 3Com comes with a lot of baggage, not to mention a muddled enterprise strategy in Europe and North America that seems moribund, if not stillborn. Even 3Com’s Secure Converged Networking (SCN) group, built around its acquisition of IPS vendor TippingPoint, is losing money.

Finally, and most intriguingly, Huawei seems desperate to sell off its stake in the joint venture. Why? What’s the end game for Huawei? Is it trying to extricate itself from a partnership that has served its purpose, whatever that purpose might have been?

If it sells all or most of its stake in the joint venture, will it still have an interest in ensuring H-3C’s success? Or will it compete against whatever becomes of H-3C with its own products in China and the rest of the developing world? Remember, a lot of the success of H-3C has turned on the sales network and the contacts of Huawei in China. If Huawei withdraws from H-3C, or if it minimizes its exposure to the company’s ongoing operations, a lot of the value of the joint venture evaporates.

According to earlier report in the Wall Street Journal, which quoted its own sources, Huawei wishes to retain a 20-percent to 30-percent stake in H-3C. If that is true, then Huawei still will have enough skin in the game to care about H-3C’s fortunes. However, a subsequent report indicated that Huawei wished to eliminate 3Com from the equation entirely and sell the joint venture in its entirety to a private-equity company, taking its payment in a mix of cash and equity.

It will be interesting to see what level of interest and commitment Huawei maintains with regard to the joint venture. It will be a crucial factor in assessing the valuation and prospects of H-3C.

At any rate, there’s a lot of posturing and gamesmanship occurring through the press in relation to the disposition of H-3C. We have no idea what’s really transpiring in private boardrooms, though we do know that 3Com and Huawei can begin bidding for each other’s shares starting November 15, which happens to be this Wednesday.

Cisco Seeks to Bolster Position in Metro Ethernet with Greenfield Acquisition

Maybe Cisco Systems didn’t like the view of at least one market analyst suggesting that Nortel Networks is well placed to compete effectively and perhaps dominate the Metro Ethernet marketplace.

More likely, Cisco heard the candid criticism of some service-provider and carrier customers demanding stronger offerings from the networking titan. Whatever the motivation, Cisco announced this morning a definitive agreement to acquire privately held Greenfield Networks Inc., which develops semiconductors for the Metro Ethernet market.

Cisco did not disclose financial terms of the deal.

Greenfield’s 60 employees — based in Sunnyvale, not far from Cisco’s sprawling San Jose headquarters, and in Bangalore, India — will join Cisco’s Ethernet and Wireless Technology Group.

Perhaps belaboring the obvious, Kathy Hill, senior vice president of Cisco’s Ethernet and Wireless Technology Group, said the following regarding the acquisition:

By integrating Greenfield Networks technology with Cisco’s family of Metro Ethernet switches, we will be able to improve time to market of new carrier-class features to our service provider partners,

One would expect that to be the general plan.

Microsoft’s Allchin Misrepresented on Vista’s Need for AV

A controversy has developed over comments that were made by Jim Allchin, Microsoft Co-President of Platforms and Services, a couple days ago.

As ZDNet’s Mary Jo Foley writes:

I’ve always been one to question Microsoft’s motives and double-speak. But it is completely misleading to paint Allchin’s acknowledgement that his son — running a heavily locked-down, parental-control-ridden PC, in non-admin mode (one would pretty safely assume) — isn’t running a Microsoft- and/or third-party-developed AV program means Microsoft is claiming Vista is so solid that it doesn’t require AV software.

Did Allchin make a mistake in his attempt to prove that Vista is far more secure than any previous version of Windows, including XP SP2? Yes. He should not have suggested that any users, even those with Windows chiefs as their fathers, can or should forego antivirus software.

Foley is right to say that it is misleading to portray Allchin’s comments about his son’s AV-free Vista PC as suggesting that antivirus software isn’t required as an accompaniment for the new version of Windows.

However, I think she is wrong to say that Allchin was out of line in pressing the point that Vista is more secure than any previous version of Windows that Microsoft has produced. While some might say, with justification, that Vista didn’t have much of a hurdle to clear in surpassing the security capabilities of Windows XP, it isn’t necessarily wrong for Allchin to acknowledge the security advances Microsoft has made.

As for his alleged suggestion that a user can or should forego antivirus software on a Vista PC, I don’t think he’s guilty of the charge that’s been leveled at him. Let’s look at what Allchin is reported to have said, as reported by BetaNews:

"I would say that Windows XP SP2 did an amazing job, and I’m proud of what we did there. But you have to understand, we learned a lot during Windows XP SP2, and there were things that we couldn’t put in that product," explained Allchin.

"I’ll give you an example: It’s my favorite feature within Windows Vista, it’s called ASLR (Address Space [Layout] Randomization). What it does is, each Windows Vista machine is slightly different than every other Windows Vista machine. So even if there is a remote exploit on one machine, and a worm tries to jump from one machine to another, the probability of that actually succeeding is very small. And I wanted to do this in Windows XP SP2, but we couldn’t figure out how to do it. So then a smart guy here came up with a solution, so we put it in Windows Vista."

After summarizing that past statement, Allchin continued, "Please don’t misunderstand me: This is an escalating situation. The hackers are getting smarter, there’s more at stake, and so there’s just no way for us to say that some perfection has been achieved. But I can say, knowing what I know now, I feel very confident."

"I’ll give you an example: My son, seven years old, runs Windows Vista, and, honestly, he doesn’t have an antivirus system on his machine. His machine is locked down with parental controls, he can’t download things unless it’s to the places that I’ve said that he could do, and I’m feeling totally confident about that," he added. "That is quite a statement. I couldn’t say that in Windows XP SP2."

I don’t think Allchin is advising anybody to run a Windows Vista machine without antivirus software. In fact, he explicitly recognizes that hackers and other propagators of malware are constantly devising new exploits and threats. He returns to that theme later in the Beta News article:

But I need to say the following: Windows Vista is something that will have issues in security, because the bar is being raised over time," Allchin continued. "But in my opinion, it is the most secure system that’s available, and it’s certainly the most secure system that we’ve shipped. So I feel very confident that customers are far better off by using Windows Vista than they are with anything that we’ve released before."

The problem, in my opinion, was not in what Allchin said, but in the way in which his comments were misinterpreted and misrepresented by others.