Thoughts on HP-3Com, MOFCOM, and China’s Smart Grid

As China’s Ministry of Commerce (MOFCOM) continues its review into HP’s pending acquisition of 3Com, I am attempting to get more information on how the MOFCOM process works and what conclusion the ministry might reach.

After doing some digging, I know more about how MOFCOM operates, what its current priorities seem to be, and how it has resolved previous acquisition reviews. Still, I would not want to wager heavily on the outcome of HP’s 3Com purchase. It should go through, but MOFCOM remains a significant wildcard, consistent in some respects but seemingly arbitrary in others.

If you care to learn more about MOFCOM, how it’s handled recent cases, and how it has become more assured and ambitious in its rulings, I direct you to the MOFCOM website. a recent article on MOFCOM from law firm Sidley Austin, another from law firm Allen & Overy LLC, and a third article (which appeared at The Deal’s website) by lawyers in the employ of Weil Gotshal.

None of those law firms was involved in the HP-3Com deal. That transaction was handled by Cleary Gottlieb Steen & Hamilton, which represented HP, and by Wilson Sonsini Goodrich & Rosati, which acted on behalf of 3Com.

Separate from the deliberations of MOFCOM, another piece of news surfaced this week that might have implications for HP and 3Com. According to a Reuters report that quotes market researcher Zpryme, China will invest $7.3 billion on smart-grid technology and services this year. Moreover, China could spend more than $100 billion upgrading its power-infrastructure in the next decade, according to Yuanta Securities analyst Min Li.

Why, you ask, is that relevant to HP and 3Com? As Cisco knows, realization of the smart grid involves deployment of two-way communications and network infrastructure. Meanwhile, in an IDG News Service story that hit the wires just after HP and 3Com announced the acquisition, we learned that 3Com has a strong presence in Chinese energy sector. To wit (quoting from the aforementioned IDG story):

One area where HP may increase its focus after the 3Com deal is China’s energy sector, said Adam Jura, a senior analyst at Ovum. Gear from H3C is used in Chinese backbone networks including those for its energy and transportation sectors, giving 3Com strong ties in those areas, said Jura. HP could benefit, for instance, from potential smart power grid projects in China spurred by government funding, he said.

If 3Com can hold off Huawei, its former H3C partner, and repel Cisco’s push into China’s smart grid, 3Com and HP could benefit significantly from China’s energy-related splurge.


One response to “Thoughts on HP-3Com, MOFCOM, and China’s Smart Grid

  1. Wow, the China-US saga continues and this is not so good for HP expanding its footprint in China…

    Google to shut China search engine
    By Richard Waters in San Francisco and Kathrin Hille in Beijing
    Published: March 12 2010 20:11 | Last updated: March 13 2010 02:16

    Google has drawn up detailed plans for the closure of its Chinese search engine and is now “99.9 per cent” certain to go ahead as talks over censorship with the Chinese authorities have reached an apparent impasse, according to a person familiar with the company’s thinking.
    In a hardening of positions on both sides, the Chinese government also on Friday threw down a direct public challenge to the US search company, with a warning that it was not prepared to compromise on internet censorship to stop Google leaving.
    The signs that Google was on the brink of closing, its local search service in China, came two months after it promised to stop bowing to censorship there. But while a decision could be made very soon, the company is likely to take some time to follow through with the plan as it seeks an orderly closure and takes steps to protect local employees from retaliation by the authorities, the person familiar with its position said.
    Google is also seeking ways to keep its other operations in China going, although some executives fear that a backlash from the Chinese authorities could make it almost impossible to keep a presence in the country.
    When the search giant first promised to end censorship in response to what it claimed were a series of cyber-attacks mounted from inside China, many China-watchers warned that its public defiance of Beijing would provoke a stern response.
    On Friday, Li Yizhong, minister for industry and information technology, said: “If [Google] takes steps that violate Chinese laws, that would be unfriendly, that would be irresponsible, and they would have to bear the consequences.”
    One person close to the search company, meanwhile, said that its senior executives remained “adamant” about ending the censorship. The company has also ruled out keeping the search service going by handing majority control, or even the entire business, to a local player, this person said.
    Google’s executives have made it clear that they still hope to stay in the country, whatever the fate of “It’s very important to know we are not pulling out of China,” Eric Schmidt, Google’s chief executive, told the Financial Times at the time. “We have a good business in China. This is about the censorship rules, not anything else.”
    The company’s other operations, which pre-date the launch of four years ago, include its research centre in Beijing and a sales force that sells advertising on the Chinese-language search service, based outside China, to advertisers inside the country.
    Mr Li encouraged Google to continue its operations in the country. “[Google] has taken 30 per cent of the Chinese search market.
    “If you don’t leave, China will welcome that, if you don’t leave, it will be beneficial for the development of the internet in China.”
    Copyright The Financial Times Limited 2010. You may share using our article tools. Please don’t cut articles from and redistribute by email or post to the web.

    Will China Make a Point With 3Com?
    What is the best fear gauge for U.S. companies operating in China? An obvious one is how well the shares of Google’s local rival Baidu are performing. After all, Google is still discussing with the Chinese government whether or not it will quit the country. Another is 3Com.
    Hewlett-Packard has offered $2.7 billion to buy the maker of networking gear, a deal it intends to close in the next few months. Though both are listed in the U.S., 3Com’s biggest business in based in China—giving Beijing’s antitrust regulator power over the deal. The Chinese Ministry of Commerce, or Mofcom, is notoriously opaque and unpredictable. Two recent steel mergers collapsed because the regulator never announced a decision.
    So no surprise 3Com stock trades at an unusually large discount to H-P’s $7.90-a-share offer. In early January, 3Com traded at a discount of around 4%, roughly double what risk arbitragers say it would have been without the Mofcom factor. Then Jan. 13, the day after Google threatened to quit China, the spread widened to 5%, with volume triple the average for the prior month.
    Why the Google hit? Fears have intensified that China, feeling squeezed by a huge, popular U.S. company and its government, would fight back. For starters, the U.S. blocked a bid by China’s Huawei Technologies and Bain Capital for 3Com in 2008 to keep certain security software out of Chinese hands.
    If Mofcom sticks with its mandate to prevent firms from gaining excessive market share, a green light looks certain. An H-P deal would simply switch one U.S. owner for another. But investors should be on guard in case Beijing decides to flex its muscles.

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