Why Huawei Wants a Part of 3Com

Posted by: Bruce Einhorn on October 03, 2007

When it comes to big overseas acquisitions, the Chinese track record is pretty spotty. There have been some big flops – TCL’s deals with Thomson and Alcatel, for instance. Some, like Haier plan for Maytag and CNOOC’s for Unocal, never got off the ground. The best of the lot has been Lenovo’s purchase of IBM’s PC division, and the verdict is still out on that. So what to make of the news that Huawei Technologies is teaming up with Bain Capital in a $2.2 billion deal to take 3Com Corp. private? At first, this seems like a classic case of the Chinese getting suckered into buying something that nobody else wants.

Once, back in the 1990s, 3Com was important in the network equipment business and for a while the company broke out of the business page and into the sports section thanks to its naming rights for the stadium where the San Francisco 49ers played. But the glory days are long gone for 3Com, which has fallen far behind Cisco and hasn’t managed to make money this century.

So why bother? Maybe Huawei execs think that their engineers can learn something from the Americans at 3Com. The two companies did work together in a joint venture that lasted for three years, so the two sides do go back a while together. Last year, 3Com bought out Huawei’s share of the joint venture, for $886 million, and that business in China is today probably the most valuable part of 3Com.

Moreover, Huawei can certainly need the help on the other side of the Pacific. It hasn’t exactly been smooth sailing for the Chinese company as it has tried to make its way into the U.S. Huawei is privately held and its reclusive CEO, Ren Zhengfei, is a former officer in the People’s Liberation Army. In response to questions about ties with the PLA, Huawei officials say repeatedly that there is no connection between the company and the Chinese military, but the company does have an image problem that makes expansion in the U.S. difficult.

That’s one reason that Huawei has been focusing on expanding sales in developing countries in Asia, Africa, the Middle East and the former Soviet Union. Huawei has also managed to make some inroads in Western Europe. Last year, for instance, Huawei formed a partnership with Vodafone to supply the British cellular operator with Chinese-made 3G phones. (More on that in this BW story from September a year ago.)

The problem is, ZTE, the Huawei rival that also is based in the southern Chinese city of Shenzhen, has making some impressive moves in the U.S., including a deal that it announced a few months ago to sell equipment to Sprint Nextel. ZTE also signed a deal last year to cooperate with Cisco, the company that embarrassed Huawei by taking it to court for alleged intellectual property rights violations. It’s no secret that the Chinese government wants its top companies to be expanding globally, and that includes the U.S. As the top Chinese communication equipment company, Huawei couldn’t sit back and let its next-door neighbor steal a march on it in the U.S.

In a press release from last Friday, Huawei’s CEO emphasized that this deal was about business, not politics. “This is a commercial investment for Huawei. We believe the new ownership structure will help 3Com to improve its business operations, provide better products and services and bring more value to its customer,” the press release quoted Ren saying.

The big question now is whether opposition to the deal builds in the U.S. because of Huawei’s involvement - and what Ren and other Huawei execs are willing to do in order to address those concerns.

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Reader Comments

George

October 3, 2007 03:42 PM

It seems that Huawei is only pursuing 16.5% stake in this deal. Huawei and 3Com had a joint venture H3C several years back with 51% owned by Huawei. Now H3C is probably the only profitable business for 3Com and accounts for more than 50% of the company's revenue. H3C's major market is China. After 3Com bought Huawei's shares of H3C last year, H3C sales have been down since then. I think what Huawei should do is just to buy back H3C, which equals to the better half of 3Com.

Yang

October 3, 2007 06:26 PM

3Com signed an agreement with Huawei to avoid competition, that's why Bain Capital choose Huawei instead of Cisco to be part of this deal. Otherwise, H3C will be in direct competition with Huawei.

max

October 3, 2007 07:50 PM

H-1Bs and outsourcing have discouraged Americans from majoring in the sciences and engineering and has caused the Indians and Chinese to do the opposite: Indian and Chinese are entering the science and engineering field by the bucket full…can’t blame them.

So what is the big deal with a Chinese company picking up an old company who’s sun set long ago?

As far as a thread to US interests, H-1Bs and outsourcing is what will do us in. We don’t build anything and soon we will not design anything…and it will eventually follow that someday the foreigners will not want the worthless dollars. Who is going to design and build the F-45? …the Indians and Chinese? …lol

mark

October 3, 2007 08:28 PM

The $2.2 deal with Bain Capital acuired 2Com is one strategy of put in one foot in the global network market. Huawei wants a name of 3Com and consultant experts from Bain Capital in dealing with US laws and or issues. Chinese minds can work in the American company. Huawei will exploit all available resources, practical security techonology in 3Com, from that start, Huawei will add values and know how to compete with Cisco and other network equipment suppliers. There are chinese engineers who graduated in Electrical and computer science at US universities will help Huawei to make a turnaround from Zero. Where will be the playing ground for US companies?

Andy

October 3, 2007 11:52 PM

Is it wrong for a company to have a former military officer as its CEO? Aren't there a lot of former military officers in the top of US companies? Should the Chinese stop their businesses in China? We all know how close those companies to Pentagon.

Milthen

October 4, 2007 01:06 AM

Business is business. I can not understand why Americans always think Chinese company has connections with China Government

Ronald

October 4, 2007 01:43 AM

3Com is a piece of garbage and should sell to anyone who wants it. But if I was a Chinese company, I would have run away from it as far as I could. 3Com, what a mess! It is funny that there are people on both sides - from China and US - think this company still has something left and, seriously, those people need to have their brain checked.

rick

October 4, 2007 01:26 PM

if 3com goes through with this deal,they are nothing but a bunch of traitors.

Dante

October 4, 2007 07:56 PM

Oh well, time to stop buying 3Com equipment. Last thing I need is for the Red Army to have a back door to my data. Not that the West doesn't do the same. But at least there's a rule of law and civil liberties in the West.

Wang Xiang Dao

October 7, 2007 10:31 AM

yea, i think so, chinese government is building a company which calls China Investment Corp. just like the singapore government did. they buy a lot of shareholdings from other countires big company. their purpose is to control the other countries in economy. they never mind this company is useful for them or not. such as lenovo.

Xie Xie

October 8, 2007 06:29 PM

First, Lenovo is actually a private company, it has nothing to do with the Government. Secondly, about Huawei and 3COM, oh well, it is easier to have a stake in a "sunset" company than a big fish one, obviously, American authority would not let a Chinese company or any foreign company having a big stake in a big famous company. So instead, Huawei picks a small fish and learn from its technical skills, absorb the knowledge. My knowledge in this field is very limited, so I will not say much, but I think there must be something for Huawei to learn from 3COM, that is why Huawei is willing to pay the price.And as the article said, Huawei cannot just stand still and look at ZTE expands its business in the US, Huawei wants a market share as well. oh well, only time can tell. And these are just my opinions and my thoughts, I am not saying it is 100% correct.

max

October 8, 2007 09:07 PM

I wonder how many H-1Bs from China are spies. If I was Chinese and worked in their intelligence community, I would go to the countryside and select the brightest and offer them an engineering education and a chance to serve their country. We probably have thousands of Chinese spies working all over the US. The Chinese probably laugh at us about how easy it is to send a spy to the US.

So what is the big outcry about 3com being bought by Huawei?

james

February 21, 2008 03:28 PM

Max

I thought of that too, some of these students are in their late 50's and one just wonders if they are really just students or something else. its not common to say the least to find a horde of 50 year old undergraduates! with a ton of papers on their tables carrying out what seems to be a big time research.

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BusinessWeek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies. Eye on Asia’s bloggers include Asia regional editor Bruce Einhorn, Tokyo reporter Ian Rowley, Korea bureau chief Moon Ihlwan, Asia News Editor and China Bureau Chief. Dexter Roberts, and Hong Kong-based Asia correspondent Frederik Balfour.

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