Posted by: Bruce Einhorn on October 3, 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.