3Com Future Unclear

Senior 3Com Corp. executives are waiting for the full terms of a US$2.2 billion acquisition bid to be made public, as several important details affecting the company's future remain unclear.

Bain Capital Partners LLC and Shenzhen Huawei Investment & Holding Co. Ltd. announced an offer to buy 3Com on Sept. 28 for $5.30 per share, a 44 percent premium over 3Com's closing stock price on the previous day.

"It's clearly a win for shareholders. When you can get a 44 percent return on your investment overnight, you take it," Jay Zager, 3Com's chief financial officer, said in an interview in Singapore on Monday.

But Bain and Huawei, which is an affiliate of Chinese networking vendor Huawei Technologies Co. Ltd., offered little insight into their future plans for 3Com, including whether the company's senior management will be retained and how ownership of the company will be structured.

In particular, Huawei's role and the size of its stake in 3Com if the acquisition goes through remain uncertain. The information is not revealed in any of the documents filed with the U.S. Securities and Exchange Commission (SEC) and Zager said his discussions related to the bid have so far involved only Bain executives, despite several meetings that took place in China.

These questions should be resolved soon. Full details of the acquisition bid will be disclosed in a proxy statement that Zager expects to be filed during the last week of October.

The deal is likely to face some regulatory hurdles as Huawei, which is a private company, retains close ties with the Chinese government. If reaction to Lenovo Group Ltd.'s bid for IBM Corp.'s former PC division is any guide, there are may well be calls to examine national-security implications for the U.S. arising from the acquisition of 3Com.

On the other hand, Huawei and 3Com have previously worked together. In 2003, the two companies established a joint venture, called Huawei-3Com Co. Ltd. (H3C), in which 3Com held a 49 percent stake. Two years later, 3Com increased its stake to 51 percent as the company became an important supplier to Huawei.

3Com bought out the remaining 49 percent of H3C from Huawei in March for $840 million, implying a valuation at that time for the joint venture of approximately $1.7 billion.

The former joint venture is the largest source of revenue for 3Com and is currently the only one of its business units that is profitable, earning an operating profit of $27 million on sales of $187 million during the quarter ended on Aug. 31. And 30 percent of H3C's revenue comes from Huawei, which signed an 18-month non-compete agreement when it sold its stake to 3Com.

Huawei's role in the acquisition bid should put to rest fears it will re-enter the market for enterprise switching network gear on its own. "The H3C-Huawei relationship, as best as we can tell, should more than likely continue far beyond the 18 months," Zager said.

Of course there's more to 3Com than H3C. The company's Data Voice Business Unit, its second-largest source of revenue after H3C, reported an operating loss of $4.7 million on sales of $140 million during the most recent quarter. And then there is TippingPoint, a security company that 3Com acquired in 2005 for $430 million, which reported an operating loss of $553,000 on sales of $25.5 million.

Earlier this year, 3Com announced plans to spin off TippingPoint in an initial public offering early next year, saying its products were not a tight fit with networking gear produced by other units. That IPO is still likely to happen, but the decision to proceed will ultimately be Bain's and Huawei's to make if the 3Com acquisition goes through, Zager said.

The value of these individual units, as indicated by their previous valuations, has some investors questioning whether the bid for 3Com reflects the company's true value. But Zager notes that 3Com's market value is reflected in the company's current stock price, not valuations done at an earlier time.

"You can argue philosophically, how did 3Com get to a valuation on the street of $1.4 billion or $1.5 billion when the individual pieces add up to more than that, and my guess is that gets down to expectations, execution, etc.," he said.