3Com said the price it paid for the 49% holding represented an implied equity value of $1.8bn, yet the whole of 3Com is currently valued by the stock market at $1.6bn, a rating that reflects the company’s dismal financial record.
Marlborough, Massachusetts-based 3Com bought H3C under an agreement made at the start of the partnership that the two companies could hold an auction to buy out the other party’s stake after three years of operation.
It couldn’t let the operation slip away as H-3C transformed 3Com’s operations and has enabled it to fight back in what had been a one-sided battle with market leader Cisco Systems Inc. H-3C’s growth in China has been mainly at the expense of Cisco, and it aimed to increase its 35% market share to be the number-one provider.
H-3C broadened 3Com’s product line both at the low and high end of the market, and enabled it to offer a complete range of products from the edge to the core of the network.
3Com had been spiraling downward, with revenue falling from a peak $5.48bn in 1997 to $651.2m in 2005, but then H3C kicked in and it rose 22% in 2006 to $794.8m. Apart from its TippingPoint security division, all other 3Com operations are in decline.
so it is not surprising that the market is skeptical about H3C prospects now that it is under 3Com control. The other point of concern was a point in the statement that 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. There is considerable apprehension about the possibility that a dynamic operator such as Huawei could re-emerge as a competitor to 3Com.
However, a lowly rated company such as 3Com could now be a target for a private equity bid. In October a report in the Wall Street Journal newspaper suggested that private-equity firms Silver Lake Partners, Bain Capital Inc, and Texas Pacific Group were interested in buying H-3C with offers ranging from $1bn to $1.5bn. Now that has fallen through, they could well switch their interest to 3Com.
