Bain Capital to Acquire 3Com for $2.2B

The $2.2 billion deal gives Huawei Technologies a minority share in 3Com.

Beleaguered 3Com announced on Sept. 28 that it has struck a deal to be taken private by Bain Capital and former Chinese partner Huawei Technologies for some $2.2 billion.

Eight days after it announced a net loss of $18.7 million for its first fiscal quarter of 2008 on revenues of $319.4 million, the Marlboro, Mass. company agreed to be taken private for $5.30 a share in cash. That represents a premium of about 44 percent.

Bains investment in 3Com gives the company more time to turn its fortunes around and helps to keep competition in the market more robust. 3Coms continued presence in the market provides pricing leverage for buyers looking to negotiate better deals.

As a part of the transaction, Huawei, which until last March held a 49 percent stake in its H-3C joint venture with 3Com, will take a four percent stake in 3Com.

"The 3Com Board of Directors and senior management team have thoroughly reviewed our strategic alternatives and have determined that the agreement with Bain Capital provides the best value for 3Com shareholders," said Edgar Masri, 3Com president and chief executive officer in a written statement. "We believe that this agreement better positions 3Com to establish itself as a global networking leader, which will benefit our employees, our customers and our partners."

In its most recent quarter, 3Coms revenue from H-3C totaled $186 million and TippingPoint contributed $25 million. The company reported a loss for the 2008 first fiscal quarter due to acquisition costs related to the joint H-3C venture.


Read more here about the H-3C joint venture.

3Com has increasingly seen itself shut out of networking deals and watched its market share for network switches and routers shrink. For the company to re-establish itself as a serious contender in the market, going private is a prerequisite, said Zeus Kerravala, industry analyst with the Yankee Group in Boston, MA.

"They have good products, but their consideration rate in enterprise is pretty low. A lot of companies dont even think of 3Com. They have to rebuild their channel strategy and go to market, but thats hard to do as a public company. If theyll ever be a major force again, they need go to private, rebuild and comeback out as a much leaner company," he said.

3Com will still have an uphill battle in trying to re-establish a serious presence as Cisco Systems and Hewlett Packard Companys ProCurve unit continue to dominate the market—particularly in North America, according to Abner Germanow, director of enterprise network research at International Data, based in Framingham, Mass.

"Ciscos growing their switch business in the high teens. For a mature IT hardware market, thats pretty impressive. And Procurves been growing (in North America). 3Com has a fairly strong base in Europe; they have some success in Latin America, and now China (through the H3C unit). The question is can they use their success elsewhere to bolster their core business. They cant give up on the North American market, but its the toughest market to crack against Cisco," he said.

3Com has seen some bright spots in its business, particularly with its Tipping Point security business, its Voice over IP business and the access it has gained to the growing Chinese market through the H3C venture, Germanow said.


Read more here about about an IBM and 3Com collaboration on VOIP

"And they are doing OK in emerging markets. Thats the place where Bain says the second generation of IP Telephony customers have moved," he said.

But will the minority stake that Huawei Technologies is taking as a part of the deal clear regulatory hurdles?

"I dont think its going to be a big deal for a couple of reasons. One is that 3Com and Huawei have been in business together for four years now, and on top of that its a minority stake with Bain," Germanow said. "Four percent is a helluva lot different than 49 percent. Forty-nine percent would indicate they want the whole thing, which I dont think they want. Huawei is in the telecom equipment business, and enterprise is a very small part of what they do. Think of Huawei as the Chinese Lucent or Ericsson. They are not the Chinese Cisco."

Also rumored to be in the running to acquire 3Com was Nortel Networks.

"I dont think the market should consolidate through acquisitions like that," Yankee Groups Kerravala said. "(That) doesnt solve the problem of too much product and too little demand. Id prefer to see Darwin take over here and have the weaker companies just die. The market is going to rationalize the number of vendors it has."

The deal is expected to close in the first quarter of 2008.


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