Chapter 10 〇9. Acquisition of 3COM

"This is a challenge to the heart of American cybersecurity!" On October 4, US Republican Congressman Duncan Hunter announced on CNN. "The Committee on Foreign Investment should tell those Chinese that the security of the United States cannot be bought with money!" Earlier, another Republican Congressman Thaddeus McCourt asked.He is chairman of the Republican Policy Committee of the U.S. House of Representatives. Some groups, including China e-Lobby, have written to CFIUS Staff Chair Gey Hartwell-Sears asking her to block the deal. If you just listen to these voices of opposition, you will think that an acquisition that is more disturbing to Americans than China National Offshore Oil Corporation's acquisition of the US oil company Unocal two years ago has taken place.That deal fell through because of too much pressure from Congress.

This time, there are three protagonists in the acquisition case in the vortex - 3Com of the United States, Bain Capital of the United States private equity investment fund, and Huawei Technologies Co., Ltd. of China.One is an American network communication equipment manufacturer that was once brilliant but has been struggling for many years without seeing the light of day; the other is a top private equity investment fund in the United States with a management fund of more than 50 billion US dollars; the other is relying on the rapid growth of the Chinese market and starting Establish an internationally competitive Chinese telecom equipment manufacturer.

On September 28, Bain Capital and Huawei announced that they will form a joint venture to acquire 3Com at a cost of US$2.2 billion; Bain Capital will hold 83.5% of the shares, and Huawei will hold 16.5% of the shares. 3Com's Board of Directors has approved the transaction.It would be the largest overseas acquisition ever undertaken by a private Chinese company - provided the approval process goes through without paranoia.That is pending a national security review by the Committee on Foreign Investment, which is about to start. "3Com may finally be loaded into the business case tutorial as an example of achieving nothing." RBC Consulting analyst Mark Su wrote in the analysis report.It's a biting but irrefutable satire on 3Com, a company that once had a glorious history.

3Com, a company based in Marburg, Massachusetts, was one of the ancestors of modern network communications technology.Its founder, Bob Metcalfe, is the inventor of Ethernet technology. In 1998, the company's global sales were 5.4 billion U.S. dollars, second only to Cisco Systems' 8.5 billion U.S. dollars, and it is also Cisco's main competitor. The Palm handheld computer is another great product from 3Com. In 2000, when 3Com spun off the Palm business, the market valuation of this business alone reached tens of billions of dollars. 3Com's own market value once exceeded $40 billion.

However, a series of business decision mistakes ruined 3Com's former glory. The acquisition of US Robotics in 1997, the spin-off of Palm in 2000, and the $430 million acquisition of Tipping Point, a network security company in 2004, which has not been profitable so far-in the eyes of analysts, the results are all value-destroying moves. After 2000, 3Com completely failed to grasp the happy time of being in a high-growth industry.The former competitor, Cisco, has already become the overlord of the data network communication world, occupying 65% of the entire market share, and its market value is even higher than 200 billion US dollars! 3Com's stock price was once above $20 in 2000, but today, Bain Capital and Huawei's bid is only $2.2 billion, equivalent to only $5.3 per share, and this is a 44% premium to the market price!The cruelty and ruthlessness of the business world can be seen.

According to the fiscal year 2008 first quarter report disclosed in September, 3Com's sales in the first quarter were only 319 million US dollars.This figure only accounts for 5% of the entire SME data network communication market. It is very obvious that 3Com is not enough to survive on its own. The backlash against the acquisition was sparked by 3Com's 2004 acquisition of Tipping Point, a network security firm. Tipping Point develops network intrusion prevention system products, which can detect whether the data packets transmitted on the network are legitimate or malicious, so as to prevent attacks.Many U.S. government agencies, including the U.S. Department of Defense, are clients of Tipping Point, according to the Washington Times, a right-wing U.S. newspaper.

At the beginning of September this year, Western newspapers including the British "Financial Times" anonymously quoted a Pentagon official's accusation that "Chinese military hackers invaded the Pentagon's computer network in June"; The timing of the news was "really not coincidental" for the acquisition, said one source in the investment community close to the deal. Although the main acquirer is Bain Capital of the United States, it has not reduced the degree of attention of the transaction.Ren Zhengfei, the founder and president of Huawei, served in the Chinese People's Liberation Army, and Huawei's business operations in Iraq, Afghanistan and other places, as well as the intellectual property dispute between Huawei and Cisco from 2003 to 2004, were once again brought up, sorted out and discussed by the media. guess.

Christopher Simkins, a lawyer at the US Covington & Burling law firm and a former US Department of Justice official, told reporters: "Any transaction related to China, as long as it involves the US government's information technology system, will be subject to a detailed investigation by the Committee on Foreign Investment in the United States. The object of participation in the transaction as a minority shareholder is no exception." Because of this, on October 4, Bain Capital and 3Com jointly applied to the Committee on Foreign Investment in the United States for a national security review.The Committee on Foreign Investment in the United States was established in 1988 to review whether foreign investment in the United States poses a security threat. In 2005, China's Lenovo Group acquired IBM's personal computer business, and CNOOC's bid for Unocal all went through the agency's review.

The committee is composed of 12 senior government officials. The Secretary of the Treasury is the chairman. Members also include the US Secretary of State, Secretary of Defense, Secretary of Commerce, Attorney General, Director of the Office of Management and Budget, US Trade Representative, Chairman of the Council of Economic Advisers, Director of the Office of Science and Technology Policy, National Security Advisor and Economic Policy Advisor to the President.Because 3Com's financial advisor is Goldman Sachs Group, an American investment bank, Paulson, the former CEO of Goldman Sachs, has said that he will avoid participating in the review process of the acquisition.

The general operating procedures of CFIUS are: relevant enterprises involved in foreign capital acquisitions first voluntarily submit materials for analysis and exchange of views by members.If the committee members deem it necessary, a 30- to 75-day investigation will follow. After 75 days, even if the investigation is not yet complete, the committee must submit a report to the president, who by law must make a final decision within 15 days.Therefore, the entire investigation process will not exceed 90 days.Since its inception in 1988, the committee has received 1,500 cases.Among them, only 13 were withdrawn, and 25 entered the formal investigation process.

In the application documents, Bain Capital and 3Com stated that the sale of 3Com will not have any negative impact on the national security of the United States; Huawei will not obtain the management and operation rights of 3Com, nor will it obtain any US sensitive technology or US government orders. ; All sales of 3Com to the US government departments are carried out through resellers or system integrators, and never directly contact the US government departments.More importantly, "3Com's main customers are small and medium-sized enterprises. The products 3Com sells to the US government are all commercial-grade products, which are available everywhere in the market, and there are no products customized for the US government." As for Tipping Point, which is the focus of controversy, 3Com has been planning to list it separately. After acquiring the company in 2004, it has not integrated its business with other businesses of the company but has run it independently.In the most recent quarter before the acquisition, the business had sales of less than $20 million and was not yet profitable. 3Com's goal is to have it listed in 2008. The voices from the business level basically believe that there is no reason why the transaction cannot pass the security review, and analysts from American consulting agencies are mostly optimistic that the transaction will pass. "CFIUS will not block the acquisition because of information security issues, because 3com does not sell sensitive products to the US defense and intelligence agencies," Kaufman Brothers analyst Ray Calle told reporters. The American "Business Week" wrote an article ridiculing the "security paranoiacs", "Thinking that the sale will lead to a loss of security actually means that Bain Capital is unable to keep secrets (if any), so we have to worry, Bain Capital just bought the parent company of Outback Steakhouse, we would never want to see the potato chip recipe leaked, would we?" As for Huawei, earlier this year, Iraqi state-owned telecommunications company Kalimat Telecom placed a US$275 million order with Huawei to build a nationwide wireless communication network.This order shows that Huawei's business in Iraq in the early years was not a hidden worry for policymakers. "Edgar (referring to 3Com CEO Edgar Masley)," September 28, at a conference call between 3Com executives and analysts after the deal was announced, Morgan Stanley analyst John Marchetti said, "You just repeatedly emphasized that the acquisition group's bid of $5.30 per share is very good, but I have a question." Marchetti's question has context.In March of this year, 3Com just completed the acquisition of 49% of the equity of Hangzhou H3C Communication Technology Co., Ltd. (hereinafter referred to as H3C) from Huawei, thereby fully owning the company that was originally a joint venture with Huawei. 3Com's bid is US$882 million, which is equivalent to an overall valuation of US$1.8 billion for H3C, which is equivalent to US$4.55 per share. Marchetti's question: Does this mean that 3Com's business outside of H3C is worth only $400 million -- or $0.75 per share? It's a question that 3Com executives can't answer head-on.But it is not difficult for an outsider to answer, almost exactly.Morgan Stanley analyst Marchetti's sharp question may have been intended to humiliate 3Com executives a little - 3Com's stock price trend has really made everyone unhappy in recent years - but it revealed clearly Bain Capital initiated this acquisition and its real goal: not Tipping Point, whether it wants to be spun off or not; nor is it 3Com’s voice and data business in the North American market. It's called "legacy business" and its target is H3C. Registered in Hong Kong and headquartered in Hangzhou, Zhejiang Province, China, Hangzhou Huasan Communication Technology Co., Ltd. contributed half of 3Com's $1.3 billion in sales in fiscal 2007 and all of its gross profit. In the data communication equipment market, China is the only market where 3Com can compete with Cisco, because of H3C.According to CCID Consulting's statistics, Huawei/H3C ranked first in China's data communication equipment market in 2006, with sales of 7.9 billion yuan; Cisco ranked second with 6.6 billion yuan. H3C was officially established in November 2003, and its main business is enterprise-level routers and switches.As Claflin, the CEO of 3Com at the beginning of the joint venture, said, what 3Com contributed to the joint venture was capital, business in China and the Japanese market, and what Huawei provided was technology, products and employees. Zhu Jia, managing director of Bain Investment, told reporters: "H3C was developed on the basis of Huawei's VRP technology platform, not 3Com's technology platform. Huawei is a net technology exporter, not an importer. If The Americans say that such valuable technology is about to enter the hands of Chinese companies, but they do not understand the facts." H3C's initial shareholding arrangement is that Huawei holds 51% of the shares and 3Com holds 49% of the shares; however, the joint venture agreement stipulates that the latter has the right to acquire a 2% stake from Huawei within two years to obtain a controlling stake. The beginning of the joint venture was not far from the founder Ren Zhengfei's prediction that Huawei would "prepare for the winter". Founded in 1988, Huawei was still in the predicament of the telecommunications equipment industry after the Internet bubble burst.Huawei has no cash contribution in the joint venture, "actually it can be said to be cashing out." The greater threat facing Huawei, or the greater threat that its decision-maker Ren Zhengfei believes, comes from the Harbor Network Company founded by Li Yinan, the former Huawei boss.Li Yinan is recognized as a technical genius by Huawei. He was immediately promoted to vice president of the group when he was weak. He was once considered as Ren Zhengfei's successor.Li chose to set up his own business in 2000, acting as an agent for Huawei products at the beginning, and immediately developed routers, network switches and other products by himself.With the support of venture capital such as Warburg Pincus, Harbor developed extremely rapidly, and its sales in 2003 exceeded 1 billion yuan. For Huawei with lofty aspirations, competitors such as Cisco and Nortel are more like catching up targets; the harbor that has split from Huawei and is chasing after it is the real confidant.If Harbor is successfully listed, it will have a devastating impact on Huawei's corporate culture. For quite a period of time, Huawei's various arrangements have included the intention of attacking Hong Kong.H3C joint venture is no exception.Enterprise-level routers and switches do not belong to Huawei's main business scope. Huawei focuses more on the R&D and manufacturing of carrier-class communication equipment.Separating the enterprise-level data network communication business into a joint venture with 3Com, on the one hand, Huawei can concentrate its limited resources; The result was more successful than expected. In 2006, H3C's sales revenue was US$712 million, maintaining a year-on-year growth of about 70% for three consecutive years. More than half of the nearly 5,000 employees are R&D personnel. During this period, Huawei also ended its "winter".After experiencing a sales decline in 2002, Huawei's sales revenue has soared since 2003. In 2003, it increased by 50% compared with the previous year, reaching 31.7 billion yuan; in 2006, its sales increased to 65.6 billion yuan, of which overseas Sales reached as much as 44%.Amid the sluggish global telecommunications equipment manufacturing industry, Huawei has emerged as a giant in emerging markets, and has the conditions to compete with world-class manufacturers. At the beginning of 2006, when the two-year cooperation period expired, 3Com exercised its option to acquire 2% of the equity from Huawei, increasing its shareholding ratio to 51%, thereby controlling H3Com. The price of 2% equity reached 28 million US dollars, which means that the company's overall price has reached 1.4 billion US dollars.In just two years, the investment has greatly increased in value. By the middle of 2006, the clampdown strategy on Harbor Network also ended in Huawei's victory.Due to the sales offensive from Huawei that almost ignores the cost - some former Huawei personnel estimated that Huawei's price war may make it actually lose money in 2005, but because Huawei is not a listed company and does not disclose financial reports, this statement cannot be confirmed - Harbor Sales Upward momentum is blocked.In addition, the listing process was boycotted by Huawei's intellectual property lawsuits. After the sales of Harbor Bay reached 1.5 billion yuan in 2005, it was unable to climb up and turned around and fell.In the end, under the pressure of investors, the core business of Harbor was sold to Huawei as a whole. This eliminates the confidant's troubles, which is even more unexpected for Huawei.Due to the broken wings of the harbor and the departure of competitors, H3C's growth momentum is less hindered, with explosive growth of more than 50% in multiple quarters.China's enterprise-level router and switch market is estimated to be about 30 billion yuan, and it is still growing at a rate of 30% per year. It didn't take long for private equity investment funds to take a fancy to H3C. An insider told the reporter that due to the catalytic effect of investment funds, before November 2006, Huawei and 3Com launched repeated bids for the acquisition of each other's equity in the joint venture H3C.Since the joint venture agreement between the two parties stipulates that they can only purchase equity from each other, private equity investment funds can only stand behind the two parties and intervene.Bain has wanted to work with Huawei ever since.The idea at the time was that Huawei would buy back 51% of the other party's equity, and then sell 80% of the entire equity to Bain, and Huawei would keep 20% for itself. "Repeated bidding means that you quote a price, I quote another price, and when one party no longer bids, it will be set according to this price." The insider said. On November 15, 2006, 3Com made its first offer. On November 29, 2006, the two parties reached an agreement.Huawei sold the remaining 49% stake to 3Com at a price of US$882 million, which is equivalent to the company's overall valuation of US$1.8 billion.Compared with the US$1.4 billion at the beginning of the year, it has increased by more than 30%. In the 2007 fiscal year, H3C was the only profitable department of 3Com, contributing half of all sales and all gross profit. In the past few quarters, the performance growth rate was over 50%, and 4,500 employees also accounted for 80% of the total number of 3Com employees. .If H3C is lost, 3Com will cease to exist. H3C is not the main business for Huawei, and the gains and losses do not hurt the fundamentals; for 3Com, it is a matter of life and death.Because of this difference, although there have been multiple rounds of mutual quotations, the result has long been doomed. By March 2007, the transaction between the two parties was completed. "Assets are more valuable in the right hands" Despite 3Com's disastrous bid, Wall Street is not optimistic about the deal.Analysts have lowered their ratings on 3Com.The reason is that H3C is too dependent on Huawei. If Huawei does not hold a stake in it, H3C's performance may be damaged as a result. That's exactly what happened. Most of H3C's thousands of employees are from Huawei. Except for CEO Masley, 3Com has served as the chairman of H3Com, and only a few senior managers such as the CFO are dispatched to manage financial and other matters. All key businesses are controlled by the management team transferred from Huawei.Huawei itself is H3C's largest customer and thus accounts for 30% of 3Com's total sales.H3C's dependence on Huawei is in every detail, including H3C's headquarters office building in Hangzhou also leased from Huawei.All these are clearly listed in the "Potential Commercial Risks" item of the financial statements published by 3Com. Once the shares of the two parties have been handed over and the boundaries are drawn, as 3Com CEO Masley admitted, by 18 months, that is, September 2008, Huawei will no longer be bound by the non-compete clause and can freely enter H3C's enterprise-level Data Communication Equipment Market.As for the former Huawei employees and management team currently working in H3C, they can return to Huawei from now on. "At that time, Huawei will likely become our competitor," 3Com wrote in a document submitted to the SEC.Not only that, since Huawei no longer holds equity, it can completely reduce the purchase volume in H3C. "If Huawei is not satisfied with our products and services, it will turn to other places to purchase, or produce itself." Although these listed are still future risks, H3C's performance has been realistically affected. Still at the meeting of 3Com executives and analysts, John Marchetti, an analyst from Morgan Stanley, finally raised a question that made the executives speechless: "Can you say that you will manage this company after 100% holding?" Is the company more difficult than before?" "Assets are more valuable in the right hands," one analyst commented in the report.This is the same as "Orange grows in Huaibei and becomes trifoliate orange". According to 3Com's first-quarter report for fiscal year 2008, H3C's growth in the quarter was only 10%.The executive's explanation was that integration takes time, but apparently Wall Street only believes in results. 3Com's stock price has been falling steadily, and by the eve of the acquisition, it has fallen to a historic low below $4. 3Com in trouble has become the next prey of Bain Capital.It would be best if we can purchase H3C with Huawei alone by the end of 2006, but it is also feasible to purchase 3Com in full. "Our goal is H3C," said a person close to the acquisition team. Negotiations on the direct acquisition of 3Com went smoothly, "the negotiation was completed within two months." Founded in 1984 and headquartered in Boston, Bain Capital currently manages assets of US$50 billion and is a leading private equity investment fund in the United States. The founder of Bain Capital, Matroni, left the fund in 1999 and entered the political arena; in 2002, he was the chairman and chief executive officer of the Salt Lake City Winter Olympics in the United States. From 2002 to 2006, he served as the governor of Massachusetts, and has now announced that he is the candidate of the Republican Party One of those who ran in the 2008 U.S. presidential election. The famous equity investment projects in the history of Bain Capital include the famous American office supplies distributor Staples, Inc, Domino's Pizza (Domino's Pizza), etc., owning the equity of toy distributor Toys R Us, fast food chain Burger King, etc.Recently, there have been frequent big-ticket deals, and there are many examples of participating in acquisitions of more than tens of billions of dollars. Since there have been no major investment projects in China in recent years, Bain Capital is not well-known in China, but it has made frequent moves. Two years ago, Bain Capital teamed up with another private equity investment fund, Blackstone, and the Chinese home appliance giant Haier Group to bid for US$1 billion for Maytag, an old American home appliance company.In the end, another home appliance dealer, Wirlpool, bid even higher, and the Bain-Blackstone-Haier bidding group failed to win. In 2006, China Mobile planned to cooperate with Bain Capital to acquire the Luxembourg telecommunications company Millicom Mobile.The company operates mobile networks in several countries and is an important target for China Mobile's overseas expansion.Based on the proposed quotation, this case may become the largest overseas acquisition by a Chinese company. Unfortunately, at the last minute, China Mobile unexpectedly decided to withdraw. The head of Bain Capital in China is Zhu Jia, the former CEO of Morgan Stanley China.Zhu Jia, 43 years old, worked at Morgan Stanley for nearly ten years and joined Bain Capital in early 2006.When Huawei and 3Com established a joint venture company, it was Zhu Jia, who was at Morgan Stanley, who acted as Huawei's financial advisor. Judging from the above cases, Bain Capital's investment style is quite obvious, that is, to join hands with the emerging industrial giants in China.The joint Huawei acquisition of 3Com, this strategy will finally bear fruit. This is a reasonable strategy.China's emerging industrial capital may face many bottlenecks when launching overseas acquisitions: it is not well-known overseas, and it also needs to increase its persuasion to the seller. "One thing that needs to be confirmed in mergers and acquisitions is that there will be no problems with the buyer's financial arrangements at the time of the transaction." Bridge loans are an important source of funds in acquisitions.Even a Chinese company like Haier Group, which has been abroad for many years, is still small overseas, and it is difficult to obtain a bridge loan on ideal terms. Teaming up with a well-known private equity investment fund can immediately increase its persuasiveness to banks. According to a person close to the acquisition team, Bain Capital and Huawei will acquire 3Com in partnership with Citigroup, UBS, HSBC, ABN AMRO and Bank of China, which will receive a total of about US$1 billion in loans. The possible value of domestic emerging industry capital is also obvious.As Chinese manufacturing companies climb up the industrial chain, it is an obvious and reasonable strategy to acquire brands and markets through acquisitions, supplemented by the cost control that Chinese companies are good at.Private equity investment giant Texas Pacific Group invested in Lenovo, which acquired IBM's personal computer business, and the cooperation between Bain Capital and Haier all fell into this category. As for the acquisition of 3Com this time, it is necessary to join forces with Huawei, which is the idea of ​​Bain Capital.Whether it was standing behind Huawei in bidding for H3C or acquiring 3Com last year, Bain Capital insisted on making progress with Huawei. After all, 3Com made mistakes before. "Some people say that this acquisition was made by Huawei and Bain Capital made the acquisition on its behalf. This is completely wrong. It was Bain Capital who asked Huawei (to participate in the purchase of 3Com), not Huawei who asked 3Com." The person close to the acquisition team said. Analysts observing the communication equipment manufacturing industry generally believe that because of the limited scale, this acquisition will not have a "substantial impact" on the industry leader Cisco; Benefits vary.One side argues that freedom from financial reporting pressures will give 3Com more flexibility in formulating its strategy, while the other argues that 3Com's past history of tragically wrong decisions makes it hard to look to the future. All parties can agree that H3C has thus re-established an equity bond with Huawei, which is a positive factor.According to the reporter, the agreement between H3C and Huawei on issues such as personnel, sales, and non-competition was originally scheduled to expire in September 2008, but it will be extended after the acquisition is completed.This is a definite plus. Where Tipping Point goes may depend on which arrangement best secures CFIUS approval for the deal. 3Com originally planned to spin it off and go public, and it seems that this is the least controversial arrangement. 3Com CEO Masley said that they will continue to advance this plan, but everything will be determined by the new shareholders. A person close to the acquisition team told reporters that for this issue, "it is likely to continue to do so (that is, spin-off and listing)".The question may simply be the timing of this move; after all, the company is not yet profitable. Zeng Yimin, president of the Huayuan Science and Technology Association, told reporters that the security concerns of the United States over the sale of Tipping Point are actually unnecessary. "It is enough to find a third-party organization for notarization," she said. However, Zeng Yimin believes that the pure network security software market is narrow.She was the founder of Protego Network.Inc., a network security software company that competed directly with Tipping Point before selling the company to Cisco for $65 million in February 2005.Zeng Yimin is not optimistic about the prospects of Tipping Point.She believes that the market size of network intrusion technology has been proved to be very narrow based on data packet analysis, and requires the cooperation of antivirus software and terminal software, so it is of little significance to separate Tipping Point into the market. 3Com's data network communication business in North America, due to the attack of Cisco and small and medium-sized manufacturers such as D-Link and Netgear, has sluggish growth and accumulated losses, and its future fate is uncertain.One of the foundations of a private equity investment fund is to perform ruthless operations on companies, and this business is the best target for surgery. In the final analysis, the success of this acquisition depends on the future of H3C, and the future of H3C is still closely connected with Huawei. The reporter asked the people close to the acquisition group why they would withdraw in the future to obtain returns. "Maybe resale, maybe listing", the answer is quite vague.But whether it is resale or listing, who would dare to take over H3C whose fate is so closely controlled by Huawei?Who can take over? Whether the buyer Bain Capital is a winner remains to be answered in the future; but Huawei is already a winner now, and there is no suspense.Throughout the three changes in China's three shareholdings, Huawei has benefited from each change.In terms of asset appreciation only, when the joint venture introduced 160 million US dollars in cash, the company was valued at 1.4 billion US dollars when it sold 2% of its shares, and it was valued at 1.8 billion US dollars when it was fully sold. Huawei has made huge profits.Participating in the acquisition this time can actually be regarded as repurchasing part of the equity at a lower price.Among the 11-member board of directors of 3Com in the future, Huawei will have 3 seats.Huawei's actual influence in H3C and 3Com in the future should not be limited to the proportion of equity. In the high-speed growth market, Huawei has firmly grasped the core competitiveness of enterprises and supported by actual performance. This time, Huawei is the winner.Other Chinese companies that have already “goed out” or are facing a time of “going out” should think carefully about their success.