AT&T and Vodafone could be eyeing Huawei's handset division, according to a story published Monday in the South China Morning Post.
The newspaper cited unnamed sources who said that phone companies AT&T and Vodafone had expressed interest in acquiring 50 percent of Huawei's handset division. Private equity firms Blackstone, TPG, and Kohlberg Kravis Roberts are also supposedly interested.
Huawei, based in China, is looking to spin off its mobile phone, laptop, wireless data-card, and home router businesses. Meanwhile, it will keep a 100 percent ownership in its network infrastructure business. The company doesn't publish separate revenue figures on its different businesses, but its handset business is believed to be profitable.
Vodafone already sells Huawei's phones, but AT&T doesn't offer the handsets in the U.S. A move by either mobile operator to become a handset maker is somewhat unusual. Typically, phone companies buy handsets from a wide range of suppliers.
But as handset manufacturers like Nokia, Research In Motion, and Apple build more sophisticated devices and services around their phones, carriers may feel pressure to push back with devices of their own.
As for Huawei, it's clear the company is looking to spread beyond the Chinese and Asian markets. The company had tried to take a stake in U.S. infrastructure provider 3Com. But its attempts were thwarted by U.S. politicians concerned over national security.
Even though a partnership with either service provider could provide broader reach for the handset division, Huawei could risk losing infrastructure business with competing carriers.
Network equipment maker 3Com announced Wednesday a new CEO who will be based in China.
Robert Mao, 3Com CEO
(Credit: 3Com)Robert Mao, 64, will succeed Edgar Masri as chief executive officer. Mao, who is fluent in Mandarin and English, had most recently been 3Com's executive vice president for corporate development. Prior to working at 3Com, he headed up Nortel Network's China operations. And before that he had worked for the French telecommunications equipment maker Alcatel, which is now Alcatel-Lucent.
3Com also said Wednesday that it has hired Ronald Sege, 51, as chief operating officer. Sege, who will run 3Com's U.S. operations, returns to 3Com after a decade. From 1989 to 1998, Sege held several senior executive positions at 3Com. Most recently he had been CEO of the Wi-Fi equipment maker Tropos from 2004 until this year.
The news of the management shift comes after the U.S. government essentially put the kibosh on a proposed $2.2 billion buyout of 3Com by Bain Capital Partners and Huawei Technologies.
Bain Capital had originally agreed to buy 3Com in September 2007 in a deal that would have given Huawei Technologies, which is based in China, a 16.5 percent stake in the company. As part of the deal, Huawei would have had the opportunity to increase its share by another 5 percent.
The Bush administration had raised security concerns over the deal. 3Com makes network security equipment that is sold to the U.S. Department of Defense. The government has traditionally been leery of allowing foreign ownership of critical communication assets.
Last month, after the Committee on Foreign Investment, an official security panel under the U.S. Treasury Department essentially blocked the deal, Bain Capital Partners withdrew its bid for the company.
3Com, which was founded in 1979 by the Ethernet inventor Robert Metcalfe, helped shape the early Ethernet and IP networking market. The company had many successes over the years, including the spin-off of the handheld device company Palm. But over the last decade, the company has lost much of its luster and market significance as competitors, namely Cisco Systems, have risen in importance.
Despite the company's decline over the years, 3Com has survived. And in recent years, it has recognized China as a key emerging market. In 2003, it formed a joint venture with Huawei to better serve the Chinese market. And in November, 3Com paid $882 million to buy Huawei's 49 percent stake in the venture. Today, about 4,000 of 3Com's 6,000 employees are based in China with only a little over 400 employees working at its U.S. headquarters in Massachusetts.
3Com's decision to put Mao in charge is yet another signal that the company sees China as its most important market.
"In addition to his 30 years in the global IT and telecommunications industry, Bob's bi-cultural background, extensive business experience in Asia and fluency in Mandarin and English offer a rare set of skills that can bridge Chinese and western organizations," Eric Benhamou, chairman of 3Com, said in a statement. "Bob brings the company a set of skills that are uniquely fitted to 3Com's current business needs. Having him based out of China and having an experienced leader of Ron's caliber based in the United States will allow us to speed execution of our global business plan."
Most Americans probably are not intimately familiar with Huawei (pronounced "Wa-way," as if Gilda Radner of Saturday Night Live fame were asked to pronounce the name). The company's founder, Ren Zhengfei is a former officer of the People's Liberation Army.
Tough to know what to make of that. When it comes to speaking with the press, Ren is a regular Greta Garbo. A mini-profile Forbes ran three years ago noted that many of Huawei's major customers are state-run businesses in China. And while Ren owns 1 percent of the company, the rest belongs to an unidentified "union."
Go figure.
Meanwhile, Ren has gone about building Huawei into a success story disregarding the usual corporate niceties. In 2000--three years before the WMD craze got us all nutso about taking out Saddam--the CIA accused Huawei of secretly selling a communications system to Iraq. In the final report of the Iraq Survey Group, Huawei and two other Chinese companies were singled out for carrying out "extensive work in and around Baghdad"--mainly telecommunication switches and the installation of fiber-optic cable.
Then in 2003, Cisco socked Huawei with a patent infringement lawsuit. Cisco claimed Huawei ripped off its intellectual property to make a lineup of routers and switches. Huawei denied the allegations though in the end caved.
But if at all possible, business doesn't let politics intrude. So it is that Friday we learned that Bain Capital is paying $2.2 billion to acquire 3Com. Part of the deal involves China's Huawei Technologies, which will acquire a minority stake in 3Com.
And, oh, by the way, Mitt Romney, the former Massachusetts governor running for the Republican presidential nomination--he headed Bain Capital for 14 years.
Six degrees of separation. In this case only 2--but who's counting.
I wonder whether a future President Romney might have commented on Huawei figuring in a major U.S. tech acquisition. I'm darned sure candidate Romney has since turned off his cell phone for an early start to the weekend.
Kudos to 3Com CEO Edgar Masri and the board for selling the company to Bain Capital and Chinese networking provider Huawei. I suppose the company will be taken private from here. We've seen this in the networking business before: Enterasys was taken private in November of 2005 for $385 million.
While the strategy is well-understood, I really have no idea what Bain and Huawei are thinking. You could point to the fact that 3Com did about $1.2 billion in revenue, and has global distribution in place for more product sales. You can even talk about 3Com's market share in SMB networking. Yes, the company has a few strengths, but it has also been bleeding red ink for years and has reinvented itself more times than Cher. Here in Massachusetts, lots of people I know have worked at 3Com at one time or another and generally leave the company, either by force or voluntarily, in a rather unhappy state. It's been a proverbial "house of cards" for at least 10 years.
When companies go private, investors typically cut resources, sell off assets, and fix core operations. Once this is done, they look to go public or sell the now healthy entity to another firm. The problem here is that 3Com has already made more cuts than Edward Scissorhands. At the same time, other networking vendors have greatly improved products and sewn up markets. Cisco is Cisco; Juniper kills it in the service provider market; Hewlett-Packard is winning in the SMB space; Extreme has a killer end-to-end switching architecture, etc. Other than TippingPoint, I can't recall the last time an IT executive even asked me if 3Com was still in business.
Perhaps this new 3Com team will prove me wrong and reinvent itself this time (as opposed to numerous other times) but for now, the only people who are guaranteed to make money on this deal are the investment bankers and lawyers. Oh, and the 3Com management team will also make some dough here as well for dressing up the company and finding a buyer. These few fortunate souls pale in comparison to the generations of investors and employees who long ago lost money and faith in 3Com.
Huawei was already in bed with 3Com, but why Bain went along for this ride is a mystery to me. Perhaps the Bain folks would also be interested in a certain bridge in New York City that I will gladly sell.
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