AnalysisBain's 3Com deal: More questions than answers

Published 2 October 2007

Bain is paying a premium for 3Com, hoping that its Chinese acquisition partner would help the 3Com make money in the Chinese market; here we hope that Huaweis’ 20% stake would give it enough of an incentive to help Bain do so — provided the U.S. government approves the deal

Bain Capital’s acquisition of 3Com — Bain will own 80 percent of 3Com, Chinese acquisition partner Huawei echnologies will own 20 percent — is intriguing. As the FTs Lex column notes, not only is the $2.2 billion buy-out one of the first public-to-private deals since the debt markets froze up in August, but Bain is offering a rather hefty 44 percent premium. Now Bain finds itself facing networking giant Cisco Systems, and may find it difficult for 3Com to make money in the United States. The deal, though, is about Asia, not about the United States. Lex notes that 3Com’s biggest and most profitable business is in China, so this is why Bain is not relying on the usual U.S. suspects to pick up the $1 billion of debt required to fund the deal. Instead it expects its banks, including Bank of China, to provide most of the debt out off Asia, at least initially. The seciond thing to note is that rather than following the usual path of buying a strong company and gearing it up to the hilt, Bain is trying for a turnround — and this is why the debt burden, at less than half enterprise value, is low compared with most recent deals.

Which brings us to Huawei Technologies. The Chinese networking company is taking a stake of about 20 percent in 3Com. The degree and intensity of huawei’s commitment to the venture would thus be important in whether or not it succeeds in the mounting a serious challenge in the Chinese market, in which 3Com is competitive but trails Cisco. As we mention in the previous article, Huawei’s involvement may well be a problem, as the U.S. government is likely to look closely — very cliosely — about any Chinese involvement in 3Com, what with the company’s sensitive U.S. military-related businesses. If Huawei’s involvement is not approved, then Bain would likely find it a tough going in China. Not only in the United States and China, but in the rest of the world, too, 3Com is behind by Cisco, making profitability tough to achieve. “Bain should get some savings from better integrating the Chinese business with 3Com’s broader operations,” writes Lex. “But having paid a full price, it has a real operational challenge to turn 3Com round globally.”