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What next for 3Com? Another merger may be in the works

But company holds out hope for Bain-Huawei acquisition

February 26, 2008 12:00 PM ET

Computerworld - The future of 3Com Corp. remains unsettled since Bain Capital LLC and Huawei Technologies Co. last week withdrew a joint filing for a deal to purchase the company that was being considered by a U.S. committee on foreign investment.

3Com officials said yesterday that Bain's acquisition attempts are still moving forward, despite last week's news and some press accounts that made it appear that the acquisition effort was dead. "The goal is [still] to make the acquisition work," said John Vincenzo, a 3Com spokesman, in an interview yesterday.

Still, some analysts believe the acquisition has been scuttled and that 3Com might be acquired by another investment house such as Silver Lake in Menlo Park, Calif., which purchased Avaya Inc. last October.

Late Friday, Shenzhen, China-based Huawei issued a statement that some observers interpreted as signaling the end of the acquisition effort, but Vincenzo said that interpretation was incorrect. He said part of the problem was that the statement had been translated into English from Mandarin, the dialect used by Huawei officials in China, and some subtleties were lost.

Vincenzo said that an earlier statement posted by 3Com last Wednesday is still true. It simply said that the three companies "remain committed to continuing discussions." In that statement, 3Com CEO Edgar Masri expressed disappointment and said 3Com would work with Bain and Huawei to address concerns by the U.S. Committee on Foreign Investment in the United States (CFIUS).

Huawei has close ties to the Beijing government, and that apparently has caused concerns for CFIUS, an interagency committee inside the U.S. Department of the Treasury. CFIUS was investigating whether Huawei's proposed purchase of a 16.5% stake in 3Com would pose a risk to U.S. security. 3Com had always contended that Huawei would not have any control over 3Com's operations in the event of a merger. But Rep. Thaddeus McCotter (R-Mich.) noted that 3Com makes intrusion-detection systems used by the U.S. Department of Defense and that Chinese hackers have targeted the Pentagon.

Vincenzo said there have been a range of interpretations by financial analysts and the press about what 3Com will do next.

One technology analyst, Zeus Kerravala at Yankee Group Research Inc. in Boston, said the merger is over, and not just the filing to CFIUS. "That means 3Com's future is in doubt," he said.

Kerravala said there could be another interested buyer, such as Silver Lake, which recently hired Charles Giancarlo as a managing director. Giancarlo was the chief development officer at Cisco Systems Inc. until December, and he is a 25-year network systems veteran.

Silver Lake could acquire 3Com with an eye toward merging 3Com products that focus on data switching with Avaya products that focus on voice switching, Kerravala said. "That scenario is probably a long shot," Kerravala acknowledged, but, he added, "it is the type of acquisition" that should happen.

3Com faces uncertainty partly because it has failed to attract a large business customer base even though it has "very good products," Kerravala said. "A merger with a larger vendor with a bigger [sales and distribution] channel makes sense."

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