Huawei Buys Stakes in 3Com

Huawei, the Chinese telecommunication equipment maker, has made a comeback in the U.S following its pullout three years ago. It announced Friday a joint bid for 3Com, the U.S. networking group with Bain Capital, the private equity firm.

The deal is worth $22 billion. Bain will take more than 80 percent stake of 3Com while Huawei owns the rest.

Politics watchers, however, have started voicing concerns of national security over the purchase. The Financial Times quoted Christopher Simkins, an attorney at Covington & Burling and former US Justice Department official, as saying that “Any Chinese-related deal that touches on government IT systems, even in a minority capacity, is going to be something that the Committee on Foreign Investment looks at closely.”

3Com’s core products include an intrusion prevention system protects clients, such as the U.S. Defense Department, from hackers.

Huawei, founded by a military officer, is widely considered to enjoy political and economic backing from Chinese army, which just weeks ago was accused by the Pentagon of launching a massive cyber attack on computer systems of the Defense Department.

No wonder the assertion in the FT that the deal would fall under scrutiny from Washington “on national security grounds”.

So why would Huawei pursue an agreement that was sure to cause political backlash?

It is not because Huawei wants to control 3Com, as many expect it to do after Bain pulls out several years later. While 3Com has seen a plunge of its share price from the peak of $78 in 1996 to $4.94 yesterday, it was arguably sold for $22 billion, a 44 percent premium to its closing price on Thursday. This is an amount far beyond Huawei’s capacity. Given its current margin, the Chinese company won’t be able to afford a controlling stake in 3Com even years later.

3Com’s strength in network security and a considerable client base also appear off limits to Huawei. Any effort to acquire 3Com’s technology or approach its clients may suffer serious setback as the Congress stands ready to block what it considers dubious foreign ownership of sensitive communications networks.

More importantly, Huawei may simply find 3Com has lost technological edge on many levels. This is especially true of today as the deep financial trouble has made it much harder for 3Com to invest in innovation.

Huawei’s real target, my guess, is Huawei 3Com, its joint venture with 3Com that was sold last year to the latter. The H3C is now worth $400 million, roughly the amount Huawei is to pay for its stake in 3Com. H3C also runs a strong enterprise network operation, an area Huawei has long been trying to tap into.

Under such circumstances, there seems little for congressmen to worry about when they review the deal.