H3c.gif[UPDATED] 3Com has decided to go it alone in China by buying full control of H3C, the Chinese JV that the US equipment vendor previously held with China's Huawei.

Contrary to what EngagingChina expected, Huawei decided not to outbid 3Com in the bidding process that started two weeks ago when the terms of their original JV expired. 3Com will thus pay Huawei $882m for the 49% stake in H3C that it does not already own. H3C had sales of $324m in the first six months of 2006.

At first sight, it would have made more sense for Huawei to buy out its US partner. That's because H3C is a JV focussed mainly on the Chinese market with its HQ in Hong Kong and its principal operations as well as its R&D facilities on the mainland. It also has a facility in Bangalore, India.

While 3Com's press release talks about using H3C's assets to build a “powerful global technology leader”, H3C is today more of a play on China's potential to develop a sizable and fast-growing domestic market for enterprise communications kit such as routers and switches. H3C currently claims a 35% stake in this local market.

Huawei focusses more on high-end communications gear for carriers, so there is not much overlap between the two companies. Just to be sure, 3Com says that Huawei will, under certain circumstances, be subject to a non-compete provision for 18 months after the deal closes.

It remains to be seen how well that provision works in practice and how well 3Com can handle the inevitable “transition issues” as Huawei pulls staff and expertise from the JV.

But if 3Com can successfully integrate the assets of the H3C and avoid too much of a culture clash, then the purchase of H3C could once again turn 3Com into a serious competitor to Cisco.

UPDATE: Financial analysts are none too keen on 3Com's purchase of H3C. The issue is not so much the price 3Com is paying — although it will leave 3Com in a weak position — but fears that H3C will lose its value when Huawei bails out and 3Com is left to run it by itself — the so-called “execution risk” mentioned in this Barron's story. See also this BusinessWeek story.

Analysts fear that Huawei could also become a competitor to 3Com once their non-compete clause ends. Although as we say above, the reason that Huawei did not bid for H3C suggest its more interested in building its strengths in high-end carrier-class equipment rather than competing with the likes of Cisco and Alcatel in business and SOHO commmunications.


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