3Com Buys The Rest of Its Huawei Joint Venture Stake; Wall Street is Skeptical

Stock Tickers: COMS, CSCO

by Jon C. Ogg

Well, we knew that private equity firms were interested in the Huawei-3Com router venture known in the sector as "H3C."  We also knew that because of the way the deal was structured that either 3Com (COMS) or Huawei also had the right to buy its partner out starting in Q4 2006.

Today after the close 3Com (COMS) issued a press release saying it was the winner so to speak as it it is acquiring the 49% interest of the joint venture for some $882 million in cash.  The deal is subject to Chinese regulatory approval, but this should go through based on the international trade deals.  3Com initiated a bid on November 15, 2006; 3Com’s last bid was accepted by Huawei on November 27, 2006.  3Com had listed $915.6 million in cash and short-term investments and listed a total of $682 million in total liabilities on its August 31, 2006 balance sheet.

There are the formalities of the praise and thanks being passed between the companies, but this will likely be the end of the wonderful cooperation that has been 3Com’s ONLY saving grace in the coming months.  This was deemed as the one potential savior for 3Com after it has been ailing for most of the last decade.  The non-compete provision here is for a period of 18 months, so if 3Com can’t secure some major in-roads and some serious contract and partnership wins in that time then management will have to take their turn in the barrel again before they get buried by Wall Street.

The street is now going to be very critical of how it analyzes 3Com because this is truly a go-it-alone basis.  Since management has a history of giving away the jewels we now have a finite period of this 18 months after the deal closes.

We would like to wish 3Com a round of "good luck" here, but we also as anaylsts have to caution that the company now will be back 100% entirely on its own.  Some may think that is good that they own the venture that competes as the Cisco (CSCO) knock-off or geared down routers, but the company’s history leaves most wondering if they can be successful if left entirely on their own.  The company is still in the midst of closing offices and consolidating operations (polite term for lay-offs).

It looks like the after-hours traders may be thinking with the same caution as the shares were only up 2% to $4.58 initially, but now shares are down 0.9% at $4.45 in after-hours trading.  That is a general sign of disbelief in a model, particularly if the was supposed to be THE saving grace.  COMS stock is also still well under the $5.70 high over the last 52-weeks.  Unfortunately the just cannot be given the benefit of the doubt.

Here is how the investor letters are probably starting:

Dear 3Com,

Sincerely,
Your disgruntled investor base.

You can be certain that the analysts will be out with many calls after tonight’s conference call.

DISCLOSURE:  I know this sounds venomous or personal, but it is meant to be more of a guiding path and message to management there.  I do not own any shares of the company and literally have no dogs in the fight, but all I have to do is consider the history of the company and look at the COMS investor pain evident on the charts.  This company would be given an outright "F-" for a grade if it was a teacher or case study grade.  The company surely won’t like that comment, but they have literally no way of refuting it and would probably agree that they deserve and "F-" on their investor report card.