3Com acquisition a mixed bag for Huawei

The acquisition of 3Com, announced today by Bain Capital and Huawei Technologies, gives the Asian equipment vendor entry into the U.S. enterprise market. But some analysts say the business poses plenty of challenges for its new owners.

“Private equity investors may see some value in 3Com, but we're not so convinced,” said Mark Sue, an analyst for RBC Capital Markets, in a note this morning. “Battling a strong Cisco in the enterprise may prove increasingly difficult, and the low end is now getting more competitive due to new entrants such as Netgear and D-Link … The low-cost approach to data networking often doesn't work outside of certain end markets.”

Bain Capital will pay $5.30 per share for 3Com, or about $2.2 billion, while Huawei takes a minority stake.

3Com has long suffered from execution and strategic problems, at times contradicting earlier moves to reverse the course of its customer focus. “We're not sure if going private solves anything,” Sue said.

In late 2006, 3Com paid $880 million for Huawei’s stake in their joint venture: H3C, the IP networking and enterprise router vendor. Since then, H3C’s revenue growth has cooled from more than 50% year-over-year growth to about 10% in the most recent quarter.

“From a failed U.S. Robotics acquisition to a disastrous Palm spinout, overpaying for Tipping Point, with many changes in customer focus and strategies, 3Com may end up being the business school case study of what not to do,” Sue said. “The back and forth bidding between Huawei for the [joint venture] was yet another chapter of poor decision making.”