Chinese telecom equipment maker Huawei Technologies has made a counteroffer to take full control of Huawei-3Com (H3C), a joint venture with 3Com, a US-based maker of computer-networking equipment.

 

With the counteroffer, Huawei, which has a 49 percent stake in H3C, intends to buy the remaining 51 percent stake owned by 3Com.

 

But analysts said Huawei's true intention might be to sell its stake to 3Com. The counteroffer was designed to force 3Com to offer a higher price to buy out H3C, they said.

 

A spokesman with Huawei yesterday confirmed the counteroffer is in the pipeline but declined to reveal details.

 

Huawei's counteroffer followed a bid by 3Com to buy the stake owned by Huawei in H3C on November 17. Under a shareholder agreement, Huawei's counteroffer could be at least 2 percent higher on a per-share basis than the offer made by 3Com.

 

"I believe Huawei has a very clear intention to pull out of H3C," said Wang Yuquan, an analyst with research firm Frost&Sullivan China. "Currently, H3C is not a strategic priority for Huawei."

 

H3C was established in November 2003 with Huawei taking a 51 percent stake and 3Com owning the remaining. In October 2005, 3Com signed a deal to buy an additional 2 percent stake from Huawei for US$28 million, which helped 3Com take a controlling stake in H3C. The deal was completed in February.

 

The establishment of H3C was designed to help Huawei expand its business overseas.

 

US-based Cisco Systems in January 2003 launched a lawsuit in a US court against Huawei, accusing the latter of infringing upon its patents in computer-networking technologies.

 

The lawsuit put a temporary brake on Huawei's overseas expansion. The forming of H3C was believed to have provided a shortcut to Huawei in its overseas expansion.

 

In June, Huawei signed a deal to buy its smaller domestic rival Harbour Networks, founded by some former Huawei executives. The deal has largely undermined H3C's importance for Huawei as Harbour and H3C have almost similar product portfolios.

 

But H3C is crucial to 3Com as the joint venture contributes a large portion to the US firm's global revenues.

 

According to H3C's website, the firm's year-on-year sales revenue growth was more than 70 percent during 2004-06. Net sales revenue for the first half of this year totalled US$324 million.

 

Huawei's counteroffer could help the firm increase its bargaining power in negotiations with 3Com.

 

If Huawei sells out of H3C it could help the firm finance its overseas expansion and focus more on its mobile telecom business, an industry source said.

 

The total assets of H3C could be up to US$2 billion, according to some industry estimates.

 

Huawei, a privately-held company, has been seeking an overseas listing, but the process has been stalled largely due to its complicated shareholding structure.

 

The firm is believed to be under increasing financial pressure as the telecom industry has become increasingly competitive and consolidated.

 

In the past months, Alcatel has agreed to merge with Lucent while Nokia and Siemens have agreed to merge their network equipment business. The moves are putting heat on smaller rivals such as Huawei.

 

(China Daily November 22, 2006)