3Com sells to Huawei, Bain

Under the terms of the agreement announced Friday, Sept, 28, 3Com shareholders will receive $5.30 in cash, representing a premium of about 44% over the shares' closing price Thursday of $3.68.

3Com's board has unanimously approved the merger agreement and said it will recommend that the Marlborough, Mass.-based company's shareholders adopt the agreement.

"We believe that this agreement better positions 3Com to establish itself as a global networking leader, which will benefit our employees, our customers and our partners," said Edgar Masri, 3Com president and chief executive officer.

Jonathan Zhu, a Bain Capital managing director based in Hong Kong, said in the statement that 3Com has a strong competitive position, and the deal provides a platform to "grow by acquiring customers and introducing new products."

Bain Capital is one of world's largest private equity firms. Huawei is China's largest communications equipment maker.

Boston-based Bain would own a majority stake, and affiliates of Huawei will acquire a minority interest in the company as well as become a commercial and strategic partner of 3Com.

The deal is expected to close by the first quarter of 2008, pending approval by 3Com shareholders and regulatory clearance.

Citigroup Global Markets Asia Ltd., UBS, Hongkong and Shanghai Banking Corp. Ltd., ABN Amro Bank NV and Bank of China (Hong Kong) Ltd. have provided firm financing commitments to Bain.

3Com turned to Goldman, Sachs & Co. for financial advice, which also provided a fairness opinion to the company in connection with the transaction. Wilson Sonsini Goodrich & Rosati PC provided legal counsel to 3Com.

Citigroup Global Markets Inc. and UBS Securities LLC provided financial advice to Bain Capital, and Ropes & Gray LLP acted as legal counsel.

The deal is an encouraging sign for private equity firms, whose dealmaking activity has been sharply curtailed by the credit crunch.

News of the acquisition comes a week after the struggling manufacturer of networking equipment reported that it lost money in the first quarter.

3Com said that while sales grew 6% to $319.4 million, its loss widened to $18.7 million.

One of the big winners in this deal is Citadel Investment Group. The Chicago-based hedge fund bought a 10% stake in 3Com earlier this year.

3Com will also benefit from its familiarity with one of its acquirers. In 2003, 3Com and Huawei formed a joint venture, H3C, to manufacture Internet protocol-based routers and switches to meet growing demand in China. The deal transformed 3Com into a major player in the Chinese technology market.

But last November, 3Com agreed to buy out Huawei Technologies' 49% stake in H3C for $882 million. The deal was completed in March giving 3Com full ownership of H3C.

Many investors questioned the purchase, which pushed 3Com's stock down below $4 per share from a peak price of more than $5 when the deal was announced. Industry analysts, on the other hand, were more hopeful, with most saying that despite the risk, expanding 3Com's reach into China could be the best chance for a turnaround for the money-losing company.

The latest collaboration would give Huawei a bigger foothold in the U.S. market.

In 2004, 3Com also acquired Austin, Texas-based TippingPoint Technologies, a supplier of intrusion prevention systems, for $430 million in cash. 3Com had planned to spin off TippingPoint to the public, but that could be scrapped as part of the current buyout agreement.

3Com offers products helping to manage voice, video and data over a network and Internet security products.

The stock has traded in a range of $3.24 to $5.24 in the past year.