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3/25/2008
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After A Deal Goes Bad, 3Com Still Works With Huawei

The two companies have returned to their old business practices after the collapse of a proposed merger that was slated to be built around Bain Capital Partners.

It's still business as usual between 3Com and its longtime Chinese partner, Huawei Technologies. The two companies have returned to their old business practices in the aftermath of the collapse of their proposed business entity that was slated to be built around Bain Capital Partners.

"We have a very solid working relationship with Huawei," a 3Com spokesman said in an interview Tuesday. "Huawei remains a very important customer of H3C." The old Huawei-3Com, or H3C, business entity, 100% owned by 3Com, sells routers, modular switches, and stackable switches to Huawei under the 3Com brand. H3C operates a 4,500-person factory and research and development facility in China.

The three companies -- 3Com, Huawei, and Bain -- have been involved in business transactions of Byzantine proportions. Huawei once was the majority owner of H3C, but 3Com later took over majority ownership and finally became sole owner of the entity in 2006. In the most recent overhaul, Bain was scheduled to acquire 3Com in a $2.2 billion deal and form a new company, with Huawei owning about 16%.

But it all unraveled when the U.S. government's Committee on Foreign Investment in the United States (CFIUS) looked askance at the deal because of concerns over 3Com's Tipping Point system, which markets some security products to the U.S. Defense Department.

Bain then backed out of the merger deal, saying it had made "several alternative proposals to 3Com that we believe could have satisfied" CFIUS. But the parties have not been able to nail down a new merger plan.

3Com is now seeking a breakup fee of $66 million from Bain. In still another unusual development, 3Com shareholders voted in favor of the Bain merger Friday even though the deal had already collapsed, because 3Com needed the approval vote to pursue the breakup fee. The 3Com spokesman said about 70% of 3Com shareholders approved the merger plan -- and indirectly an action to seek the breakup fee from Bain.

Previously, 3Com said sensitive technology wouldn't be shared with Huawei. The 3Com spokesman said Tipping Point accounts for $23.6 million of the company's $336.4 million in revenue for the most recent quarter ended Feb. 29. For the quarter, revenue rose 4%, with a $7.8 million loss.

"In the third quarter, our revenues were at the highest level since we began consolidating H3C revenue," said Edgar Masri, 3Com's president and CEO, in a statement. "Our gross margins reached a record high of 53% ... and we were cash-flow positive for the second consecutive quarter."

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