3Com Renews Cisco Rivalry After Buying China Venture
By Ari Levy
Dec. 1 (Bloomberg) -- 3Com Corp., which lost business to U.S. rival Cisco Systems Inc. over the last decade, is escalating its battle against the company in China, according to Chief Executive Officer Edgar Masri.
3Com said this week it will spend $882 million to buy partner Huawei Technologies Co.'s stake in a Chinese joint venture. The three-year-old entity, which sells computer- networking gear in Asia, is 3Com's most profitable business.
By taking over Huawei-3Com Co., or H-3C, Marlborough, Massachusetts-based 3Com becomes the second-biggest equipment supplier in the region, behind Cisco, according to Synergy Research Group. The companies were similarly ranked in the U.S. before 3Com's sales spiraled starting in the late 1990s as Cisco, the world's largest maker of switches and routers, took customers. 3Com is better equipped this time around, Masri said.
``For the first time, 3Com has a large portfolio of products to offer larger enterprises combined with a large pool of very talented engineers,'' Masri, 48, said in an interview yesterday. ``We have a management team that has proven itself, that has taken on the largest networking company in the world'' in China.
Masri, who was promoted to CEO in August, said he spends 50 percent to 60 percent of his time in China and is heading back next week.
Started in November 2003, H-3C gave 3Com an inroad into China through the country's biggest maker of telecommunications gear. The Nov. 28 agreement to purchase Huawei's stake bars Huawei from competing with 3Com for 18 months. H-3C employs 4,800 workers, or 80 percent of 3Com's total.
Investor Concerns
3Com shares tumbled the most in three years the day after the announcement on concern the company may struggle without Huawei's contribution. Bear Stearns analyst Matthew Shimao cut his rating to ``peer perform'' from ``outperform'' because of the ``risk of lower operational support from Huawei.''
Shares of 3Com rose 16 cents to $4.18 yesterday on the Nasdaq Stock Market. They've gained 16 percent this year.
After the deal, expected to close in four to six weeks, 3Com will have 25 percent to 30 percent of the Asian market for corporate networking gear, said Synergy analyst Ray Mota. That's second to San Jose, California-based Cisco, which has 31 percent in the region, compared with 51 percent in North America, according to Synergy's second-quarter report.
``Cisco doesn't have the presence or brand dominance outside the U.S.,'' said Mark Mowrey, an analyst at Laguna Beach, California-based Al Frank Asset Management, which oversees $855 million, including shares of Cisco and 3Com. ``The joint venture has done pretty well in China so far and there's no reason to believe 3Com can't be successful.''
Falling Down
In 1998, 3Com had worldwide sales of $5.4 billion and was the second-largest maker of networking gear, behind Cisco, which had $8.5 billion. Since then, Cisco's sales have more than tripled and 3Com's have tumbled 85 percent. While the market for equipment declined in 2001-2003, Cisco won sales from phone companies and customers of 3Com and other competitors.
``3Com got complacent in the U.S.,'' Mota said in an interview from his office in Reno, Nevada. ``They didn't have the routers to compete with things from Cisco.'' Synergy now ranks 3Com 11th in equipment sales to North American companies.
3Com is counting on the Chinese venture to boost revenue and help the company reach profitability for the first time since 2000. H-3C accounted for more than half of 3Com's $300.1 million in fiscal first-quarter sales and had a profit of $18.2 million in the latest period, while 3Com reported a loss.
In addition to increasing sales in China, Masri said 3Com aims to capture market share in Europe, the U.S. and Latin America. The company, which currently gets about 70 percent of revenue in China, has added products to compete with Cisco and other vendors.
``We believe that global expansion is the next phase of the success of H-3C and the more challenging one,'' he said.
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