HP Eyes Chinese Partner For Router Division

HP shops majority stake in China H3C unit

Ripples from Hewlett-Packard’s (NYSE: HPQ) decision to break itself into 2 companies are being felt in China, with word that HP is looking for someone to buy a majority stake in its China-based router division. I can immediately think of 2 Chinese firms that would be interested in the stake, namely homegrown networking equipment giant Huawei and also leading PC maker Lenovo (HKEx: 992).

China’s second largest networking equipment maker ZTE (HKEx: 763; NYSE: 000063) could also be interested, even though it doesn’t have a past record for major acquisitions. There’s also the chance that one of Europe’s major networking equipment makers might be interested, with Ericsson (Stockholm: ERICb) or Nokia (Helsinki: NOK1V) as the most likely choices.

Before we go any further with the list of likely bidders, let’s examine the latest headlines that say HP is looking for a buyer for 51 percent of its H3C unit based in the Chinese city of Hangzhou. HP acquired the unit a few years ago when it purchased 3Com, a networking equipment maker that was a main rival of global leader Cisco (Nasdaq: CSCO). Unlike Huawei, ZTE and Ericsson, which make equipment for big telecoms networks, Cisco and 3Com make smaller gear like routers and switches used to build internal networks for individual companies, often known as enterprise business.

3Com and Huawei originally formed H3C about a decade ago as such an enterprise-focused joint venture to complement Huawei’s original core business of selling networking gear to big carriers like China Mobile (HKEx: 941; NYSE: CHL) and British Telecom (London: BT). But 3Com ultimately exercised an option to buy out Huawei’s share of the joint venture, forcing Huawei to rebuild a new enterprise business by itself.

The latest reports say H3C is worth about $5 billion and HP wants to sell a majority stake to an Asian investor. Of course the valuation figure is just HP’s estimate and is almost certainly overvalues the company, meaning a final sale price might be around the $1.5-$2 billion range. The sale would come as HP prepares to split into 2 companies, one focused on enterprise business and the other on its more consumer-focused PCs and printers.

Given the history of H3C, Huawei would certainly seem like the most logical suitor for the Chinese unit. Such a purchase would be relatively easy to finance for cash-rich Huawei, and integration issues would be relatively minimal. What’s more, H3C’s location in China means it wouldn’t be subject to the politics that have dogged many cross-border deals lately between China and the west.

But I also wouldn’t rule out a serious bid by Lenovo, which has been extremely acquisitive lately, and whose recent purchase of IBM’s low-end server business reflects its attempts to diversify into more enterprise-focused services. None of the European players has shown much interest in enterprise networking equipment companies to date. But Nokia might consider such a bid, following the recent sale of its core cellphone business and decision to focus instead on networking equipment.

So, how is all of this likely to play out? If I were betting, I would probably put my money on Huawei purchasing H3C for about $2 billion. I expect we could see a small bidding war break out between Huawei and Lenovo; but the latter would probably quickly bow out as it works to integrate its IBM server purchase and another pending acquisition of the Motorola Mobility smartphone business from Google (Nasdaq: GOOG). Such a Huawei-HP pairing could create a potent partnership, bringing together 2 companies with highly complementary businesses.

Bottom line: Huawei is likely to emerge as the new buyer of a majority stake in HP’s H3C unit, making the purchase for about $2 billion after a brief bidding war with Lenovo.

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