TELECOMS: HP Asset Sale Sparks China Bidding War

Bottom line: Tsinghua Unigroup is likely to win the bidding for a controlling stake in HP’s China-based networking equipment unit, and could help HP consolidate its place as one of China’s leading IT service providers.

Bidding war breaks out for HP asset sale

Hewlett-Packard (NYSE: HPQ) is finding itself in a rare position of power in China, with word that an unusual bidding war has broken out as it looks for a partner to buy a controlling stake in its locally-based networking equipment unit. The development could bring not only a windfall in terms of money HP will get for its H3C Technologies unit, but will also allow it to choose between 2 potent partners to help consolidate its place as one of China’s leading IT services providers.

HP is in the process of splitting itself into 2 as part of a broader restructuring announced last fall. In this case the China-based H3C networking equipment venture would almost certainly go into its new HP Enterprise unit, focused on products and services for corporate customers. The other main unit under the break-up will include HP’s older PC and printer businesses, which will go by the name HP Inc.

The bidding war for H3C comes as a rare piece of good news for HP in China, where its core PC business has struggled for the last few years to the point of becoming a non-player in a market dominated by hometown giant Lenovo (HKEx: 992). But that’s really not too alarming these days, since PCs in general are fast heading towards extinction. HP has fared better in the faster-growing and more profitable IT services realm, where it is considered one of China’s top 5 players. That part of its business would almost certainly become part of the new HP Enterprise unit.

The H3C unit has a slightly complicated history, starting out as a China-based joint venture between Chinese networking equipment giant Huawei and US-based 3Com. 3Com later bought out Huawei’s stake in the venture, and HP took over the operations when it purchased 3Com in 2010, giving the former joint venture its current name of H3C.

Media have been reporting since last fall that HP was looking for a Chinese partner to buy a majority stake in H3C, and now the latest reports indicate a bidding war has broken out between 2 local companies with very different backgrounds. One of those is the Shanghai-based China Huaxin Post and Telecommunication Economy Development Center. The other is a telecoms chip company named Unigroup, which is connected to the prestigious Tsinghua University, China’s leading sciences university. (English article)

HP believes H3C could be worth up to $5.5 billion, and thus the 51 percent of the unit it wants to sell should fetch a price of $2 billion or more. In this case Unigroup appears to have violated protocol by outbidding Huaxin without first getting official permission to even make such a bid. The reports say Huaxin had previously been selected by China’s powerful state planner as the preferred buyer, meaning it should have had exclusive rights to negotiate a deal. All investments of this size by Chinese firms must be approved by the planner, the National Development and Reform Commission (NDRC).

The latest reports say Unigroup is now lobbying the NDRC for permission to formally make its own bid, which would likely be higher, even as Huaxin objects. Unigroup has emerged as a player to watch in China’s IT space over the past year, after it privatized 2 of the country’s largest publicly traded telecoms chip design houses and signed a major equity tie-up with Intel (Nasdaq: INTC) last year. (previous post) Media reports had even emerged a month ago saying Unigroup was the preferred bidder for the H3C stake. (previous post)

I’m less familiar with Huaxin, which appears to be a more traditional maker of networking equipment. The latest reports say the Shanghai-based company is complaining loudly to the NDRC, asking it not to let Unigroup enter the final bidding at this late stage. I suspect the NDRC may ultimately reopen the process, as Unigroup exercises its strong government connections to lobby for such a move.

This particular bidding war seems to pit a traditional company, Huaxin, against a more aggressive upstart in Unigroup, as both vie to boost their presence in China’s IT services market. At the end of the day, Unigroup is likely to bid aggressively for the H3C stake, and I suspect it will ultimately win the war. That could be good news for HP, which will not only get a premium for the stake but could also emerge with a solid, well-connected partner to help maintain its status as one of China’s leading IT services providers.

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