World Crisis Online

Case study: Huawei of China takes stock after a frustrating yearBy Sundeep Tucker

Published: November 25 2008 16:33 | Last updated: November 25 2008 16:33

It has been a tough year on the mergers and acquisitions front for Huawei, a Chinese telecommunications equipment maker.

In March, it was forced to abandon its planned purchase of a 16.5 per cent stake in 3Com, a US computer networking company, after the transaction encountered opposition in Washington on national security grounds.

The Shenzhen-based company, which was founded by Ren Zhengfei, a former People’s Liberation Army officer, makes telecommunications switching equipment.

Soon after that setback, it hired Morgan Stanley to oversee the sale of a stake in its mobile devices division, which produces handsets, PC cards and home routers.

The Huawei division that makes network infrastructure drives the group, so the company was keen to attract a strategic investor to ensure the mobile devices unit also received a strong focus.

By the summer, a host of US private equity firms had flagged a serious interest. Among those who were shortlisted for the second round were Bain Capital (its lead partner in the failed bid for 3Com), Kohlberg Kravis Roberts, Silver Lake and a private equity arm of Goldman Sachs.

Several other firms which had considered joining the race, including TPG, Carlyle Group and Blackstone, either did not submit a bid or failed to proceed past the first round.

The company, which is privately held by Mr Ren and employees, does not provide detailed financial breakdowns of its various units. However, according to people familiar with the sale process, the mobile devices unit boasts annual sales of $5bn, with growth of some 25 per cent a year – at least until the credit crisis kicked in.

The unit reported annual earnings of about $450m and Huawei wanted to divest a majority stake in a deal that would value it at least eight times earnings or $3.6bn.

Final bids were submitted in early October, but this coincided with the financial crisis, which saw lending costs soar while the world economic growth outlook tumbled.

Despite the worsening environment for credit, the private equity firms did table bids, several of which valued the unit in the region of $3bn. This was close to Huawei’s valuation – but evidently not close enough. Rather than take a few hundred million dollars less, Huawei shelved the sale process.

The collapse of the sale disappointed private equity firms operating in Asia, as it was one of the few opportunities to deploy a large amount of funds in one transaction

No one is sure what happens next. Huawei dangled the possibility of restarting a sale process in the future. Meanwhile, executives and strategic investors await some stability to return to the equity and credit markets.

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