Two big private equity deals today. Shareholders finally approved the $8.2 billion buyout of Avaya by Silver Lake Partners and the Texas Pacific Group (not bad for an IP phone company that once was part of Lucent). And 3Com, the perpetually money-losing maker of computer networking equipment and competitor of Cisco Systems, has agreed to be acquired by Bain Capital and Chinese networking company Huawei Technologies for $5.30 per share in cash, or $2.2 billion total. For 3Com, that’s 1.7 times last year’s revenues, and for Avaya it is 1.6 times.
The price for 3Com is a 44% premium to Thursday’s closing share price of $3.68. Huawei Technologies will gain a minority stake in 3Com as part of the deal.
This 3Com deal marks the ascendancy of China in the networking equipment market, partially because networking is still very much a growth market in China and partially because Ethernet switches and the like have become such commodities that only the Chinese can compete. The deal also marks the latest of a string of low-margin tech giants getting bought out with private equity money going all the way back to Silver Lake’s acquisition of Seagate in 2000. But like all private equity deals, those too were fueled by low interest rates. The Avaya deal was brokered earlier this year, before the recent subprime credit crisis threatened to put a damper on the buyout trend. How many more of these do the markets have an appetite for?
And DEMO gets their videos up earlier than TC40, even though TC40 happened over a week ago, BURP
that was cheap for 3com !
Two LOSER companies. Both got their ASS handed to them by Cisco. And now companies such as Fonality, ShoreTel and Digium are whooping them all over the place.
I’m not sure this is the “ascendancy of China” quite yet – Huawei is certainly a beast, and a ruthless one at that, but they’re not quite ready to take on the US market – not quite yet.
Interesting.
Do not know much about Huawai, but a minority stake I think can be hardly consider “ascendancy”. Don’t you think?
I thought Techcrunch’s main focus is doing stories on Web 2.0 companies only, no?
Here’s my analysis:
http://sramanam...ng-after-cisco/
Sramana
i like your headline, Eric!
#7 Sramana,
After reading some of your posts you know the space well. HOWEVER, you fail to realize that Cisco is the king of the space, who does not think twice about making acquisitions whether defensive or buying innovation.
You said….”Now, the game is very different, and this is going to be a massive price-war, a game at which only the Chinese can compete and win.”
Yes and No. What would happen if Cisco acquired Digium? It would make Bain and Huwaei write of their $2.2B acquisition as a loss. It is that simple!!! On the other hand if I was working at a technology private equity firm such as Silver Lake Partners I would be on a plane to “Sweet Home Alabama” Monday morning to explore Digium a little closer. Yes, Silver Lake in my opinion understands the real risks associated with buying into this space via Avaya.
update on TC40 videos?
The 3COM deal represents a relative tightening in the private equity market after it began spiraling out of control a few years ago. From the WSJ article posted in this entry:
“It also helped that the total debt only amounts to four times cash flow, according to people close to the deal. In addition, the buyers are putting up more than half of the purchase price, much higher than the typical private-equity deal.”
A typical PE deal involves buying a company for 4-5x cash flow or EBITDA (earnings before interest, taxes, depreciation, and amortization) and injecting 20-30% of its own equity. The remaining equity would be borrowed from the banks and the debt would become part of the acquired company. This allowed investors to make small improvements to the acquired companies to improve performance and recuperate their investment.
However, over the past few years low interest rates made borrowing funds cheaper for the PE investors, and they began to overpay for companies. Prior to the subprime crisis, investors were paying upwards of 15x EBITDA for companies and did not have a viable plan to create value out of their investments. These overpayments increased the debt needed to complete the transaction, and while rates were low, interest payments were too high for companies to sustain themselves.
Although I don’t have a lot of knowledge about the networking infrastructure market, the deal itself is conservative and it appears that Bain and Huawei have a plan for 3COM. It is important to remember that the way to be successful in any business is to see value in companies that most people do not. While Cisco may have the market cornered at this point, the right strategic alliances and acquisitions could create competition for them.
That’s a lot of money, even for me.
It’ll be interesting to see when Silverlake flips Avaya to Cisco.