“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.

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.

Sramana

Do not know much about Huawai, but a minority stake I think can be hardly consider “ascendancy”. Don’t you think?