With its failure earlier this year to co-acquire 3COM Corporation with Bain & Company, Huawei’s plan to enter North America by way of acquisition was thwarted, but now the company, the largest networking and telecommunications equipment supplier in China,
is trying again through acquisition of Nortel's Metro Ethernet Network (MEN).
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What choice will Nortel take, bankruptcy or asset sale? Nortel's MEN has received "serious" tender offers, and Huawei and Ericsson are the most likely tenderers. However, Nortel has not announced an official position yet, and Huawei has no comment to make on this issue.
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Bankruptcy or sell assets?
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After the report of $3.4 billion in losses in the third quarter in 2008 and the plan to cut personnel by 1,300, the venerable Nortel appears to be in an increasingly difficult situation. The firm has acknowledged that it has begun consulting lawyers on bankruptcy, but would not immediately submit a bankruptcy petition. According to its third quarter financial report, its $2.6 billion in cash reserve can maintain operations up to 2010, which gives it a breathing space for solutions to be found before bankruptcy becomes unavoidable.
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At present, Nortel's business consists of three main parts: MEN, its operations business and its enterprise network. Nortel is most likely to sell MEN, which, though valued at up to $2 billion, is unlikely to fetch so high a price in foreseeable conditions.
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Insiders point out that Nortel may, besides MEN, also sell its operations business, which would see Nortel withdraw from the operations equipment market, and only serve as a solution provider for enterprise networks. The operations business was the foundation on which Nortel was established more than eleven decades ago, when it was spun off by Bell Telephone Company of Canada as the Northern Electric and Manufacturing Company, Limited.
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Hauwei wants in
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Huawei is relentlessly seeking a route to enter the North American market and its 3COM failure, though disappointing, has been seen as nothing more than a temporary obstacle.
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Canadian Advanced Technology Alliance recently issued a notice that Huawei is looking for partners in Canada. The fields Huawei was said to be interested in include: intermediate frequency and radio frequency technology; base-band technology; MIMO and AAS; mobile communications chip design; and test equipment and technology for wireless access to network. Huawei’s practice strengthens the guess that it will participate in the acquisition of Nortel.
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At present, Huawei has considerable advantages in the optical communications market, and has maintained a leading position in the existing and new market share. Nortel also owns advanced technology in the 40G/100G optical networking market, making their businesses very complementary.
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If the acquisition is successful, Huawei will have an annual increase in revenue of $ 1.5 billion. In the current global financial rumpus, Huawei also has greater initiative in the negotiation on price and its bid in the competition for Nortel assets should come as no surprise. In 2007, insiders disclosed that Ericsson tendered an offer to Nortel but was refused. Huawei's most likely rivals are Ericsson, Cisco and Nokia-Siemens.
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Recently, the joint venture Huawei Marine Company, set up by Huawei and Global Marine Systems, began operations, signaling Huawei's formal entry into the cable market. The establishment of the company is another of Huawei’s forays into other fields through joint venture, which include HuaSy, set up by Huawei and Symantec, whose business scope is as a global telecoms operator and enterprise security and storage software market .
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Huawei’s expansion has seemed at times to encounter financial problems and it is now raising funds from employees through placement of shares. Huawei has just completed a recent round of large-scale staff allotment. Although it is not new, the scale and the amount of the financing are still rare in its history.
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Insiders say the allotted stock is 4.04 yuan per share, with a higher than 6% annual interest rate. Staff with over a year’s work experience in Huawei are expected to take part in the allotment and the stake for every staff member is about 20,000 shares. With a total staff numbering 87,500, the total financing amount should be about 7 billion yuan based on about 80,000 participants.
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This year, Huawei has also planned to sell 50% of its terminal business for $4 billion, but the plan has been interrupted by the impact of the global financial crisis.
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In the past few years, sales of assets have been an important means of financing for Huawei. In 2001, Huawei sold its Huawei Electric to Emerson at $750 million. In 2006, Huawei sold 49% of its shares in 3Com back to 3Com at $882 million. Insiders believe that the unfinished terminal business sale plan upsets Huawei’s use of its strategic funds. Under the present circumstances, Huawei launched the back-up financing program, financing from its staff, to deal with more serious economic and financial pressure.
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