Deal may have to pass U.S. muster and Huawei may not have the stomach for legal fight on American shores.
The rumored purchase of Marconi, the British telecommunications equipment maker, by Huawei, a Chinese networking gear manufacturer, is already ensnared in a tangled international web.
The United Kingdom-based trade union, Amicus, is calling on the U.K. government to review any possible sale of Marconi under the country’s mergers and acquisitions framework.
Amicus considers Marconi’s intellectual property to be so critical to national security that it should be prevented from falling into the hands of certain foreign governments.
But perhaps the toughest hurdle that awaits a Huawei/Marconi merger will most likely come from the United States. Marconi owns Fore Systems and Reltec, two U.S. companies it bought during the telecommunications bubble period. Fore Systems and Reltec now operate as Marconi’s data networks division.
That division reportedly gets more than half of its $250 million in annual revenue from the federal government, where the unit has a $1.5-billion installed base of equipment. The unit also has an ongoing equipment supplier relationship with the U.S. Department of Defense.
This means that the potential $1-billion deal may need to pass muster with the U.S. Committee on Foreign Investments (CFIUS), which is designed to examine foreign acquisitions of U.S. firms.
A call to CFIUS was not returned by press time.
Poor History
Huawei has had at least one bad past experience with the U.S. legal system. In 2003, Cisco, the U.S. enterprise networking equipment leader, sued Huawei for intellectual property infringement. Cisco said that Huawei used two U.S.-based subsidiaries to copy its patented technology.
Huawei paid an undisclosed fine, but the experience, according to analyst Jesse Parker, has left Huawei executives with less of an appetite for U.S. firms.
“That misstep with Cisco has changed Huawei. They have shifted their attention to Europe and to the less developed world,” said Mr. Parker, who is managing director of Adventis China. “They are gaining experience and sort of encircling the bigger markets. They are increasing their skills and the next logical step was the purchase of a European firm.”
Logical Target
Marconi was a logical target. The company has a mutual distribution agreement with Huawei under which it resells Huawei’s carrier-grade equipment in its market, while Huawei resells Marconi’s wireless products. The two companies also agreed in January that Marconi would use its services arm to support Huawei’s contracts in the European market.
In May, Marconi acknowledged that it would be amenable to a merger as one of a number of options at its disposal. The announcement came after the company’s surprising exclusion from BT Group’s list of preferred suppliers for its $19-billion network project, which set the industry abuzz (see Marconi Sheds Jobs).
The company lost various parts of the lucrative deal to companies such as Huawei, Ericsson, and Fujitsu. If its BT bid had been successful, Marconi would have added an estimated $600 million to its coffers over five years.
Instead the company has lost more than half its market value since the BT announcement. Marconi was forced to reorganize and shed 800 jobs.
Source: Red Herring
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