TELECOMS: HP Picks Beijing Group As China IT Partner
Bottom line: HP’s choice of a Beijing-based group with strong ties to a top science university as its China IT services partner looks like a smart move, which will help ease potential for conflict over national security concerns by Beijing.
Hewlett-Packard (NYSE: HPQ) has chosen a relatively dynamic, Beijing-based tech company as its future China partner over a stodgier state-run firm in Shanghai, as the US computer giant prepares to split itself into 2. The development is seeing HP get a bit less money than it had hoped for the 51 percent stake of its China-based H3C unit, which makes equipment for use in small telecoms networks. But the choice of Tsinghua Unigroup as the buyer looks quite prudent, and will bring in a new politically connected partner for HP as it prepares to split off its core PC unit from its more dynamic business that sells computing and networking services to enterprises.
This particular deal dates back to at least last October, when media first reported that HP was looking to sell the stake in H3C. (previous post) No reason was ever given for the decision, though it has become increasingly clear that HP was more interested in finding a local partner to help with the expansion of its China-based IT services, rather than simply raising cash. That strategic choice is apparent in its selection of Unigroup as the buyer.
Media reports vary slightly in the actual sale price, but the general figure has Unigroup buying the controlling 51 percent stake of H3C for at least $2.3 billion. (English article; Chinese article) Unigroup is an investment arm of Beijing-based Tsinghua University, one of China’s oldest universities and generally considered the country’s leading center of technology research. Unigroup had been vying with Shanghai-based China Huaxin Post and Telecommunication Economy Development Center for the purchase.
The price of $2.3 billion is a bit lower than what HP had originally been seeking for the H3C stake. The original reports had said HP believed the unit could be worth as much as $5.5 billion, meaning the stake should have been worth around $3 billion. So this final price will be around 20 percent lower than the original goal, though it’s not uncommon for such discounts to occur as companies negotiate such sales.
At the end of the day, this particular deal looks a bit political and aimed at helping HP consolidate its position as one of China’s leading providers of lucrative IT services. Unigroup, with its strong Beijing connections, should be a strong partner in that regard, especially as China’s central government places growing restrictions of foreign technology firms due to national security concerns.
From Unigroup’s perspective, the deal adds an important new piece in its recent bid to build up its own IT services company. Last year it made headlines when it purchased 2 of China’s leading telecoms chip design houses and then merged the pair into a single company. Not long afterwards, it sold 20 percent of the new company to US powerhouse Intel (Nasdaq: INTC) for $1.5 billion, valuing the new company at $7.5 billion.
It’s a bit unclear where this new HP partnership will fit into the equation, though it looks like Unigroup’s H3C stake will remain separate from the Intel-invested microchip maker for now. But I could see Unigroup eventually combining those 2 assets into a single company, with HP and Intel each owning perhaps 10-20 percent and Unigroup holding the remainder.
Such a strategy would certainly appeal to Beijing, which is eager to develop some homegrown technology leaders that can compete globally. Such a company would also play well to Beijing’s security concerns, since it would be controlled by a trusted domestic name like Tsinghua. At the end of the day this kind of tie-up should certainly win goodwill from Beijing for both Intel and HP, which should be important to ensuring their longer term success in China.
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