"Huawei's on first."
"No, What's on second ."
Actually, let's cut that joke short. Huawei's on neither first nor second, but now it's in-house at high-tech networker 3Com (Nasdaq: COMS ) . Actually, we're not speaking of Chinese tech star Huawei proper, but its erstwhile joint venture with similarly erstwhile Palm (Nasdaq: PALM ) maker 3Com. In a press release yesterday, the American and Chinese partners announced that after a two-week round of bidding to buy each other's respective 51% and 49% stakes in their Huawei-3Com (or "H3C") joint venture, Huawei blinked first and 3Com took the prize.
Of course, H3C didn't come cheap. Based on its closing price on the Nasdaq yesterday, shares of 3Com proper command a multiple of a mere 1.8 times revenues. For comparison, the $882 million that 3Com will be shelling out to acquire sole ownership of H3C values the whole subsidiary at $1.8 billion, or nearly seven times its trailing-12-month revenues (according to Capital IQ).
Or does it?
Here, Fools, we trip once more across an example of how buggy data can derail sound analysis. In reading up on the transaction to give you the relevant details, I came across a Forbes article that suggests H3C's revenues are now considerably higher. While Capital IQ reported trailing annual revenues of approximately $259.9 million (giving rise to the 1.8-times-revenues calculation above), Forbes said H3C "reported $324 million in revenues for the first half of 2006" alone.
It doesn't take a lot of high-level math to calculate that if that number is correct, H3C's sales are running closer to $650 million per annum, which generates a price-to-sales ratio of roughly 2.8. While that's still higher than the valuation accorded to money-losing 3Com as a whole, it seems a much more reasonable price to pay to increase the firm's ownership interest in its fastest-growing market.
Whomever to believe?
So, apparently, 3Com didn't pay nearly as much of a premium as it first appeared.
Mr. Market seems to have followed this same line of thinking, by the way. After plunging 10% in price the day after the buyout was announced, 3Com's stock retraced 3% of that loss yesterday, and is continuing higher today.
Looking for a unique way to value 3Com? Find it in: 3 for 3Com!