It took Boston-headquartered Bain Capital Private Equity nearly five years and two derailed attempts to acquire Huawei-3Com (H3C), a data networking systems company headquartered in Hangzhou.
H3C, which was set up as a joint venture between Chinese technology provider Huawei Technologies and Massachusetts-based networking solutions provider 3Com, was looking for ways to commercialise the business. The company manufactured telecommunications network routers and switches and emerging technologies, including video surveillance systems.
On its first attempt in 2006, Bain Capital worked with Huawei to buy 3Com’s interest under a dissolution mechanism. 3Com, however, had a higher-priced offer and bought out its partner.
Bain Capital’s second try happened a year later, when it offered to acquire 3Com for $2.2 billion, a controversial deal that came under the scrutiny of the Committee on Foreign Investment in the United States, a government panel that reviews corporate acquisitions involving foreign buyers of US assets.
The deal was blocked by regulators and Bain Capital had to abandon it. At issue was Huawei, which signed up as a minority investment partner in the high-tech transaction. 3Com, along with H3C, was eventually acquired in 2010 by US tech giant HP, which later sold H3C’s surveillance business to Bain Capital.
Jonathan Zhu, Bain Capital’s Hong Kong-based managing director, says: “When the deal came about in 2011, the business was already much bigger than what it was from our initial talks in 2006 and generating about 300 million yuan ($43.5 million; €40.5 million) of revenue.”
However, Zhu adds that H3C’s unit was not a deal that would typically interest Bain Capital because of the size. “It was a small deal for a firm like us and too complicated for the venture and growth capital guys, but we understood the potential for this business.”
He says the business was small, which meant there were opportunities to grow. “We were very aggressive, we tried to win this asset. And very soon into the deal process, we entered into exclusive discussions with HP.”
In November 2011, Bain Capital bought the unit for an undisclosed sum through its 2007-vintage, $1 billion Bain Capital Asia Fund.
1. LEASE OF LIFE
The firm knew it had a big job on its hands post-acquisition. “Once we took over the business, we had a lot to do. We had to build up the company, build up the infrastructure and then embark on a strategy to grow the business,” says Zhu.
First, it had to set up an entirely new company in China – from coming up with a corporate name and logo, to renting an office. Bain Capital formed Uniview Technologies shortly after the acquisition and, under the terms of the buyout, H3C provided Uniview with products and technical support.
Second, Bain Capital needed to recruit talent. Zheng Shusheng, previously chief executive of H3C, moved to Uniview, as well as its research and development team. “The new company, however, did not have a chief financial officer, nor IT and finance teams,” Zhu points out. “We had to recruit a lot of people to set up all the corporate functions. Everything was very much a start-up venture.”
Zhu says the firm took over three key aspects of the business: intellectual property, a team of about 300 people, and customer contracts including right to revenues as well as obligations to continue to provide service.
2. RAMPING UP R&D
Undaunted by the task, Bain Capital set forth to grow its research and development unit. Bain Capital realised it needed to focus on the core strengths of the business: intellectual property and sales and marketing. “This business has a heritage in Huawei. And when you think about Huawei that’s what the company is good at – sales and marketing and research and development,” Zhu says.
Bain Capital boosted the R&D headcount from 100 to 300 in the first few years of ownership. Soon, what used to be a back-end platform company mainly selling hardware and sourcing cameras from third-party providers started developing its own camera products.
Zhu says the company realised that having products sourced from third-party manufacturers didn’t work. To have a full suite of products, they needed to develop their own.
Today, Uniview has hundreds of different models of camera, including equipment for special environments such as low visibility, high altitudes, cold temperatures and industrial settings.
“You look at China, and you sometimes have pollution and low visibility in the big cities. How do you develop a camera that has higher sensitivity and still captures clear images when you are in a low visibility environment? That’s what we did, there was a lot of R&D effort put into front-end equipment.”
By the end of 2016, Uniview’s surveillance solutions covered more than 500 cities in the country and boasted the best facial recognition software in China.
3. OVERSEAS EXPANSION
The second part of its growth strategy was to boost its sales and marketing efforts by diversifying its offerings to target overseas customers.
The company had focused only on large-scale video surveillance systems in municipalities, but realised it was missing out on a lot of business opportunities. So the R&D team developed a smart traffic product that can automatically track speeding vehicles and those going through red lights.
Along with cameras that monitor roads, Uniview also developed industrial solutions such as video surveillance for entrances and poorly lit places, devices for campuses that come integrated with alarms and CCTV suitable for small businesses.
Today, Uniview’s cameras are used in various locations globally, from the Imperial Palace in Beijing and Malaysia’s military headquarters in Kuala Lumpur to Madrid nightclub Discoteca Teatro Kapital and a cash-clearing centre in Zambia. Uniview also started offering network video recorders and cloud solutions to its clients to ensure the cameras have the necessary bandwidth to record to their full capability.
Uniview is ranked third in China and eighth globally in video surveillance, surpassing security giants like Tyco and Honeywell.
Bain Capital initially planned an initial public offering in Hong Kong but abandoned it when they thought the valuation was too low. Zhu says the firm started a sale process in 2016, entering deals with an unnamed Chinese strategic buyer.
The firm signed a definitive sales agreement in late 2016 and expects the deal to close in the coming weeks. Zhu says the firm will book a 4.5x return on exit, above the return of its first Asian buyout fund, which is over 2x.
Under Bain Capital’s ownership, Uniview’s revenues grew from 300 million yuan in 2011 to 2.4 billion yuan in 2016, an eightfold increase that turned a loss-making business into a highly profitable one.