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Marconi likely won't go Chinese

| Tuesday, Aug. 9, 2005

Analysts said Monday it's doubtful that sophisticated Ovum-RHK networking gear designed in Pittsburgh and used by the U.S. military and intelligence agencies for encrypted communications would be permitted to fall under the control of a Chinese company.

London-based Marconi Corp. PLC -- whose Data Networks division is located in Marshall -- is in talks to be acquired, the company said. And Marconi's Chinese partner, Huawei Technologies Inc., has emerged as the leading candidate to buy the struggling telecommunications equipment maker.

The local division gets more than half of its $250 million in annual revenue from the federal government, where it has a $1.5 billion installed base of equipment.

The London Times said Sunday that Huawei is offering $1 billion for Marconi, which Kevin Mitchell ,of Infonetics Research of Woburn, Mass., said would provide the company a beachhead in Europe, the Middle East and the rest of Asia, where Marconi is strongest.

If a deal with Huawei were to take place, a Department of Commerce spokesman said it "sounds like" a situation that could be reviewed by the Committee on Foreign Investment. The interagency group is chaired by the Treasury Department to examine acquisitions of domestic firms by foreign-owned firms to evaluate sensitive technology.

But spokesman Scott Kamins said it's too early for the government to comment on a specific potential transaction.

Chinese companies have been aggressively pursuing Western companies with mixed success. China's CNOOC Ltd. oil company failed in its bid to acquire U.S. oil-and-gas producer Unocal Inc. in a deal that came under intense scrutiny by lawmakers, who raised national security concerns.

But Chinese computer maker Lenovo Group Ltd. successfully acquired IBM Corp.'s personal computer business, and Nanjing Automobile Corp. bought British automaker MG Rover out of bankruptcy.

Jeff Ogle, analyst at Current Analysis in Sterling, Va., said Marconi is "painfully aware" of the national security implications of its federal government business when evaluating any possible mergers.

Brett Azuma, an analyst with Ovum-RHK in San Jose, Calif., said equipment the Data Networks division sells and maintains for the government is "highly sensitive stuff that is increasingly software-driven."

Options for the Data Networks division, analysts say, include being acquired by a U.S. company or a company based in a country more closely allied to the United States, or being spun off as an independent company.

Ogle said last week's naming of a new CEO for the local division, Joe Ferrara, is an indication that Marconi management is setting up the Pittsburgh-area unit to operate independently. "You can draw some conclusions they're trying to distance themselves and create some autonomy (for Data Networks)," he said. "Given the revenues of that division, it could be a small company unto its own."

Marconi said yesterday in a statement it is in talks with "third parties," but added that "discussions are at the preliminary stage and there can be no assurance that an offer will ultimately take place." A local Marconi spokeswoman said Ferrara would not comment on the merger talks.

Marconi acquired the local unit when it bought the former Fore Systems Inc. in 1999 for $4.5 billion. At its peak, the local unit employed nearly 2,000.

Fore was created in 1990 by four Carnegie Mellon University computer scientists with funding from the U.S. Naval Research Laboratory. The four focused on a new technology known as "asynchronous transfer mode" for moving information on local area networks that connect computers at faster speeds than previously achieved.

Marconi's local presence, however, has been in a downward spiral since 2001 and the bursting of the dot-com bubble, which hit the telecommunications industry hard.

The parent company has undergone several restructurings since then. It now directly employs about 350 locally, in addition to supporting the employment of another roughly 150 subcontractors and service providers.

The Data Networks division had revenue of $250 million in the year ended May 31, compared to $330 million in the previous year.

Parent Marconi suffered a signicant blow this spring when its largest customer, BT Group Inc. (formerly British Telecom), from which it derives a quarter of its total revenue, shut it out of a $20 billion contract to rebuild its United Kingdom telecommunication network, dubbed the 21st Century Network.

"Marconi has had a couple of setbacks this year," said Brett Azuma at Ovum-RHK. "It's kind of embarrassing to lose on your home field."

One of the companies that did land a piece of that BT Group contract was Huawei Technologies, a company that has built itself on sales to the Chinese military. It's now China's largest telecommunications gear designer with sales of nearly $4 billion and deep inroads into China's communist government.

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