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Why Huawei is the Hottest IPO to Never Be

By , Contributing Writer, Money Morning •

The Wall Street Journal reported last week that Huawei Technologies Co Ltd, the world's second-largest telecommunications equipment company, is mulling an initial public offering.

A big reason for a Huawei IPO is to expand business while U.S. carriers need faster 4G networks to support exploding data usage. The telecom equipment industry is fast-growing thanks to the increasing global use of mobile technology, which would make cash-rich Huawei a hot IPO.

But an even bigger reason for a Huawei IPO: Going public would make the China-based company more transparent, helping it score big contracts worldwide. Huawei needs to make friends if it's going to continue its global reach.

And the most important friend it has to make to do that is the U.S. government.

That's because the government is incredibly wary of trusting Huawei, so much so that it discourages U.S. businesses from joining forces with the China telecom.

The reasons why sound right out of a James Bond movie: Espionage, a recluse CEO, worries over Communist party control, a threat to wireless communications and risks to national security.

Featured on CBS's "60 Minutes" Oct. 7, the story of Huawei is an eye-opening, eyebrow-raising tale about concerns to U.S. security should the company get a foothold in the United States.

"If I were an American company today, and I'll tell you this as the chairman of the House Permanent Select Committee on Intelligence, and you are looking at Huawei, I would find another vendor if you care about your intellectual property, if you care about your consumers' privacy, and you care about the national security of the United States of America," Rep. Mike Rogers, R-MI, told "60 Minutes" correspondent Steve Kroft.

Why the U.S. Turns its Back to Huawei

Huawei has enjoyed success in selling handsets in the U.S. (it is currently ranked No. 6 among handset sellers).

The company, however, has faced myriad obstacles in attempts to sell its flagship and leading telecommunication equipment products, despite being the world's leader in 4G, the fastest Internet speed. The company excels at moving high volume of data over airways, an industry once dominated by California based Cisco Systems Inc. (NYSE: CSCO).

But how Huawei got to the top is questionable.

Cisco alleged Huawei copied one of its network routers, right down to the design flaws and manual typos. Motorola accused Huawei of recruiting its employees to steal company secrets.

While both cases were settled out of court, "the Pentagon and the director of National Intelligence have both identified Chinese actors as the world's most active and persistent perpetrators of economic espionage," "60 Minutes" reported.

There is no hard evidence that Huawei could or would be influenced by the Chinese government to intercept sensitive U.S. information, but letting the company have such access is deemed a serious mistake.

"This is a strategic industry," former U.S. government foreign technology analyst Jim Lewis told Kroft. "It's a strategic industry in the sense that an opponent can gain serious advantage, can gain serious benefit from being able to exploit the telecommunications network."

That concern has led the U.S. government to discourage business relations with Huawei.

In 2008, following objections from the Committee on Foreign Investment in the United States (CFIUS), Huawei was forced to drop a joint venture with Bain Capital (yes, Mitt Romney's Bain Capital) for U.S. network equipment maker 3Com.

In 2010, the Chinese company lost out on a major contract from Sprint (NYSE: S) after the U.S. commerce secretary phoned Sprint's management and raised concerns about the deal.

Then in 2011, Huawei had to give up on a deal to acquire patents from U.S. technology company 3Leaf following CFIUS's urging to reconsider the sale.

Huawei has repeatedly and adamantly denied such allegations, but the fears have lingered and plagued the company's global expansion efforts.

When Kroft asked Huawei's U.S vice president of external relations Bill Plummer if the Chinese government has any influence over Huawei, Plummer vaguely replied, "We're another business doing business in China."

Not helping to squash fears is Huawei's CEO Ren Zhengfei, who never gives interviews and remains a mysterious figure.

Huawei in the U.S.

Huawei isn't totally shut out of the United States.

Over the last two years, Huawei has expanded its focus from being solely a network infrastructure company, to a business that also sells handsets and tablets to consumers, as well as equipment and services for businesses.

The shift allows Huawei to have some kind of presence in the U.S. as handsets and enterprise businesses are not considered as threatening as supplying network infrastructure.

It has also managed to install a handful of networks in U.S. rural markets. But "60 Minutes" reported that those regions have since received visits from U.S. federal agents regarding Huawei's business.

Other countries also feel threatened by Huawei and have shunned its presence. Australia and India have denied Huawei expansion in their respective regions.

A Huawei IPO

The rejections are starting to weigh on profits and dominance, making a push for an IPO looking more likely, but the approval of one less possible.

To date, nothing has been confirmed regarding an IPO. Huawei said in an e-mail statement to Reuters last week that it declined to comment on market rumors.

But, a source close to the company told Reuters, "We haven't ruled out the possibly of a listing. We've always been in touch with banks, but I don't think anything has been decided."

Another source in the banking industry also shared with Reuters that Huawei has routinely been considering an IPO, but knew nothing of immediate plans to do so.

But top U.S. officials officially pulled the welcome mat out from under Huawei and its smaller rival ZTE Corp. Monday when it released a report of a near year-long investigation - conducted with Huawei's go ahead.

The United States House Committee on Intelligence found that the risks associated with Huawei's and ZTE's provision of equipment to critical U.S. infrastructure "could undermine core U.S. national security interests."

Included in the panel's recommendation is that the Committee on Foreign Investment in the U.S. (CFIUS), which already has the task of examining mergers and acquisitions, also be given the duty of scrutinizing purchasing agreements. This move would most likely totally block Huawei and ZTE from U.S. markets.

Another recommendation calls for an investigation into the Chinese government's support for its telecom equipment makers.

A U.S. citizen who works at Huawei's headquarters in Plano, TX told the Financial Times, "They seem to be saying "we view you as the enemy because you are from China.' Why isn't there similar scrutiny of companies like [Sweden's] Ericsson of [France's] Alcatel-Lucent?" (the number one and three global telecommunication makers, respectively).

Bottom Line: Don't look for the Huawei IPO any time soon in the United States. The push will shine more light on the growing cybersecurity industry. Read more here.

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