2003 deal between Chinese group and US partner would have changed course of telecoms history

Henny Sender in Hong Kong | February 27, 2019

On a December morning in 2003, two Chinese men in bright tropical shirts and trunks, a westerner in sportswear and a translator looked deep in conversation as they strolled on a beach in the Chinese resort of Hainan island.

Two of the men were from the US telecoms company Motorola: Mike Zafirovski, chief operating officer, and Larry Cheng, head of the Chinese business. The third, dressed in blue, was Ren Zhengfei, the founder of Huawei and a former People’s Liberation Army member, then just 49 years old.

A few weeks later, a deal had been agreed. A letter of intent was signed for Motorola to buy Huawei, even then China’s leading telecoms equipment supplier, for $7.5bn.

Today, Huawei has become the most important, and most controversial, telecoms supplier in the world, with global revenues of more than $100bn last year. Its rise has triggered fears in the west over China’s control and alleged manipulation of national communications networks.

Had the deal with Motorola, which is being revealed for the first time, succeeded it would have changed the course of telecoms history. Although as one senior Chinese executive in Hong Kong noted: “It isn’t clear whether Huawei could have saved Motorola or Motorola would ultimately have destroyed Huawei.”

At the time of the deal, Motorola and Huawei were both on their way to becoming national champions.

Both companies were leaders in wireless network equipment and both companies made mobile phones, although at that point it was Motorola rather than Huawei which had a glittering global brand. The two companies had also worked together, from 2000, to develop and design technology that was resold under Motorola’s logo.

But after the proposed acquisition fell through, Motorola’s star faded and it racked up billions of dollars of losses as it was eclipsed by other companies, including its former Chinese partner, turned rival. In 2010, Motorola sued Huawei for stealing its commercial secrets, a suit that was later settled out of court, but it was too late.

The revelation that Huawei was nearly sold to a US company also illustrates how it only became one of China’s most favoured companies after it succeeded in growing its international business, starting with a pivotal deal to build the UK’s telecoms network in 2005.

“Huawei wasn’t originally handpicked for subsidies and support. Now the government supports Huawei because it succeeded and has become so important to national competitiveness,” said Yang Zhizhong, the banker at Morgan Stanley who represented Huawei in the negotiations with Motorola, and who also handled the sale of its power systems division to Emerson Electric two years earlier.

Back then, “Mr Ren wanted to be independent of the government, he didn’t want any interference from them,” he added. “He never wanted money from them.”

When the letter of intent was signed between the two companies, there were no government officials or representatives from the military present. Both Morgan Stanley and JPMorgan, representing Motorola, were content they would not suffer any reputational damage from advising on the deal.

While in the early days, Huawei sold equipment both to the government and the PLA, this business had become “modest” by 2005, according to Mr Zafirovski. “China Mobile was their biggest customer,” he said.

But Huawei was thought to be close to the government and the PLA and Mr Zafirovski said Motorola, whose biggest customers were the US networks AT&T and Verizon, spent months ensuring there were safeguards. He said he spoke with executives at Emerson Electric who assured him of the quality of Huawei’s people, products and controls. Though he noted that final due diligence would have followed the agreement on a price.

Huawei’s ownership was not a hurdle, said Mr Yang. While many influential Communist party families and private equity firms had offered Huawei investment, Mr Ren had declined them in favour of bank loans, he said.

“Huawei refused the temptation of receiving money from financial partners no matter how influential they were. He (Ren) did not want to get into bed with any family,” Mr Yang recalled. “He always resisted such requests. He believed if he let one family or princeling in, he would alienate all the others.”

Bankers who worked on the transaction say that Mr Zafirovski seemed to establish a rapport with the Huawei side. This was in part because Mr Zafirovski had immigrated from what is now Macedonia but was then part of Yugoslavia,

“I would joke with Mr Ren that I was also born in a communist country,” he said, referring to his childhood under Tito’s government. He added that he was careful to lose to Mr Ren at ping-pong when they played in Hainan.

The deal was carefully structured to make sure it would not fall foul of regulators on either side, with six business units split equally between the US and China.

The combination would have created huge value, said Mr Zafirovski. “We thought in this case one and one would equal five,” he said.

Huawei, meanwhile, had been “going through a cold winter”, said Leon Meng, the JPMorgan banker who advised Motorola. Huawei had settled a case with Cisco over technology theft, but there was no sign it would succeed in developing its own leading technology.

He said he had been surprised Mr Ren had wanted to sell, and then dismayed when the deal fell through. “I was surprised by the openness of the Huawei team and deeply impressed by their work ethics in the long and extensive due diligence process,” he said.

But even as the letter of intent was being finalised, Mr Zafirovski was being passed over and Ed Zander, from Sun Microsystems, was brought in to be Motorola’s chief executive. Mr Zander consented to further talks but ultimately balked at signing off on the deal, as the board fretted over what it saw as a high price for an unknown foreign quantity, with the bulk payable upfront in cash.

“I was shocked by the Motorola board decision to turn down this deal as the due diligence results were overwhelmingly positive and both sides’ operating teams had already formed strong rapport among themselves,” Mr Meng said.

Mr Zafirovski left Motorola and joined Nortel Networks. Today, he runs his own family office in Chicago and serves as a senior adviser to Blackstone.

Motorola went on to sell its phone handset business to Google, which in turn sold it to the Chinese company Lenovo, while Motorola Solutions now focuses on communications systems for the public sector, particularly the emergency services.

Huawei, meanwhile, became the biggest telecoms equipment company in the world, and the second largest smartphone maker by sales.