China Connection Hamstrings Bain-3Com Deal

Hoping to salvage its $2.2 billion bid to acquire 3Com, Bain Capitol and China's Huawei Technologies are reportedly prepared to spin off 3Com's TippingPoint to satisfy the government's national security concerns about Huawei's involvement in the deal.

Huawei has a 16.5 percent stake in the proposed merger.

TippingPoint, acquired by 3Com in January 2005, develops intrusion prevention systems used by the Pentagon and other federal agencies, in addition to a number of Fortune 500 companies. Given TippingPoint's close ties with the U.S. government, the Committee on Foreign Investment in the United States, CFIUS, has expressed concerns about Huawei's ability to access the TippingPoint technology.

In 2000, the CIA accused Huawei of violating a United Nation's embargo on selling fiber optics gear to Iraq. Huawei also allegedly has close ties with the Taliban and the top leadership of China's military.

According to Reuters, Bain has now offered to sell TippingPoint if the merger is approved. Before its acquisition by 3Com, TippingPoint was considering an IPO (initial public offering).

"We have put on the table robust mitigation proposals that offer significant structural and security safeguards to American national security interests," Bain said in an e-mail to Reuters, which added that spinning off TippingPoint was one of the offers it made to CFIUS.

In addition to CFIUS, a number of members of Congress have also expressed concern about Huawei's participation in the 3Com deal.

"Given that 3Com Corp. manufactures communications network components—some of which it supplies to the Pentagon, including firewall technology—this transaction raises significant concerns about its potential effect on the national security of the United States," Rep. John Dingell, chairman of the House Energy and Commerce Committee, wrote in a Jan. 31 letter to Treasury Secretary Henry M. Paulson.

Dingell said in the letter that his committee was opening its own inquiry into the deal.