Bain-3Com Deal Hits the China Skids

Huawei Technologies' involvement in the merger scuttles CFIUS approval.  

Unable to sway skeptical federal regulators, 3Com said Feb. 20 it has withdrawn its filing with the government seeking approval for the $2.2 billion bid by Bain Capital and Huawei Technologies to acquire 3Com.

The withdrawal does not necessarily kill the merger, but any involvement of China's Huawei would be problematic to the deal. 3Com said it would continue to search for alternative proposals with Bain.

A U.S. multi-agency known as CFIUS (Committee on Foreign Investment in the United States) has expressed concerns that Huawei's 16.5 percent stake in the proposed merger would pose security risks to the country. Huawei allegedly has close ties with the Taliban and the top leadership of China's military.

"We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction," 3Com President and CEO Edgar Masri said in a statement. "While we work closely with Bain Capital Partners and Huawei to construct alternatives that would address CFIUS' concerns, we will continue to execute our strategy to build a global networking leader."

Masri did not reveal any details of a restructured deal. Shares of 3Com fell almost 20 percent to $3.02 a share in mid-afternoon trading.

Of particular concern to CFIUS is 3Com's ownership of TippingPoint, which develops intrusion prevention systems used by the Pentagon and other federal agencies, in addition to a number of Fortune 500 companies. 3Com acquired TippingPoint in 2005.

Last week, Bain said it was prepared to sell off TippingPoint if the merger is approved by CFIUS. "We have put on the table robust mitigation proposals that offer significant structural and security safeguards to American national security interests," Bain said in a Feb. 13 e-mail to Reuters, which added that spinning off TippingPoint was one of the offers it made to CFIUS.

3Com's Board of Directors on Sept. 28, 2007, unanimously approved a definitive merger agreement to be acquired by affiliates of Bain Capital Partners. The parties voluntarily submitted the proposed transaction, which included a minority ownership stake by Huawei Technologies, to CFIUS review.

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.

In the letter, Dingell said his committee was opening its own inquiry into the deal.