Update: Security issues scuttle Bain/Huawei bid for 3Com

Update: Security issues scuttle Bain/Huawei bid for 3Com
Update: Security issues scuttle Bain/Huawei bid for 3Com 

By Grant Gross
IDG News Service
February 20, 2008

A deal for Bain Capital Partners and China's Huawei Technologies to buy 
3Com is on hold because the companies were unable to come to agreement 
with the U.S. Committee on Foreign Investment in the United States 
(CFIUS) about security concerns.

The three companies have withdrawn their joint filing with CFIUS, 
although they remain committed to continued discussions, they announced 

The proposed $2.2 billion deal, announced in September, raised security 
concerns because of networking giant Huawei's close ties with the 
Chinese government. Under the proposed deal, Bain would have gotten an 
83.5 percent stake in 3Com and Chinese networking giant Huawei 
Technologies would have gotten the remaining piece. CFIUS, part of the 
U.S. Department of Treasury, is investigating whether the investment by 
Huawei poses a risk to U.S. national security after Bain voluntarily 
submitted the deal for review in October.

"We are very disappointed that we were unable to reach a mitigation 
agreement with CFIUS for this transaction," Edgar Masri, president and 
CEO of 3Com, 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."

Among the critics of the deal was U.S. Representative Thaddeus McCotter, 
a Michigan Republican. Huawei's stake in 3Com, which markets intrusion 
detection systems, would "gravely compromise" U.S. national security, he 
said in a House floor speech in October. The U.S. Department of Defense 
uses 3Com intrusion detection products, and Chinese hackers have 
targeted the agency, McCotter said.

The companies had argued that Bain Capital, based in Boston, would have 
a controlling interest in 3Com. "Bain Capital will be able to make all 
operational decisions for the company, to set budgets, to spend money, 
to make investments, and to hire and fire personnel," 3Com said in an 
October filing with the U.S. Securities and Exchange Commission. "Huawei 
will not have any control over the operation of the business."

The companies could still put together a new proposal and take it back 
to CFIUS, said Christopher Wall, a partner in the international trade 
practice at the Pillsbury Winthrop Shaw Pittman law firm who is based in 
Washington, D.C. With cases like the 3Com one, there are often concerns 
about technology transfer to other countries, but Bain, Huawei, and 3Com 
could come back with a proposal to limit tech transfer, said Wall. 
Neither Wall nor his firm is involved in this case.

The companies could also work out a deal with less Huawei involvement, 
he added.

Wall wasn't surprised about the security concerns surrounding the deal, 
given that the U.S. Department of Defense uses 3Com networking products, 
and U.S. officials have accused Chinese hackers of attacking U.S. 
government sites. "People are obviously going to be on high alert when 
it comes to China and computer security issues," he said. "I can easily 
see why people would be very concerned about any Chinese role in a 
transaction involving that kind of technology."

This story was updated on February 20, 2008

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