National security issues put Bain-Huawei bid for 3Com on hold

Companies withdraw filing to federal panel but say they remain committed to pursuing deal

The deal for Bain Capital LLC to buy 3Com Corp., with China-based Huawei Technologies Co. taking a minority ownership stake, is on hold because the three companies were unable to reach an agreement with the federal Committee on Foreign Investment in the United States (CFIUS) about national security concerns.

The companies announced on Wednesday that they have withdrawn their joint filing to CFIUS, although they said that they remain committed to continued discussions with one another in an attempt to address the concerns raised by members of the panel.

"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's concerns, we will continue to execute our strategy to build a global networking leader."

Under the proposed $2.2 billion buyout deal, which was agreed to last September, Bain would have taken an 83.5% stake in 3Com, while Huawei would have gotten the rest of the networking vendor's stock.

But CFIUS, an interagency committee that is part of the U.S. Department of the Treasury, has been investigating whether the investment by Huawei would pose a risk to national security — a process that began after Bain voluntarily submitted the deal for review in October.

Huawei's close ties to the Chinese government were a red flag for critics of the deal, such as Rep. Thaddeus McCotter (R-Mich.). In a speech on the floor of the House of Representatives in October, McCotter said that Huawei's stake in 3Com, which sells intrusion-detection systems, would "gravely compromise" U.S. national security. He pointed out that the U.S. Department of Defense uses 3Com's intrusion-detection tools, and that Chinese hackers have targeted the Defense Department.

The companies had argued that Boston-based Bain would have a controlling interest in 3Com, thus mitigating the security concerns.

"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."

Copyright © 2008 IDG Communications, Inc.

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