China’s Involvement Helps Derail 3Com Takeover on National Security Concerns

By Jason Simpkins
Associate Editor

In a move that effectively waves the white flag on a proposed $2.2 billion merger, 3Com Corp. (COMS) and its two deal partners – Bain Capital Partners LLC and Huawei Technologies Co. – yesterday (Wednesday) announced they would withdraw their application to the U.S. Committee on Foreign Investment.

 “The deal is not going to proceed,” an anonymous source told The Associated Press.

The AP source was close to the negotiations, but wasn’t authorized to comment publicly.

Last September, 3Com agreed to be taken over by Bain Capital and Huawei Technologies, China’s No. 1 network equipment maker. The deal stipulated that Huawei would receive a 16% stake in 3Com, leaving the rest to Bain.

However, the fact that Shenzhen-based Huawei was founded by Ren Zhengfei, a former officer in the Chinese army, raised suspicion about the company’s intentions for 3Com which has its own ties to the Pentagon. The concerns about the national security issues were chronicled in a Money Morning analysis last year.

3Com’s Tipping Point unit makes security software for the U.S. government, and policymakers worry that 3Com’s networking technology would allow China to eavesdrop on U.S. domestic conversations, and that the company’s encryption technology would make Chinese networks harder to tap.

But it now appears that the Committee on Foreign Investment (CFIUS) – a 12-agency group with the authority to recommend the White House block or reconfigure deals threatening national security – has not been swayed in arbitration hearings, and still has national-security concerns, too. 3Com and its would-be merger partners have opted to surrender.

“We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction. 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,” Edgar Masri, chief executive officer of 3Com, said in a statement.

Bain said Feb. 12 that it also would be willing to make concessions if it meant government approval. Such concessions might have included divesting Tipping Point from 3Com, but now that 3Com has withdrawn its application, even that seems unlikely.

In a U.S. Securities and Exchange Commission filing Tuesday, 3Com detailed the payouts shareholders could expect from the merger. If Tipping Point were divested, shareholders would receive between $4.50 and $5.00 for each share of 3Com stock they held. If Tipping Point were still part of 3Com at the time of the deal, stockholders would get $5.30 per share.

“Another deal possibly could [be reached] but it's not going to be some small revision of that [original] deal. It would be a new and different transaction,” The AP source said.

News and Related Story Links:

• The Associated Press:
  Bain-Huawei Offer for 3Com on the Rocks

• New York Times:
  3Com, Bain Withdraw Deal From Regulatory Approval

• Bloomberg:
  3Com Falls as Bain Drops Request for Approval of Deal

• Money Morning:
  U.S. Officials Question Whether 3Com Deal Gives Defense Secrets To China.

• Time Magazine:
  Ren  Zhengfei: Modeled After Mao.