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With $2.2 billion on the table, the U.S. government may well be the culprit for derailing the proposed buyout of 3Com by Bain Capital.

Bain formally withdrew its offer yesterday citing the equivalent of irreconcilable differences with 3Com over how to deal with the U.S. Treasury Department's Committee on Foreign Investment in the United States (CFIUS). 3Com is now seeking a $66 million breakup fee.

How did it all go so wrong?

Well from the start there were concerns about the third party in this deal, China-based networking vendor Huawei Technologies. In late November, U.S. Rep. Ileana Ros-Lehtinen (R-Fl.), ranking Republican on the House Foreign Affairs Committee, called for a halt to the deal. Rep. Thad McCotter (R-Mich.), chairman of the Republican Policy Committee, also raised concerns about the transaction on charges that Huawei has links to the Chinese military.

Considering that 3Com and Huawei had a joint venture called H3C for a few years, I find it difficult to understand why the Huawei stake is an issue now. After all, these firms have already been partners so what's the practical difference?

Perhaps this is a new era of protectionism in the U.S. government?

Then again considering the world's largest retailer Wal-Mart is a U.S. company and does many billions of business out of China, blocking 3Com's deal is a minor thing in comparison.

So what is it about this deal that struck some kind of fear in the halls of Washington D.C.?

From my point of view it all has to do with 3Com's exposure to sensitive or strategic U.S. government and Defense network operations. There have been some indications that 3Com's TippingPoint security division was the real stumbling block.

The implications, though, are significant. Does this mean that now any U.S.-based company that has contracts with the U.S. government is limited in some way from foreign ownership? Or is it just China?

There certainly didn't seem to be the same kind of opposition to the Alcatel-Lucent merger of a few years back, but then again Alcatel wasn't a Chinese company.

Cisco and Juniper, two U.S.-based companies that also have exposure to the U.S. government, are also quite active in China. Neither of them have any large direct Chinese stake in the way that Huawei might have had in 3Com. Does the fact that Cisco and Juniper provide networking and security technology to China put the U.S. at risk?

I honestly don't think that's the case, but still the chill in the air from 3Com fallout might be a cause for some concern. The potential for some new form of U.S. protectionism against foreign ownership is worrisome, especially in light of the current economic slowdown.

Then again, perhaps the government should be protecting strategic networking security assets more tightly. Perhaps the government should just buy out 3Com TippingPoint and its other security partners to ensure that it can keep a tight lid on operations.

Or maybe not. The U.S. is a free-market economy in which free-market dynamics must reign supreme so long as they do not put homeland security at risk. The balance between free markets and security is a tightrope to be sure, but it is a rope that must be traversed.

Dealing with China is also a tightrope, balancing the needs of free market dynamics with the great needs for human rights and U.S. national security.

We can only hope that the 3Com-Bain deal collapse is not a harbinger of things to come for U.S.-based technology vendors but is rather just a blip on the radar. Both freedom and free-market dynamics need to coexist.

TAGS: 3Com, Bain Capital, government

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