3Com's Buyout Bid Faces Government Scrutiny

By Sean Michael Kerner

January 3, 2008

The issue of Chinese ownership could potentially hold up the $2.2 billion buyout of networking vendor 3Com.

3Com announced in September its bid to go private with Bain Capital taking a majority stake. As part of the deal, Chinese networking vendor Huawei Technology would be set to take a minority interest in 3Com.

The deal had been originally expected to close in the first quarter of 2008, pending shareholder and regulatory approvals.

One of those regulatory approvals would come by way of the Department of Treasury's Committee on Foreign Investment in the United States (CFIUS), which has been reviewing the deal. The committee determines whether there is a national security risk from a foreign investment in a U.S. company.

Yet in a move widely believed to signal concerns with the buyout, CFIUS will be extending its review by an additional 45 days beyond the initial 30-day period originally expected, according to a report in the Financial Times.

A spokesperson for Department of the Treasury declined to comment on the potential 45-day review, citing legal requirements for confidentiality.

Representatives from Bain similarly declined to go into detail on the matter.

"The review ... is a confidential process to which we submitted voluntarily," a Bain spokesperson told InternetNews.com in an e-mail. "Bain Capital is working closely with CFIUS to provide U.S. officials with information about the proposed transaction."

"As stated previously, we believe CFIUS will conclude that the company will remain firmly in the control of an American firm, has only a small minority foreign shareholder, and that the deal presents no risks to national security," the spokesperson said. "We have and will continue to respect the confidential nature of these proceedings as our constructive dialogue with CFIUS continues."

Spokespeople for 3Com were not immediately available for comment. According to a recorded message on its investor relations phone line, the company is also remaining silent for the present.

"At this time, 3Com will no longer be fielding questions from the investment community regarding the transaction with Bain Capital on an individual basis," 3Com said in its message. "We intend to only make material statements about this transaction in a public manner."

If indeed CFIUS, which is chaired by the Secretary of the Treasury, has delayed approving the deal on concerns about Huawei's ownership, it would mark an unpleasant surprise for the parties involved. In an October regulatory filing, 3Com said it had submitted the deal to CFIUS for review and had a positive outlook on its prospects.

"3Com and Bain Capital believe that the transaction will not result in foreign control of the new company and does not pose a threat to U.S. national or homeland security," 3Com stated in its October filing with the Securities and Exchange Commission (SEC).

Yet the proposed buyout has drawn criticism from U.S. lawmakers as well as special interest groups such as the China e-Lobby. 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.

Ros-Lehtinen and Rep. Thad McCotter (R-Mich.), chairman of the Republican Policy Committee, both raised concerns about the transaction on charges that Huawei has links to the Chinese military.

"U.S. regulators ought to reject the proposed buyout of 3Com by one of the least transparent companies operating in China, a firm with shadowy ties to Chinese army and intelligence services," Ros-Lehtinen said in a statement.

Activists also blasted Huawei's role in the deal. In a letter to CFIUS, D.J. McGuire, co-founder and president of China e-Lobby, an advocacy group pushing for more aggressive U.S. policies against the country's government, similarly warned about the Huawei's connections.

"In 2001, Huawei was exposed as one of the Communist Chinese firms building an Iraqi fiber-optic network that would have enabled Saddam Hussein to integrate his air-defense system," McGuire wrote in his letter. "The firm was also involved in building a telephone network for the Taliban in Afghanistan, while the terrorist group was sheltering and aiding Osama bin Laden."

While regulators may have issue with the proposed new relationship between Huawei and 3Com, it won't mark the first time the two have cooperated. The companies in 2003 launched the H3C joint venture as an effort to undercut networking giant Cisco. In 2006, 3Com bought out Huawei's stake for $882 million.

In addition to concerns about national security risks, 3Com is facing heat over the proposed acquisition from other quarters.

"Several purported class-action lawsuits have been filed since Sept. 28, 2007 by 3Com shareholders against the Company, its current directors, a former director, Bain Capital Partners, and in some cases, Huawei Technologies," 3Com noted in its October SEC filing.

According to the filing, some shareholders seek class certification and injunctions to halt the transaction, claiming an "insufficient" sale price.

Bain's all-cash deal of $5.30 per share represented a 44 percent premium over the closing price of 3Com's stock on Sept. 27, the day before the buyout was announced.

The 3Com filing also said shareholders charge that its board of directors "breached their fiduciary duties, and that Bain Capital Partners, and in some cases, Huawei Technologies, aided and abetted the alleged breaches."