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Chinese stake at heart of 3Com takeover fears

When Bain Capital announced that Huawei Technologies of China would become a “commercial and strategic” partner to 3Com as part of the private equity firm’s takeover of the US technology company, it did not address the fact that the deal might not be welcomed by at least one of 3Com’s customers – the US government.

Huawei is expected to acquire a 16.5 per cent stake in 3Com as part of a joint bid with Bain, according to a person familiar with the transaction, who says the minority stake will not create national security problems.
Washington say the deal, announced at the end of last week, could face regulatory hurdles because of the Chinese company’s involvement. The US is likely to be especially concerned about Huawei gaining access to cutting-edge security technology after it emerged that the Chinese military might have been behind a recent cyber-attack against the Pentagon.
US intelligence and defence agencies have stepped up their scrutiny of all deals involving the transfer of network technology to non-US entities, including Alcatel’s merger with Lucent and a joint venture agreement between Nokia and Siemens that involved some US assets.
The central question that the US government must address is how much control Huawei will have over 3Com. Bain is expected to retain control of the new board but the companies have declined to disclose whether Huawei would obtain seats on the board or whether it would have unfiltered access to 3Com’s technology, which includes advanced cyber-security software that it sells to US defence agencies.
Bain and 3Com are expected to point out that the company already operates in China and that it previously had a joint venture with Huawei. The companies have declined to comment on whether they would submit the deal to a review by the Committee on Foreign Investment in the US (Cfius), an inter-agency panel that investigates the sale of sensitive US assets.
Cfius can examine a deal even if it does not involve the sale of a majority stake, though it does not usually probe deals in which less than a 10 per cent stake is transferred.
Hutchison Whampoa, the Hong Kong conglomerate, abandoned its bid for a minority stake in Global Crossing, a US telecommunications group, in 2003 after it became clear that the US government would reject the deal.
Paul Marquardt, a partner at Cleary Gottlieb, says it would be a “tough case” to prove that 3Com was being diverted to the Chinese, given that Bain would own a clear majority of the company with a stake of at least 80 per cent. “That said, China is a very sensitive [subject] and I’m sure it will raise eyebrows,” he said.
Huawei and its relationship to the Chinese military would also face increased scrutiny. James Mulvenon, director at the Center for Intelligence Research Analysis, told the US-China Economic and Security Review Commission in July that Huawei was “genuinely commercial” in orientation. But he also said the company maintained clear ties to the Chinese ¬military, “which has now become both a research partner and valued customer for their IT products”.
A Huawei spokesman told the Financial Times that the company’s “proposal to take a 16.5 per cent minority stake in 3Com is primarily a commercial investment. This transaction will take some time to complete and it is premature to comment on the outcome of any review by the US government.”
The spokesman emphasised that Huawei was 100 per cent owned by its employees and had no “special links” with China’s army. Although the company did count parts of the Chinese government and its military among its clients, he stressed that Huawei’s main customer base was made up of international telecoms operators.
If Cfius rejects the deal or it meets political opposition in Congress, it could further affect the ability of US companies to invest in China.
Congressional opposition to China National Offshore Oil Corp’s bid for US energy company Unocal in 2005 provoked a chorus of protectionist voices in China that eventually culminated in Beijing tightening regulatory oversight on foreign investment and drafting its own national security rules, making it harder for foreign companies to invest in some sectors.

Источник: Financial Times

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