Security issues scuttle Bain/Huawei bid for 3Com

A deal for Bain Capital Partners and China's Huawei Technologies to buy 3Com is on hold because the companies were unable to come to agreement with the U.S. Committee on Foreign Investment in the United States about security concerns.

The three companies have withdrawn their joint filing with CFIUS, although they remain committed to continued discussions, they announced Wednesday.

The proposed $2.2 billion deal, announced in September, raised security concerns because of networking giant Huawei's close ties with the Chinese government. Under the proposed deal, Bain would have gotten an 83.5 percent stake in 3Com and Chinese networking giant Huawei Technologies would have gotten the remaining piece. CFIUS, part of the U.S. Department of Treasury, is investigating whether the investment by Huawei poses a risk to U.S. national security after Bain voluntarily submitted the deal for review in October.

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

Among the critics of the deal was U.S. Rep. Thaddeus McCotter (R-Mich.). Huawei's stake in 3Com, which markets intrusion-detection systems, would "gravely compromise" U.S. national security, he said in a House floor speech in October. The U.S. Department of Defense uses 3Com intrusion-detection products, and Chinese hackers have targeted the agency, McCotter said.

The companies had argued that Bain Capital would have a controlling interest in 3Com. "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."

The IDG News Service is a Network World affiliate.