We reported recently that 3Com Corporation, a leading U.S. provider of secure, converged voice and data networking enterprise solutions, had announced that it would be acquired in a $2.2 billion cash deal merger by affiliates of equity firm Bain Capital, LLC; with Bain Capital Hong Kong holding more than 80% interest of 3Com, and Huawei Technologies of China holding the remaining stake and becoming a commercial and strategic partner of 3Com.
A group of lawmakers from the U.S. House of Representatives have proposed a nonbinding resolution and are asking President Bush to halt the proposed buyout of 3Com Corp as it "threatens the national security of the United States." The representatives are concerned that the technology is being sold to Huawei Technologies and that its founder, Ren Zhengfei, is a former officer of the People's Liberation Army of China. While Zhengfei claims to only own 1% of Huawei, the remainder will be owned by an unidentified Chinese “union.” The legislators feel that Huawei has questionable ties to the Chinese Army and Chinese intelligence and that the sale of one of the largest U.S. voice and data technology companies should have tighter scrutiny.
3Com has recently said that a 16.5 percent stake in the company would transfer to China's Huawei Technologies Co. Ltd. as part of the merger and that Bain Capital would buy out 3Com. Huawei is currently the largest telecommunications gear manufacturer in China and one of the largest in the world. If the 3Com deal goes through Huawei could raise its stake in 3Com another 5 percent under the terms of the Bain agreement.
The Congressional leaders are acting as a result of growing tension over tainted Chinese imports into the U.S. and the concerns over corporate expansion into China at the expense of the U.S. economy. The group released a statement that the 3Com transaction “should not be approved by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency U.S. governmental panel that reviews corporate acquisitions involving foreign buyers. It would be a grave error for U.S. regulators to approve a deal that permits minority ownership in 3Com by one of the least transparent companies operating in China, a firm with shadowy ties to Chinese army and intelligence services."
Bain Capital has voluntarily agreed to submit the deal for review to CFIUS and 3Com has proactively responded with a statement that Huawei would not have access to “sensitive” U.S. technology or be able to make U.S. government sales. 3Com’s regulatory filing also indicated that Huawei would not have operational control or the ability to make decisions for 3Com.
However, when the former U.S. technology is eventually all Chinese owned, then who will sell to the U.S. government? Won’t this create a potential voice and data technology monopoly in China? In the House resolution, the Representatives claim that Huawei is a privately held company set up in 1988 by a former Chinese army officer and may still have links to the Chinese government and the army. The Resolution indicates that 3Com sells data-networking equipment to the Defense Department and other government agencies. And that is the heart of the U.S. national security issue.