Deal Between U.S., China Firms Collapses

Published May 1, 2008

A proposed co-investment deal between Bain Capital and Huawei, a major Chinese provider of telecom equipment, collapsed after preliminary review by the Committee on Foreign Investment in the United States (CFIUS).

The deal would have resulted in the acquisition of 3Com, a U.S. supplier of network security technology, with Bain Capital as the majority owner and Huawei a minority owner.

The review was an early test of the United States’s newly revamped procedures for national security reviews of foreign acquisitions that may have national defense/security implications.

Initial reports of serious security concerns in the CFIUS preliminary review, coupled with pressure from key members of Congress, had put the deal’s approval in question.

Sensitive Tech Transfers Feared

Security concerns arose because Huawei is heavily involved with the Chinese military. Its linkage with 3Com raised questions whether sensitive U.S. technology could be transferred to China because 3Com does business with the U.S. military.

John Tkacik, Jr. of The Heritage Foundation noted, “The extremely close links between Huawei and the [People’s Liberation Army] mean that the People’s Liberation Army has direct access to Huawei’s training and technology infrastructure.”

Huawei and 3Com have had a close relationship for some time, including joint ventures and cross-ownership. The Bain-backed acquisition of 3Com would have tightened that relationship, although Huawei’s stake in 3Com would have been only 17 percent, not a controlling interest.

The March 20 collapse of the deal puts 3Com in a precarious market position. Bloomberg’s Vivek Shanker wrote on March 22, “The end of the deal leaves 3Com, which hasn’t posted an annual profit since 2000, to fend for itself against Cisco Systems, Inc., which dominates sales of networking equipment. 3Com’s stock has fallen 60 percent since Bain announced the bid Sept. 28, wiping out more than $1 billion in market value.”

Agency’s Policy Unclear

Nicholas Rummel of Financial Week reported CFIUS was prepared to nix the acquisition as originally formulated, even though Bain representatives said they made several alternative proposals to the agency.

Because the deal was withdrawn, there is no official ruling from CFIUS, and there is therefore no official record on what public policy or security concerns proved fatal in the eyes of CFIUS.

This leaves others with few clues to the conditions and circumstances under which CFIUS will block other proposed acquisitions of or investments in potentially sensitive tech firms based in the United States.

Other Investments Endangered

Criticizing the way CFIUS and U.S. politicians handled the Bain-3Com-Huawei proposal, Bret Swanson, a senior fellow of the Progress & Freedom Foundation, said, “The more often the U.S. blocks or merely harasses foreign investors, the stronger message we send that we don’t want the world’s capital. The more obstacles we lay before highly skilled visa applicants and would-be immigrants, America’s status as the strongest magnet for ideas and talent erodes.

“As we build more robust firewalls to repel this ‘dangerous’ knowledge and money, it becomes more likely that ideas and capital will flow through other nodes of the global economic network. … Pushing foreign capital away could further weaken the dollar and, in a downward spiral, signal that any new investments are likely to further depreciate in dollar terms.”

Swanson says economic soundness might reasonably be viewed as a national security concern, too. He pointed out, “Trade and investment is a two-way street. China over the coming decades presents a large opportunity for U.S. businesses and everyday American investors. If America closes off investment from China, will China block us from investing in the world’s fastest-growing large economy?”

George A. Pieler ([email protected]) is a senior fellow with the Institute for Policy Innovation. Jens F. Laurson ([email protected]) is editor-in-chief of the International Affairs Forum.