China's Huawei suffers setback as US IT deal stalls

NEW YORK, Feb 20, 2008 (AFP) — The global Chinese telecommunications company Huawei suffered a setback Wednesday as US technology group 3Com and private equity firm Bain Capital said their proposed merger plan had hit a hurdle.

The two American firms said in a joint statement that they "remain committed" to Bain's proposed 2.2-billion-dollar takeover of 3Com, but announced they had withdrawn a takeover filing with the powerful Committee on Foreign Investment in the United States (CFIUS).

The companies withdrew the takeover application with CFIUS despite 3Com's assertion late last year that the deal would not threaten US national security.

Huawei, which is based in the Shenzhen region of China, stands to gain a hefty 21.5 percent stake in 3Com if Bain's takeover of the technology firm is approved by the US government.

3Com executives had stressed that Huawei would gain no "operational control" over the US firm if the deal wins a green light, but the companies withdrew their takeover blueprint amid CFIUS concerns about the deal.

CFIUS, an interagency panel that counts representatives from the Treasury, the Defense Department and the State Department among other government agencies, would likely have given the proposed deal a tough review.

The panel has raised concerns about foreign investments in the past and some US lawmakers have voiced concern about Huawei gaining a stake in 3Com.

Congressman Duncan Hunter, the top Republican on the House Armed Services Committee, welcomed the companies' announcement.

"Our nation's security interests must always prevail. It is my hope that this proposed transaction will not be repackaged and presented to CFIUS for further review," Hunter said.

The withdrawal of the takeover bid with CFIUS is also a setback for Massachusetts-based 3Com, which specializes in voice and data networking equipment, and Bain.

A source close to the negotiations, who requested anonymity, told AFP the proposed deal would likely require substantial changes before winning potential CFIUS backing.

A 3Com spokesman, John Vincenzo, said the company had held "several discussions" with CFIUS in recent weeks prior to withdrawing the current takeover blueprint.

3Com's board unanimously approved the deal with affiliates of Bain Capital Partners on September 28.

In a regulatory filing with the Securities and Exchange Commission in October, 3Com stated that Huawei "will not have any access to sensitive US-origin technology or US government sales as a result of this transaction."

Edgar Masri, 3Com president and chief executive, voiced disappointment Wednesday, but said the companies would seek to address the government's concerns about the potential tie-up.

"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," Masri said.

Investors punished 3Com's shares, as its stock tumbled 23 percent to close at 2.87 dollars.
Chinese firms are increasingly seeking US investments, especially in banking and finance.

China's state-controlled China Investment Corporation snapped up a five-billion-dollar stake in Morgan Stanley, one of America's biggest investment banks, in late December.

Another US banking group, Bear Stearns, announced a strategic tie-up with China's state-controlled CITIC Securities Co. Ltd in late October involving investments of at least two billion dollars.


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