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Huawei merger plan hits a snag

The global Chinese telecommunications company Huawei (華為) suffered a setback on Wednesday as US technology group 3Com and private equity firm Bain Capital said their proposed merger plan had hit a hurdle.

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joint statement that they "remain committed" to Bain's proposed US$2.2 billion takeover of 3Com, but announced they had withdrawn a takeover filing with the powerful Committee on Foreign Investment in the United States (CFIUS).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

Shenzhen-based Huawei 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 received the green light, but the companies withdrew their takeover blueprint amid CFIUS concerns over 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 firms' 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 for Bain.

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

A 3Com spokesman, John Vincenzo, said the firm 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 Sept. 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."

3Com president and chief executive officer Edgar Masri voiced disappointment on Wednesday, but said the two companies would seek to address the government's concerns about the potential merger.

"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.

In response, China yesterday called for the US to treat Chinese companies "fairly," and that its firms deserve better treatment.

"This was a normal business investment in accordance with market rules. It was an investment decision made in accordance with [Huawei's] own development," Chinese Foreign Ministry spokesman Liu Jianchao (劉建超) told a news conference.

"We hope relevant US management departments can deal with this issue fairly and in accordance with the law, to create a fair and favorable environment for Chinese companies in the United States," he said.

Ren Zhengfei (任正非), a former People's Liberation Army soldier, founded Huawei in 1988. The company has always maintained it is a private company that is wholly owned by its employees.

Although Congress has no direct role in CFIUS reviews, the panel is still smarting from a storm of criticism two years ago when it approved state-owned Dubai Ports World's acquisition of several US port operations.

Congress was so enraged by the approval that it enacted a tougher law requiring CFIUS to spend more time vetting deals and to keep lawmakers better informed.
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