U.S. government to scrutinize 3Com deal

Here is another example of the growing sensitivity surrounding the acquisition by foreign owners of U.S. critical infrastructure assets. The administration will likely scrutinize closely the national security grounds od last week’s joint acquisition of 3Com, the U.S. networking group, by Huawei Technologies, a Chinese telecoms equipment maker, and Boston, Massachusetts-based private equity firmBain Capital. The FT reports that the deal is worth $2.2 billion in cash. Bain will take a stake of more than 80 percent, while Huawei’s ownership will remain below 20 percent. 3Com is small compared to rivals such as Alcatel-Lucent, Nortel Networks, and Cisco Systems, but the U.S. government is concerned about the foreign ownership of sensitive communications networks. Among the reasons: 3Com’s products is an intrusion prevention technology which helps clients, including the U.S. defense department, protect themselves from hackers. It was reported widely how Chinese People’s Liberation Army (PLA) hackers were responsible for a massive cyberattack on Pentagon’s computers earlier this year (these hackers also probed the military computer systems of several European countries), and the idea of a Chinese company with close relationship to the Chinese government owning a company which sells intrusion protection to the .S. military and itnelligence agencies does sit well with the Pentagon.

Sami Saydjari, a former Pentagon cybersecurity expert and currently chief executive of Wisconsin Rapids, Wisconsin-n=based Cyber Defense Agency, said Huawei’s ownership of hardware and important network components would be “really worrisome.” Christopher Simkins, an attorney at Covington & Burling and former U.S. justice department official, said that “Any Chinese-related deal that touches on government IT systems, even in a minority capacity, is going to be something that the Committee on Foreign Investment [CFIUS] looks at closely.” CFIUS examines transactions which involve a change in control in a U.S. asset, and the panel could require the companies to agree to a mitigation agreement which would limit Huawei’s access to certain technologies and bar its involvement in any contracts with the U.S. government (similar mitigation agreements were imposed on the Alcatel-Lucent deal mentioned above).

The buyers, by the way, are offering $5.30 per share, or a 44 percent premium to 3Com’s closing share price of $3.68 last Thursday. The debt financing package for the deal will be raised through the Asian branches of Citigroup and UBS, as well as HSBC, ABN Amro, and Bank of China.