After going back to the drawing board to devise a deal structure that might passe muster with the Committee on Foreign Investment in the U.S. (CFIUS), Bain Capital and Huawei still don’t seem to have fashioned a proposal that will give them the dubious privilege of owning 3Com Corporation.
If Bain and Huawei still with to consummate an acquisition of 3Com — with Bain claiming 83.5 percent of the acquired company and Huawei holding the remaining 16.5 percent — they’ll have to respond meaningfully to persistent US government concerns regarding the national-security implications of the deal. To do that, Bain and Huawei, a powerhouse Chinese networking-equipment vendor with close ties to China’s military and government, must make certain concessions.
If the report in yesterday’s edition of the Wall Street Journal is accurate, the two companies still haven’t found a winning approach. To illustrate the problem, I will highlight a paragraph from yesterday’s news item:
3Com also supplies the U.S. government with some security software, including applications that help protect the Pentagon from online attacks. Bain and Huawei previously said they would be willing to sell the unit that handles these contracts. The business, called TippingPoint, wouldn’t be sold until after CFIUS approves the deal.
That’s not good enough. Bain and Huawei must not only “be willing to sell” the TippingPoint business unit, they must commit to doing so — on paper, in unambiguous, binding terms. In fact, I would argue that it would be preferable if Bain and Huawei were to sell the TippingPoint unit, either privately or in a public offering (okay, I know that’s not about to happen in current market conditions), before CFIUS is asked to approve the deal. If it is not practicable for TippingPoint to be divested before then, a viable recourse is for Bain and Huawei to legally commit to a divestitute of TippingPoint within a specific period of time — say, six months — of the CFIUS approval of the 3Com purchase.
But I don’t think that will be acceptable to CFIUS. The concern persists within certain US intelligence agencies that Huawei, as a co-owner of TippingPoint, will be in a position to exploit sensitive technologies and to facilitate classified technology transfer on behalf of Chinese government agencies.
Ideally, CFIUS would not want Huawei to own TippingPoint, even as a minority partner, for any length of time. A possible compromise is for Bain and Huawei to agree to hive off TippingPoint as a separate entity, with no interaction between Huawei and TippingPoint, during the interval between the acquisition of 3Com and the divestiture of TippingPoint. I don’t know how that work in practice, however, nor do I know about the legality of such an arrangement.
Is 3Com really worth all the trouble? I would think not, and so would most reasonable observers, which just makes everybody a bit more suspicious about the benefits Huawei believes it will derive from this deal.