Sourcefire Precedent Suggests Bain’s 3Com Acquisition Doomed

Yes, I misread the situation. I admit it.

When Bain Capital first made public its move to acquire 3Com, I didn’t realize that Huawei Technologies’ minority stake in the deal might cause the transaction to be denied by the US government.

Yes, Huawei was and is China’s leading network-equipment vendor, with significant ties to the Chinese military. Yes, Huawei was a company charged with alleged acts of corporate espionage and intellectual-property theft against Cisco Systems and others. But Huawei was a minor player in the player in the 3Com acquisition, at arm’s length to the transaction, along for the ride at Bain’s insistence so that 3Com would continue to have market leverage and political clout in the fast-growing Chinese marketplace.

Besides, what did spent old 3Com possess that could possibly be considered of strategic national security to the United States of America? Commodity switches and routers? No, that’s not it. Maybe 3Com’s intrusion-prevention subsidiary, Austin, Texas-based TippingPoint, which was to be spun off in an IPO until the Bain acquisition was announced?

Yes, that was a possibility, if only because TippingPoint’s customers include the Pentagon and other US government departments, and because it is plausible that Huawei, as a minority owner of 3Com, could somehow discern how TippingPoint’s security technology works and use that knowledge as means of eavesdropping on or hacking into customers’ networks.

That scenario seemed a longshot to me. After all, Huawei and 3Com already had a joint venture that might have allowed the former to learn everything it needed to know about 3Com’s and TippingPoint’s products previously. What’s more, couldn’t preventive measures be put in place, either technologically or legislatively, to preclude Huawei from taking nefarious advantage of its presumptive link to TippingPoint? Probably so.

If you cast your mind back, however, you realize there’s a precedent for the US government dissuading, if not formally rejecting, a takeover by a foreign company of a US-based intrusion-prevention vendor.

It involved Israel-based Check Point Software Technologies and its ultimately unsuccessful $225-million bid for Sourcefire, Inc. in 2006. Many of Check Point’s senior executives and technologists served in the Israeli Defense Forces and retained close ties to the Israeli government. Sourcefire, like TippingPoint, had customers in the US federal government.

About a week before the Committee on Foreign Investment in the United States (CFIUS) was to hand down its decision on whether the Check Point acquisition of Sourcefire would be formally approved, Check Point withdrew its offer, evidently after learning that the takeover was about to be blocked on national-security grounds.

There are differences between the Sourcefire situation and the 3Com case. Check Point would have been the sole acquirer of Sourcefire, for instance. In addition, Sourcefire was an open-source provider of intrusion-prevention software, and its acquisition could have had far-reaching consequences if Check Point were to subsequently decide to take the security code proprietary.

Another distinction is that Israel is an ally of the USA whereas China isn’t, at least not in the same sense. Given the precedent of Sourcefire — the apparent decision of CFIUS to discourage an Israeli company from buying a US-based intrusion-prevention firm — can you imagine the uproar on Capitol Hill and elsewhere if the US government were to look the other way and permit a Chinese company to buy and own, if only in a minority sense, the very same technology? Nobody wants to step into that sort of political maelstrom.

Just as with Sourcefire, early indications have been sent that the 3Com acquisition will be strongly discouraged by CFIUS. 3Com shareholders, who welcomed the Bain offer as if it were a godsend, should heed the warning and brace for bad news.

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