3Com Deal: 5 Awkward Questions for Hank Paulson

Posted on February 5, 2008
Filed Under Apparatchiks, China Business, Cyberespionage |

A UNITED States House committee is investigating the proposed US$2.2 billion acquisition of 3Com Corp by Bain Capital LLC and China’s Huawei Technologies Co, a deal that has sparked national-security concerns in Washington.

The Energy and Commerce Committee requested information from the US Treasury Department on its investigation of the proposed transaction, Committee Chairman John Dingell, a Democrat from Michigan, said.

The questions:

1. What percentage of interest will Huawei Technologies own in 3Com Corporation, as outlined the proposed acquisition? If this percentage represents a minority stake, will Huawei Technologies be granted minority investor protections, such as the authority to appoint members of 3Com Corporation’s board of directors?

It’s 16.5% at the outset, apparently with a later option to extend it to 21.5%. Huawei will appoint 3 members to 3Com’s board of directors.

They have been plenty of public reports on this. I assume they just wanted the official line, especially if those numbers change due to government intervention.

2. What has CFIUS learned about the internal structure and governance of Huawei Technologies? Specifically, who (e.g. shareholders) controls the company? Additionally, who (e.g. board of directors) directs the company’s operations? Is the information transparent and easily obtainable?

Whatever CFIUS (the Committee on Foreign Investment in the United States, the Treasury agency that vets deals for national security concerns) finds out, I hope it shares it with the rest of the world. Reporters are running out of synonyms for “enigmatic” when writing Huawei stories.

“Transparent and easily obtainable”? That would be a “no”.

3. Please describe the extent and nature of Huawei Technologies’ ties to the Chinese People’s Liberation Army (PLA). Do such ties constitute a threat to U.S. national security? If CFIUS does not believe this, please provide a detailed explanation.

Ren Zhengfei, Huawei’s founder and president, is said to be an ex-PLA man. Huawei is privately held, with Ren having a small chunk and the rest owned by “employees”. There are some firms, such as Lenovo, that are privately held but have shares owned by government organizations. They are subject to the State-owned Assets Supervision and Administration Commission (SASAC) and have significant ownership changes reviewed.

Huawei doesn’t seem to have been subject to any SASAC oversight, but that could just be because there have been no substantial ownership changes. It’s widely assumed that Huawei is part of a military-industrial complex with Chinese characteristics.

Does Huawei ownership really represent a threat to national security? There are legitimate concerns about updates and patches to security solutions deployed by the US government. Patches and updates can occur quite frequently and often resolve specific security problems. The last thing anyone wants in a high assurance environment is to inadvertently install a backdoor or some software that can compromise security.

The fuss is over TippingPoint, 3Com’s intrusion prevention solution (IPS). Apparently it’s used by the Department of Defense and the National Security Agency. No one wants to take the chance that the IPS will become the weak link in a security infrastructure.

TippingPoint may be a market leader, but it’s hardly the only solution out there. The US government’s IT infrastructure is about as heterogeneous as you can get.

4. Under the terms of the proposed acquisition, will Huawei Technologies be permitted to enter into a technology-sharing agreement with 3Com Corporation? If so, are there any limitations to the agreement, particularly for technologies relevant to protecting the national security of the United States, and a means to ensure compliance with any limitations of the agreement?

There really isn’t much gee-whizzery involved in intrusion prevention technology, just a programmable chip that can inspect packets in transit for known attacks. I’m sure there is some qualitative differences between different chips and the software that runs on them, but the technology is hardly ground-breaking.

The concern here is not for technology secrets, but for what secrets may be revealed if the technology were compromised.

5. In the event that this merger is approved, will 3Com Corporation be required to divest itself of subsidiaries that provide critical network components to the U.S. Government?

Oh yes, TippingPoint will be sold. It’s not profitable, meeting the US government’s concerns would be onerous, and Huawei probably has enough experience to develop the technology itself.

Representative Dingell should be congratulated for this public letter to CFIUS. The review process has clearly gone onto a second phase and there hasn’t been a peep about the outcome. These are important questions about a publicly traded company, its technology, and the ramifications of selling it to a private, foreign company.

I don’t believe that there’s any security concerns that can’t be met or mitigated. I don’t believe that 3Com is some national champion that should be coddled because one of its products is used by the government. I don’t believe that a secret cabal meeting somewhere in the Treasury department is the best way to assess the merits of the deal.

It’s ironic that the transparency and easily obtainable information that is the subject of so much reasonable criticism of Huawei is lacking in the very same organization that is meant to judge it.