3Com Deal: More Hoops Please, We’re Bain

Posted on March 4, 2008
Filed Under Apparatchiks, China Business |

The Wall Street Journal reports (hat tip China Economic Review):

Bain Capital LLC and China’s Huawei Co. plan to resubmit an application seeking U.S. approval for their planned $2.2 billion buyout of 3Com Corp. within the next several weeks, according to people familiar with the matter.

The new transaction still would leave Huawei with 16.5% of the company and Bain holding the rest. But the deal would be structured to limit Huawei’s access to some core U.S.-related network products, including certain Ethernet technologies, which are essential for the communications between computers. The purchase price is expected to remain the same.

The parties recently pulled their application with the Committee on Foreign Investment in the U.S., a 12-agency government panel, amid concerns it would be rejected. Some members of Congress had expressed concern about the security implications of allowing a Chinese-owned entity to exercise influence over the technology company.

Bain and Huawei are certainly gluttons for punishment. The article notes that the companies felt “they didn’t have enough time” during the second, 45 day, phase of the CFIUS (Committee on Foreign Investment in the U.S) investigation of their takeover bid. In their first effort, politics trumped business as their bid was likened to selling the national technology silver to a pack of devious, godless mandarins. The deal was widely assumed to have floundered on the sale of Tippingpoint, 3Com’s intrusion prevention solution subsidiary used by the US military. Whether there were legitimate security concerns that weren’t addressed, or if it was an example of China-bashing, or if it was a protectionist spasm, we’ll never know. CFIUS operates under the radar, out of the spotlight, in the shadows, and seems to treat its deliberations with the seal of the confessional.

But Bain and Huawei are undeterred. Despite the crash in 3Com’s share price (which this news has helped to recover somewhat), and without changing the percentage of Huawei’s investment, they have resubmitted the deal. What jumped out at me was the structuring of the deal “…to limit Huawei’s access to some core U.S.-related network products, including certain Ethernet technologies, which are essential for the communications between computers.”

Ethernet technologies essential for computer communications? In terms of the development of technology to support computer communications Ethernet is roughly analogous to the invention of the wheel or the adoption of agriculture. It came into use in the mid-seventies for local area networks and has reached the point where it’s being used for broadband. Companies all over the world manufacture Ethernet equipment (often via OEM agreements with China-based or Chinese manufacturers). So what’s the big deal?

There are only two things I could dig up that would seem to have some impact on national security concerns. The first is 3Com’s FIPS products: a network card and a firewall card, both for a PC. FIPS is a cryptographic standard maintained by the US government’s National Institute of Standards and Technology (NIST). Any kind of encryption equipment that the US government uses must be FIPS-140 certified. While the two products are FIPS-140-2 certified, they don’t implement the latest and greatest encryption algorithm, AES. However, because they are cryptographic products, they are subject to export restrictions.

Like any other sprawling organization (and it’s perhaps the biggest) the US government has a highly heterogeneous IT environment. There could be thousands of these cards installed under some program and still in use at sensitive sites. However, they don’t run the latest encryption and are probably being phased out anyways. 3Com probably gave up on them a while ago. So lock up the cabinets with the specifications, appoint a security-cleared special administrator for the files and documentation, and be done with it.

The other is a recent development at Tippingpoint: their intrusion prevention product now supports (at least in the marketing department) wire speeds of 10GB. That’s a very big pipe that they claim to be filtering.

Tippingpoint is going to be sold anyways, so I can’t imagine their latest gee-whizery would have much impact on approval.

I’m not sure, but I think that Bain and Huawei will have to go through another thirty day review period before CFIUS approves the deal. Assuming, of course, they do approve the deal. Smart companies like Bain don’t submit themselves to these proceeds out of bloody mindedness, they must be confident of approval.

And will everyone live happily ever after? Will the doubters of America’s free trade commitments be mollified? Has the speculated Chinese payback been averted? I don’t think so. The political and economic climates in both countries are bound to generate friction when all these elements are in play as with 3Com. It’s just another day in the life of a dysfunctional relationship between trading partners who need rather than trust each other.