Update: Security issues scuttle Bain/Huawei bid for 3Com

A deal for Bain Capital Partners and China's Huawei Technologies to buy 3Com is on hold because the companies were unable to come to agreement with the U.S. Committee on Foreign Investment in the United States (CFIUS) about security concerns.

The three companies have withdrawn their joint filing with CFIUS, although they remain committed to continued discussions, they announced Wednesday.

The proposed $2.2 billion deal, announced in September, raised security concerns because of networking giant Huawei's close ties with the Chinese government. Under the proposed deal, Bain would have gotten an 83.5 percent stake in 3Com and Chinese networking giant Huawei Technologies would have gotten the remaining piece. CFIUS, part of the U.S. Department of Treasury, is investigating whether the investment by Huawei poses a risk to U.S. national security after Bain voluntarily submitted the deal for review in October.

"We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction," Edgar Masri, president and CEO of 3Com, said in a statement. "While we work closely with Bain Capital Partners and Huawei to construct alternatives that would address CFIUS' concerns, we will continue to execute our strategy to build a global networking leader."

Among the critics of the deal was U.S. Representative Thaddeus McCotter, a Michigan Republican. Huawei's stake in 3Com, which markets intrusion detection systems, would "gravely compromise" U.S. national security, he said in a House floor speech in October. The U.S. Department of Defense uses 3Com intrusion detection products, and Chinese hackers have targeted the agency, McCotter said.

The companies had argued that Bain Capital, based in Boston, would have a controlling interest in 3Com. "Bain Capital will be able to make all operational decisions for the company, to set budgets, to spend money, to make investments, and to hire and fire personnel," 3Com said in an October filing with the U.S. Securities and Exchange Commission. "Huawei will not have any control over the operation of the business."

The companies could still put together a new proposal and take it back to CFIUS, said Christopher Wall, a partner in the international trade practice at the Pillsbury Winthrop Shaw Pittman law firm who is based in Washington, D.C. With cases like the 3Com one, there are often concerns about technology transfer to other countries, but Bain, Huawei, and 3Com could come back with a proposal to limit tech transfer, said Wall. Neither Wall nor his firm is involved in this case.

The companies could also work out a deal with less Huawei involvement, he added.

Wall wasn't surprised about the security concerns surrounding the deal, given that the U.S. Department of Defense uses 3Com networking products, and U.S. officials have accused Chinese hackers of attacking U.S. government sites. "People are obviously going to be on high alert when it comes to China and computer security issues," he said. "I can easily see why people would be very concerned about any Chinese role in a transaction involving that kind of technology."

This story was updated on February 20, 2008