That’s what this Analyst argues Huawei covets and seeks - 3Com (Tipping Point) technology and expertise, and NOT as it and other parties in the 3Com takeover deal purport – increased business revenues and market share. That façade interest by Huawei (i.e.Chinese government) is akin to Iran’s “nuclear for peaceful purposes only” sham. There’s indeed another hidden agenda, masked by the takeover ownership structure. While Bain clearly sees the money, it’s apparently equally blinded to the hidden (real) Huawei agenda. If so, an argument to be made that Bain is being played like a pawn or a fiddle. If so, then either a seemingly appropriate characterization.   

Bottom line, consider the CFIUS opportunity to engage this takeover attempt in Round 1 a very lucky national security save, if not arising solely from complete dumb luck (i.e. Bain’s unnecessary CFIUS submission). Without new changes to FINSA, the next time (future takeover and/or Chinese minority interest deals) might likely not yield such a good result, as the Chinese won’t ever again allow their (U.S.) front company to submit to CFIUS if it’s not legally required per FINSA, as the case illustrated here using a majority interest U.S. front.

Therefore, the only way to ensure/guarantee automatic CFIUS submission in the future to prevent another 3Com from “legitimately” falling through the cracks is to change (fix) the covered transaction definition. How and what to do to fix that triggering definition as well as the rest of FINSA 2007 will be provided in Part 10 of the “Commulism Series”.

As for Round 2 with Bain/Huawei, the Feb. 29, 2008 Wall Street Journal notes:

“Bain Capital and China’s Huawei plan to resubmit their application seeking U.S. approval for their planned buyout of 3Com….the new transaction would still leave Huawei with a minority 16.5% interest and Bain the rest…..Bain and Huawei previously said that they would be wiling to sell the unit that handles the contracts with the U.S. government (i.e. internet intusion technology). The business called Tipping Point, wouldn’t be sold until after CFIUS approves the deal.”

Analyst Note: The key here is “wouldn’t be sold until after”, meaning the logical sequence “if” CFIUS approved the deal, would be purchase of 3Com by Bain/Huawei and “then” sale (by Bain/Huawei) of Tipping Point. Goldman Sachs has already been involved from the get go advising 3Com on this deal as well as options/buyers for selling Tipping Point. It appears at this juncture however, based on the WSJ article, that this subsidiary unit may not be sold however until “after” any CFIUS approval, and therefore de-facto purchase of 3Com by Bain/Huawei. Then as with any effort to divest a major asset, it will take time to sell and consummate, leaving Huawei the “2 (or more) Day R&D Play” or “2 day R&D facilities/record intelligence gathering shopping spree” access time it needs. With a 16.5% interest in a $2.2 billion deal, that then equates to a cost of approx. $363 million ($181.5 million per EID (“Equivalent Intelligence Day”)) to completely sanitize and decipher Tipping Point’s R&D. A real “steal” given the stakes.

Huawei's perceived motives and tactics not dissimilar to the precedent setting, brief period China took to go through the captured U.S. Navy P-3 anti-submarine warfare plane, and picked that sensitive technology clean.  

Recall the widely reported and publicized forced landing of a highly sophisticated U.S. Navy P3 antisubmarine plane in 2001 by the Chinese Air Force onto Chinese soil, and one can further see why the Chinese are moving so fast up the technology learning and development curve. Specifically as respects the P3, the Chinese at complete U.S. objection, took it completely apart and with their science and intelligence agencies, comprehensively went through every nook and cranny before returning it piecemeal in boxes, leapfrogging their technology base 10-20 years or more on many fronts. They didn’t want the hardware. They wanted the technical knowledge. Interestingly, the average American voter myopically failed to see the sheer magnitude and longer term collective implications and ramifications of this incredibly sensitive and now compromised technology, instead thinking simply getting the plane carcass back in a box was the victory.

The same type of case scenario seems to be developing here. In this case, the target in this Analyst’s opinion, is not a technology laden and bristling P3 aircraft or even the entire 3Com company. Rather its Tipping Point R&D.

Once Huawei (Chinese government) gets what it wants, the expectation should be they will lose all interest in Tipping Point and reaffirm to this Analyst they never had any apparent interest whatsoever in the rest of 3Com, and sell their share of the carcass the same as the Chinese military gave back the nuts and bolts of the Navy P3.

Bottom Line:

The really disconcerting aspects in all this are that a) The 3Com deal could have legitimately sneaked through the FINSA 2007 loophole, and b) the Chinese are elevating their play, now seeking to hide behind legitimate U.S. fronts to get what they want – technology/expertise/R&D, NOT revenues and market share.

It’s important CFIUS look past the weak FINSA language now and recognize the hidden intent/agenda of this transaction by Huawei (i.e. Chinese government) and deal a Round 2 blow to this deal as well.

Assuming CFIUS rejects the deal to protect national security interests from the outlined stealthy intent, and while the Chinese may not have succeeded in this particular foray, they did learn a few more important tricks to use next time, in their unrelenting efforts to succeed (circumvent) against FINSA/CFIUS. They are indeed advancing rapidly up the CFIUS learning curve to identify loopholes in the new FINSA regulation, setting the stage for major sensitive technology and/or strategic expertise acquisitions in coming months and years, right under CFIUS’ nose.

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