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China (392) Technology (308) National Security (235) Espionage (27) Commulism (15) Exon-Florio (2) FINSA (2) CFIUS (1) Huawei (1)
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If the 3Com deal is CFIUS approved, the Chinese will then view it as a green light and unleash a flood of acquisition efforts on critical U.S. technologies and infrastructure. This specific 3Com deal, important in and of itself, is uniquely pivotal in the aggregate big picture and results of future deals. In other words, its CFIUS’ opportunity to draw a line in the sand for others not to cross, or if not simply putting up an open no pay toll gate, with the hordes rushing through. The 3Com takeover attempt is but one more probe of many more to come by the Chinese (and Russians). With national security at stake each time, it’s time to close and zip shut the FINSA 2007 loopholes. The Analyst provides detailed FINSA 2007 analysis and recommended “covered transaction” and other FINSA conditional language changes in Part 10 of the “Commulism Series”, coming soon. These to form the basis for an Analyst proposed next generation “FINSA 2008”. This 3Com situation provides a unique tipping point in how to deal with future efforts to circumvent FINSA and secure sensitive U.S. technology and/or expertise. In the 3Com case, it is strongly recommended that CFIUS tip this away from Huawei/Bain and towards shoring up potentially jeopardized national security. In doing so, preventing a major national security breach in this specific instance, as well as sending a message to future potential “front” companies like Bain to savvy up and get their priorities straight and (deeply not superficially) think national security before money. And the message to the Chinese - think twice before ever trying this “stealthy end run” again - period. Alternatively, if CFIUS really wanted to test Huawei (Chinese government) sincerity (or lack thereof), and as a way to prove and/or test of the Analyst’s assessment and conclusions, CFIUS could okay the deal subject 3Com selling Tipping Point BEFORE the Bain/Huawei deal consummates. Meaning Bain/Huawei would for sure NEVER get any access whatsoever into Tipping Point (i.e. no key card entry to any facilities at all, up to and including janitorial). That framework would be reinforced by CFIUS demanding 3Com completely honor that national security access firewall and access restriction on Huawei – to everything. Without Tipping Point (i.e. IPS technology R&D access), there is nothing else in this deal Huawei wants and you will likely see a very quick exit by Huawei from the deal, and Bain stuck with 100% of what’s left of 3Com (ex Tipping Point), proving the Analyst’s assessment. And since Bain’s apparent intent or objective in the deal is very different than Huawei’s perceived intent, that is respectively making money vs. accessing sensitive technology R&D, a withdrawal by Huawei changes everything for Bain too. Bain’s strategic business plan in this deal was to leverage Huawei’s minority ownership and involvement, and its existing entrenched Chinese market access, into enhanced Chinese market access for 3Com. That penetration access for 3Com by Huawei leading to greatly increased 3Com earnings to meet the deal’s proforma investment objectives. Therefore, if 80% or so ownership was perceived by Bain as winning the lotto, 100% ownership becomes tantamount to blowing the welfare check, and nothing to show. Without Huawei, their access to and goal of penetrating the Chinese market arguably all but disappears. Therefore, if Huawei walks out of the deal, Bain would presumably not be far behind. Original Article End Late Breaking Concern (add-on to the original article): The Analyst concluded that all Huawei seeks is access to 3com R&D, specifically Tipping Point’s. Ironically, because of the now defunct takeover deal, evidence the March 24, 2008 Masri (3Com CEO) also said that to address declining sales, the company will undergo restructuring efforts that include moving research and development functions to China….”. Bottom line, what CFIUS tried to prevent with a partial Huawei ownership deal may now have triggered a move to make it drastically easier for Huawei and the Chinese government to infiltrate and get access to what they seek, assuming this geographic R&D re-positioning move to China includes Tipping Point R&D. CFIUS/FINSA provides no apparent national security firewall to a company moving its own critical technology R&D to foreign countries, and particularly those with aggressive espionage operations against the United States, like China. In effect, this development exposes THE most gaping hole in FINSA/CFIUS, as there is no triggering “inter-party” covered transaction to act upon “if” 3Com moves forward with this “intra-company” action. To the Readers: Recommend you contact your Congressional representatives to amend FINSA, as the gaps ultimately affect both your and your children’s future national security. In fact, make it easy on yourself and just simply send them this article and demand an answer.
Brock Novak is a freelance Global Issues Analyst (GIA), credited with coining the contextual term "Commulism", and creating the "Commulism Response Framework" (CRF).
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