This “non-mandatory filing” was confirmed in an Oct. 15, 2007 FinanceAsia.com article stating “Private equity firm Bain Capital has followed its September 28 announcement that it will, along with China’s Huawei Technologies, buy 100% of 3Com with a ‘voluntary filing’ on October 12 to the Committee on Foreign Investment in the United States (CFIUS).
The voluntary nature of this as opposed to being mandatory is clear confirmation of a huge flaw/weakness in the FINSA “covered transaction” language, as the deal technically did not automatically trigger a FINSA/CFIUS application, and therefore need not have been formally submitted….and theoretically could have been consummated.
If Bain/Huawei followed FINSA language to the letter of the law, CFIUS would officially never have engaged the issue, at least formally through FINSA. Bain/Huawie, however, sensing the potential sensitivity of the deal, apparently decided discretion the better part of valor and best to pro-actively submit the deal to CFIUS rather than have to react to someone’s questions down the road. Clearly understanding that the greater the appearance of being forthright and “transparent?”, indeed enhances the “legit factor”. In other words, classic employment of the “best defense is a good offense” strategy.
It too is a clear case of yet another Chinese (government) probe of the U.S. national security CFIUS firewall, this time trying a new cocktail (combo) tactic and employing it against FINSA 2007. That being a minority Chinese interest buried behind a legitimate majority interest U.S. front.
So if the deal was not a mandatory CFIUS submission per FINSA, then technically this proposed takeover did not fit the “covered transaction” trigger for CFIUS review, since it was only a “minority interest” (not control/acquisition) by the Chinese “foreign entity” Huawei. Bain, the U.S. partner, had the majority.
Here’s the FINSA “covered transaction” trigger language:
A “covered transaction” includes a merger, acquisition, or takeover by or with any foreign person that could result in foreign control of any person engaged in interstate commerce in the United States”.
Analyst Note: Focus on the “that could result in foreign control” part. That’s not technically triggered in the 3Com takeover, unless Bain “then” decided to sell its desired 80% or so controlling/majority interest to Huawei or another foreign entity, which then in “mandatory” fashion per FINSA, automatically triggers a CFIUS review. Instead, Bain has made it abundantly clear they have no intention to do so (i.e. give or sell Huawei a majority/controlling interest), and Huawei has made it abundantly clear it has no interest in a controlling interest or majority ownership.
Analyst FINSA Conclusion: FINSA has a (several) gaping hole(s).
So who is Huawei and what does it really want, if not a controlling interest?
The Jan. 6, 2008 edition of the Washington Post sheds some light, noting:
…..”From a fortress-like corporate campus in this southern city (Shenzen), retired army officer Ren Zhengfei is building one of China's most successful experiments in capitalism (Analyst adds this being the raw essence of “Commulism”). A mammoth operation with 70,000 employees and strong backing from the state, Huawei Technologies brags that its goal is to dominate telecommunications equipment markets all over the world.
It’s current focus: America.
Three months ago, Huawei teamed up with Bain Capital Partners in a $2.2 billion takeover bid for U.S. networking pioneer 3Com Corp., a Marlborough, Mass., company that makes systems to protect against computer hackers.”
Prior CFIUS probes of Exon-Florio by the Chinese (e.g. Unocal, AMSAT, etc) as the Analyst noted previously in the “Commulism Series”, resulted in the Chinese concluding they do not have to own or control to get what they want – i.e. information, expertise and technology.
In the specific 3Com case, they began with that learned “under the CFIUS radar” minority interest approach. Huawei then added (i.e. Chinese government experimented with?) another component or “distancing complexity”, a U.S. front, to create legitimacy vis-à-vis a mixed cocktail like masking veneer. Given the sensitivity of the 3Com technology and Huawei’s less than admirable reputation, coupled with a very poor track record as respects suspected links to the Chinese government and Chinese espionage agencies, and intellectual property lawsuit with CISCO, Huawei chose to then further shield itself from potential scrutiny, hiding behind a reputable (U.S.) front – Bain Capital.
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