Analyst Opening Statement: The following article was written March 15, 2008 in anticipation Bain Capital and Huawei Technologies (China) would resubmit their 3Com takeover application to the U.S. government foreign takeover review committee – CFIUS, about the same time as the 3Com Board meeting on March 21, 2008.
On March 20, 2008, the two entities abruptly (surprisingly - based on their previous statements indicating intent to resubmit) decided to apparently “not fight City Hall (i.e. CFIUS)”, and chose to completely abandon their takeover bid in its entirety, obviating the need for resubmission to CFIUS.
While the takeover by these two parties of 3Com has now been officially terminated, there remain interesting aspects and insights regarding the sensitive critical technology involved and the government CFIUS/FINSA review process which should be tabled if for no other reason to reflect upon and help CFIUS in future foreign takeover attempts of critical U.S. technology.
In fact, this specific 3Com situation should be considered a model or case study standard by which all future takeover (including foreign minority ownerships) attempts of critical U.S. technology and infrastructure be measured, evaluated and acted upon.
Therefore, the Analyst is publishing the article as “originally drafted” below, with NO changes, again noting to the reader it was written assuming the Bain/Huawei CFIUS application would be resubmitted, which has proven now to NOT be the case.
The Feb. 29, 2008 edition of the Wall Street Journal reported on a plan by Bain Capital and China’s Huawei Technologies to reapply for CFIUS approval of their joint takeover bid of 3Com.
Round 1 previously went to CFIUS, when Bain and Huawei withdrew their application on Feb. 20, 2008, fearing rejection from mounting opposition within CFIUS. Their apparent plan was to then address CFIUS concerns and resubmit. That initial submission anticipated CFIUS rejection even after factoring in Bain’s assurances to CFIUS that Huawei would not get control and no access to sensitive technology used by U.S. government agencies. Clearly and understandably, those assurances and guarantees were not sufficient to CFIUS.
Analyst Note: As the Feb. 20, 2008 Red Herring article notes, “3Com previously said Huawei would not have access to sensitive U.S. technology or U.S. government sales and that it would lack operational control or the ability to make decisions for the firm.”
This Analyst would then ask, what about access to similar technology information/insights sold to other buyers, and perhaps more importantly, access to the real crown jewel – “future technology” – vis-à-vis sensitive R&D, which even the U.S. has not seen or equipped its networks with?
Evidence the WSJ report, the Bain/Huawei duo will apparently make some application modifications in gearing up for Round 2 with CFIUS in their further efforts to acquire 3Com. Keep in mind though, the Analyst note above regarding key R&D et al.
This analysis provides insights into why in the interests of U.S. national security, this derivative 3Com takeover plan should be rejected by CFIUS too, and a third attempt not allowed.
For some quick background, as outlined in Part 2 of the Analyst’s 10 Part OpEd “Commulism Series”, there exists a government review structure and process regarding foreign entities seeking to acquire or gain controlling interest in U.S. companies/technology determined to have an impact on U.S. national security.
Formally reviewed under the Exon-Florio provision, this process now falls under the recently “upgraded?” E-F, called FINSA 2007. The Foreign Investment and National Security Act of 2007 (FINSA), was an attempt to upgrade the 1988 Exon-Florio Amendment (furthered amended by the 1993 Byrd Amendment) to the Defense Production Act of 1950. The impetus to upgrade E-F to FINSA, being two relatively recent events. The first, China National Offshore Oil Corp’s (CNOOC) attempt to takeover Unocal and the second, Dubai Ports World’s (DPW) attempt to take over management of U.S. ports.
The workhorse vehicle under FINSA 2007 (as it was under E-F), is the inter-agency Committee on Foreign Investments in the United States (CFIUS) chaired by the Secretary of Treasury. It can recommend to the President that an acquisition, merger or takeover of a U.S. entity by foreign interests be disapproved in the interest of national security.
CFIUS was apparently about to do just that in Round 1 of this battle, and why Bain/Huawei prematurely pulled their application prior to formal rejection, thereby leaving room to resubmit. The disturbing part of the first submission was that this proposed takeover of 3Com by Huawei and Bain Capital was not brought to CFIUS in mandatory fashion per FINSA, but rather voluntarily, and only then raised Congressional eyebrows.