3Com renegotiates with Bain, Huawei to address U.S. concerns

Feb.29, 2008 in Market Outlook

3Com renegotiating with suitors Bain, Huawei

Parties try to tackle U.S. security issues; shareholder vote off

By Jeffry Bartash, MarketWatch

Last Update: 9:18 AM ET Feb 29, 2008

WASHINGTON (MarketWatch) — Shares of 3Com Corp. rose as much as 25% in premarket
trading Friday, gaining on news that the networker continues to work on securing
the sale of the company to a U.S. investment firm and its Chinese partner.

Earlier this month, 3Com (COMS) and the two prospective buyers withdrew an
application with a federal oversight panel that investigates mergers involving
foreign companies. Concerns raised by the panel over Chinese participation have
threatened the $2.2 billion deal.

Late Thursday, 3Com said it continues to negotiate with the two buyers, Bain
Capital Partners LLC and Huawei Technologies Co., on ways to address concerns
about national security. The three companies could soon refile a new application
with the Committee on Foreign Investment in the United States, an arm of the
Treasury Department.

As a result, Marlborough, Mass.-based 3Com said investors would not vote on the
proposed sale at a shareholders meeting previously slated for Friday. The meeting
would be convened and immediately adjourned without a vote.

The shareholders meeting has been rescheduled for March 7, 3Com said.

Shares of 3Com, which closed Thursday at $2.91, last traded at $3.52 ahead of the
bell. The stock fell 23% on Feb. 20, when the company withdrew its initial
application with CFIUS.

While the negotiations are ongoing, 3Com cautioned: “There can be no assurance
that these discussions will not adversely affect the terms of the pending merger
transaction, including valuation, or that these discussions will result in an
alternative that adequately addresses CFIUS’ concerns.”

Under the renewed negotiations, the three companies were looking for ways to
minimize the role of Huawei in parts of 3Com’s business that serve the federal
government.

Although it’s a relatively small player in the networking market, 3Com sells
anti-hacking and other network-security services to the Defense Department.

The U.S. has been particularly sensitive about foreign ownership of
communications assets, especially in light of repeated attempts to hack the
nation’s defense systems. Chinese-based hackers are viewed as a major concern.

The little-known CFIUS, part of the Treasury Department, monitors the effects of
cross-national mergers and can block deals if it believes the nation’s security
would be placed at risk. Only rarely has the agency taken that step, however.

Huawei is the largest networker in China and a company with links to the
mainland’s communist government. Huawei is run by a former mid-ranking officer in
the Chinese army whose firm has raised the ire of the U.S. government and Western
rivals such as Cisco Systems Inc.

Under the prior agreement Huawei would have gained a 16% stake in 3Com, with Bain
Capital Partners owning a majority stake. Boston-based Bain was founded by former
Republican presidential candidate Mitt Romney, though he’s no longer involved
with the firm.

Yet some politicians in both parties have raised public opposition to the deal
and the pending presidential election looms as another potential obstacle. Some
lawmakers believe Huawei has been working with its government to undermine
Western interests.

Did you like this? If so, please bookmark it,