3Com, Bain Merger Hits Snag

Amid political and national security concerns, 3Com and Bain Capital Partners withdrew their joint filing to the Committee on Foreign Investment in the United States (CFIUS) concerning their proposed merger transaction, a deal that would give China-based Huawei Technologies a more than 16 percent stake in the networking vendor.

The groups said they will continue merger discussions and the withdrawal doesn't mean the buy-out has gone bust.

VARs, however, were surprised by the withdrawal and wonder if this is the latest in a series of missteps by Marlborough, Mass.-based 3Com that could sour the merger and lead to the company dropping off the map.

"I like 3Com and I like a lot of things 3Com does," said Sean Johnson, business development manager for Hayes Computer Systems, a Tallahassee, Fla.-based solution provider. "They've made some missteps here and there, but I was hoping the whole Bain agreement might bring back some stability."

Late last September, 3Com's Board of Directors unanimously approved a definitive merger agreement under which 3Com would be acquired by affiliates of Bain, a Boston-based private investment firm, for roughly $2.2 billion in cash, with minority ownership going to Huawei Technologies. The parties voluntarily submitted the proposed transaction to the CFIUS, which monitors and reviews international mergers and can block deals if it feels national security may be at risk.

The CFIUS was poised to examine Huawei's part in the merger. Huawei is China's largest networking company and reportedly has links to the communist government. Under the Bain merger, Huawei would take more than a 16 percent stake in 3Com. 3Com, on the other hand, does business with the US government and its TippingPoint network security arm sells into the US Department of Defense, a potential red flag that could call into question national security and stall the acquisition.

Johnson questioned whether fear of giving a Chinese vendor a stake in the U.S. and European markets, especially when network security is involved, raised enough political and national security concern to stymie the deal and prompt 3Com and Bain to withdraw their CFIUS filing.

"I wonder if this withdrawal is mainly because of political and national security," he said. "You don't just withdraw unless there's something big going in. That's pretty serious."

In response to some concerns, top 3Com sales and channel executives had recently indicated to partners that the companies planned to divest the TippingPoint division in order to push the deal through.

"They told us they were looking to divest the TippingPoint piece, and that seemed like the right move," said Frank Kobuszewski, vice president of the technology solutions group at Syracuse, N.Y.-based solution provider CXtec, recalling a conversation he had with 3Com executives within the past few weeks. Bain last week had offered to divest TippingPoint, according to a Reuters report that cited an unnamed source.

3Com representatives could not be reached for comment.

In a statement, 3Com president and CEO Edgar Masri said, "We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction. While we work closely with Bain Capital Partners and Huawei to construct alternatives that would address CFIUS' concerns, we will continue to execute our strategy to build a global networking leader. We remain focused on serving our growing base of worldwide customers and providing them with innovative solutions that deliver long-term investment for their network infrastructure and offer them a lower total cost of ownership."

Kobuszewski said he would be disappointed if the 3Com buy-out gets scuttled.

Johnson agreed, but said he will take a "wait and see approach." The withdrawal, he said, should have little immediate impact on his current 3Com business, which he said has remained steady.

"We'll see what happens," he said. "We want to believe in 3Com. We want to see them succeed. And we want to be a part of it. But f this deal fails, is 3Com close to death's door?"

Johnson added that even after the possible Bain merger was announced last fall, he closed several 3Com deals. Customers, he said, didn't appear concerned about the merger as long as product support remained intact and new products were being introduced.

"This isn't something where I'm freaking out," he said. "I'm not freaking out. I'm not impatient. Let's see what happens six months from now or a year from now."