3Com Huawei Transaction to be Reviewed by CFIUS

October 9, 2007. 3Com announced on September 27, 2007, that "it has signed a definitive merger agreement to be acquired by affiliates of Bain Capital Partners, LLC, a leading global private investment firm, for approximately $2.2 billion in cash". See, 3Com release and Huawei release.

This transaction will be reviewed by the Committee on Foreign Investment in the United States (CFIUS).

Bain Capital is a private investment firm based in Boston, Massachusetts, that also has offices in the People's Republic of China (PRC). The affiliates of Bain include Huawei companies, in the PRC.

3Com stated in a Form 8-K filed with the U.S. Securities and Exchange Commission (SEC) on October 4, 2007, that "it will make a joint voluntary filing of this transaction (together with Bain Capital) with the Committee on Foreign Investment in the United States, or CFIUS. CFIUS, an inter-agency committee chaired by the Secretary of the Treasury, reviews foreign investments in U.S. companies to determine whether they might pose a threat to U.S. national or homeland security." (Parentheses in original.)

3Com added in this SEC filing that "3Com and Bain Capital believe that the transaction will not result in foreign control of the new company and does not pose a threat to U.S. national or homeland security."

3Com wrote in its Form 10-Q, filed on October 9, 2007, that the CFIUS "will review this transaction and could recommend that the transaction be changed, or blocked by the President, on national security grounds. On October 4, 2007 we announced that we will make a joint voluntary filling (with Bain Capital) of this transaction with CFIUS."

CFIUS. The secretive CFIUS is the instrument by which the US government blocks foreign investment in, and acquisition of, certain technology companies.

See, story titled "Senate Banking Committee Holds Hearing on CFIUS" in TLJ Daily E-Mail Alert No. 1,230, October 10, 2005, and story titled "Deputy Treasury Secretary Discusses CFIUS" in TLJ Daily E-Mail Alert No. 1,479, October 31, 2006.

Entities affected by certain transactions also invoke the CFIUS process in pursuit of protectionist objectives, with some success.

There are previous examples of foreign companies acquiring interests in US information and communications technology companies, such as Alcatel's acquisition of Lucent.

Huawei. 3Com disclosed in its release that "As part of the transaction, affiliates of Huawei Technologies will acquire a minority interest in the company and become a commercial and strategic partner of 3Com."

A Wikipedia entry for Huawei states that "Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner. Both the government and the military tout Huawei as a national champion ..." (Entry reviewed on October 9, 2007.)

Huawei also has a history of incurring claims of intellectual property theft. On January 23, 2003, Cisco Systems filed a complaint [77 page PDF scan] in U.S. District Court (EDTex) against Huawei America, Huawei Technologies, and FutureWei alleging patent infringement, copyright infringement, trade secret misappropriation, and other claims.

The complaint alleged that "This is an action arising from Defendants' systematic and wholesale infringement of Cisco's intellectual property. Huawei, a Chinese company, and its wholly owned United States subsidiaries, Huawei America and FutureWei, manufacture and offer for sale a line of network routers designed to compete with Cisco's network routers."

The complaint continued that "Unlike Cisco, however, which invested substantially in the development of its own proprietary router technology and software, Huawei has chosen to misappropriate and infringe Cisco's intellectual property in an attempt to develop a cheaper, inferior router which Huawei claims is compatible with Cisco's routers. In doing so, Huawei and its U.S. subsidiaries have shown a complete disregard for Cisco's intellectual property rights and the laws which protect those rights."

Cisco also alleged in its complaint that "The extent of Defendants' copying and misappropriation of Cisco's intellectual property is staggering. Defendants have copied Cisco's patented technologies; they have copied the copyrighted user interface for Cisco's routers; they have made verbatim copies of whole portions of Cisco's user manuals; and there is overwhelming evidence that they unlawfully gained access to Cisco's source code and copied it as the basis for the operating system for their knock-off routers. Cisco brings this action to enjoin this wholesale theft of its valuable intellectual property and recover the substantial damages it has incurred from Defendants' illegal conduct."

See also, story titled "Cisco Sues Huawei and FutureWei" in TLJ Daily E-Mail Alert No. 591, January 27, 2003, and Cisco release.

National Security. Critics of the transaction have argued that it threatens US national security. For example, on October 3, 2007, Rep. Thaddeus McCotter (R-MI) spoke in the House in opposition to the deal.

He said that the CFIUS "must review and block Bain Capital and Communist China's Huawei Technologies' deal with the 3Com Corporation. If approved, Communist China's Huawei Technologies stake in the 3Com Corporation will gravely compromise our free Republic's national security."

He explained that 3Com "is a world leader in intrusion prevention technologies designed to prevent secure computer networks from hacker infiltration, and our Department of Defense extensively utilizes them. These technologies were severely tested this June when Communist China hacked into our DOD's computer networks and caused a shutdown. Given this and other instances of Communist China's persistent cyberwarfare against us, approving this sale would be an abject abnegation of CIFUS's duty to protect America's vital defense technologies from enemy acquisition." See, story titled "DHS Computers Compromised by Hackers" in TLJ Daily E-Mail Alert No. 1,645, September 25, 2007.

Rep. McCotter continued that "Few doubt the aims of Communist China's Huawei Technologies, which was set up in 1988 by a People's Liberation Army officer to build military communications networks."

He elaborated that "At the start of this decade, Huawei violated U.N. sanctions and illegally provided a fiber-optic network to Iraq. This network linked the Iraqi military's air defense network. Moreover, the CIA-led Iraq Survey Group's final report concluded Huawei illicitly participated in providing transmission switches for Iraq's fiber-optic communications. In August 2001, this Chinese-made fiber-optic network was bombed because it was part of the Iraqi air defense missile sites firing at U.S. and allied aircraft which were enforcing a no-fly zone. And also, for the record, this company found time to help the Taliban too."

He concluded that if the "CIFUS approves this sale and its accompanying sensitive defense technologies to Huawei, it will place in Communist China's cyberhacking hands some of the most sensitive technologies employed for our high-tech defense". He urged the CFIUS "to do its job and block this deal". See, Congressional Record, October 3, 2007, at Page H11226-7

The transaction also requires approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.