Bain's effort to acquire 3Com on verge of collapse

Remember Dubai Ports World? Two years ago DPW acquired the U.S. assets of a U.K.-based port management company. The U.S. government agency which examines the acquisition of U.S. critical infrastructure by non-U.S. companies approved the deal, but a firestorm broke, and critics charged that it was not a good idea to have a Middle Eastern company run operations — including security operations — in major U.S. ports at a time when one of the major security worries is the use of cargo containers to smuggle weapons of mass destruction into the United States. DPW eventually sold its U.S. operations to AIG, making a healthy profit, but one result of the controversy is a tighter system of examining the national security aspects of any deal involving the acquisition by non-American entities of U.S. critical infrastructure assets.

Which brings us to this story, which is an update to a story we ran in October 2007, a story: Bain Capital LLC’s pending $2.2 billion purchase of Marlborough, Massachusetts-based 3Com was thrown into doubt— perhaps “further doubt” would be more accurate — after the leveraged buyout firm and its Chinese partner failed to settle national-security concerns with a U.S. government panel. Bain and Huawei Technologies withdrew their application to the Committee on Foreign Investment in the United States (CFIUS) after the panel raised questions about 3Com’s TippingPoint unit. TippingPoint sells security software used by U.S. government agencies. The move may signal the end of the effort to acquire 3Com, which also makes equipment for computer networks. If so, this would be but the latest in a lengthening series of private-equity buyouts which have foundered amid fears of a recession and limited access to debt financing. 3Com is trading about 42 percent below Boston-based Bain’s $5.30-a-share offering price. “We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction,” Edgar Masri, 3Com’s chief executive officer, said in the statement. 3Com and the buyers “remain committed to continuing discussions,” the statement said.

On 12 February Bain said it was willing to make concessions to win government approval. A U.S. House committee is investigating the transaction after lawmakers such as Senator Jon Kyl (R-Arizona) said the buyout would put 3Com’s anti-hacking software into Chinese hands. Eight Republicans, led by Florida’s Representative Ileana Ros-Lehtinen, the top Republican on the House Foreign Affairs Committee, had proposed legislation urging the administration to turn down the sale.

Bain told 3Com last year that it would value the company at $4.50 a share to $5 a share without the TippingPoint unit, according to a filing yesterday with the U.S. Securities and Exchange Commission. Bain, along with Huawei, agreed to buy all of 3Com for $5.30 a share. Huawei, based in Shenzhen, China, was founded by Ren Zhengfei, a former army officer. Under the original terms of the transaction, Huawei would get a 16.5 percent stake in 3Com, while Bain would own the rest. 3Com was halted in New York trading today, citing pending news. 3Com fell 26 cents, or 6.5 percent, to $3.73 at 4 p.m. yesterday in Nasdaq Stock Market composite trading.