The CFIUS has the right ôto suspend or prohibit any foreign acquisition, merger or takeover of a US corporation that is determined to threaten the national security of the United Statesö. The Committee was established under the Ford regime in 1975 but gained prominence and power under the Reagan administration in 1988. Deals can be voluntarily submitted to the CFIUS, as Bain/3Com have done, but the committee also reviews transactions which it, in its own wisdom, determines could be prejudicial to national interest.
Past cases reviewed by the CFIUS include the proposed takeover by China National Offshore Oil Corporation's (CNOOC) of UNOCAL and Dubai Ports World's acquisition of P&O. Both deals were controversial and the former was finally dropped by CNOOC while issues relating to the latter were resolved only when Dubai Ports sold the assets in question to a US investor.
But, to put the role of the CFIUS in perspective, it has reviewed and approved more than 1,600 cases, while approvals were withheld in select instances.
The CFIUS is chaired by the secretary of treasury. In an interesting aside, Hank Paulson who currently holds this position is likely to excuse himself from deliberations on the Bain-3Com submission because he was a career Goldman Sachs banker before he joined the government. Goldman Sachs is advising 3Com on the sale to Bain.
The terms of the agreement between Bain and Huawei give the Chinese firm a 16.5% equity stake in 3Com, with an option to increase this ownership to 21.5%. The Shenzhen-headquartered firm will have three directors on the board out of a total board strength of 11. HuaweiÆs ability to negotiate board representation proportionately higher than its ownership interest, reinforces how critical HuaweiÆs involvement in the deal is.
Huawei can exercise the option to increase its stake by 5% based on certain performance criteria, but will not get additional board representation even with a higher holding. And HuaweiÆs influence over 3Com will be limited to board representation.
ôUS persons and a US company will be in complete control of 3Com. Huawei will have no operational control over 3Com and no ability to make decisions for it,ö explains Bain in the filing, which was submitted jointly by the private equity firm and target company, 3Com.
Bain said it ôis committed to working with US officials to satisfy them that the transaction presents no risks to US national securityö. It also clarified that Huawei will not have any access to sensitive US-origin technology or US government sales as a result of the deal.
The private equity firm emphasised that 3ComÆs commitment to operating in an environment of strict checks and balances, with strong adherence to maintaining confidentiality, stemmed from senior most levels at the firm and that Bain was committed to continuing with best practices at 3Com after the takeover.
In the statement, Bain also said it ôis confident CFIUS will conclude that the company (3Com) remains firmly in the control of an American firm, has only a small minority foreign shareholder, and that the transaction presents no riskö.
Neither 3Com representatives nor BainÆs corporate communications firm responded to requests for clarification.
Bain reiterated that ô3ComÆs future success is highly dependent on its Chinese business unit (H3C), and the companyÆs commercial relationship with Huawei is important to 3ComÆs growth and operations in China and other emerging markets.ö
The jewel in the crown for 3Com is its China subsidiary, H3C, from which 3Com derived 50% of its $1.3 billion revenue in 2007 and its entire 2007 profit. A substantial part of the $2.2 billion value Bain is paying for 3Com is attributable to H3C.
Specialists also comment that BainÆs commitment to moving forward with the IPO of the TippingPoint division of 3Com could allay many of the national security fears which are being expressed. TippingPoint makes anti-intrusion software and holds the sensitive US department of defence contracts.
On TippingPoint specifically, Bain clarified: ôIts products are primarily sold through resellers and are sourced from contract manufacturers. TippingPoint is a stand alone business unit, and Huawei will have no involvement in its operation, or access to its technology.ö
For the Citi-led consortium of banks that is funding the LBO, TippingPoint is unlikely to be critical to the loans, making it easy for Bain to dilute its ownership of the division. The lending by the banks is primarily based on H3C cash flows.
The good news for the deal is that the CFIUS sets itself quite stringent timetables for its reviews so should announce its decision before the end of the year.
In the meantime, a number of US politicians for whom HuaweiÆs role in the transaction has become their new bugbear against foreign investment and specifically against deals involving China, will continue to try to grab newspaper headlines as they attempt to garner anti-deal support.
But specialists, who are confident that the US is committed to open markets, are hopeful the resistance will take the form of only rhetoric and the deal will finally go through.
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