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The China Factor: Bain-3Com Deal Withdrawn

Posted on Wednesday, Feb 20th 2008

I reported on Bain’s proposed acquisition of 3Com when it was announced in late September.

The deal has been withdrawn due to objections from the Committee on Foreign Investment in the United States (CFIUS). 3Com’s Tipping Point business unit supplies sensitive monitoring equipment to the US Government’s Defense Department.

Chinese company Huawei was to be a minority owner of 3Com as part of this transaction, and clearly, the strategy had been to leverage the China cost-structure to compete against Cisco, especially in the emerging markets.

My understanding was that the plan was always to divest Tipping Point. It seems, everything would have been hunky dory if 3Com completed the divestiture before applying for the US Government’s permission to clear the Bain deal.

This also raises a broader question, though. Most of the hardware and chips that the US sells / uses comes from China. What are the security loop-holes in the entire eco-system of China-based manufacturing of mission-critical hardware and semiconductors?

Should the US stop import of China-manufactured electronics altogether, especially where those products touch the networks and computers which in any way, shape, or form, touch the US Government?

Where should the lines be drawn?

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Remember when CNNOC wanted to buy Unocal which had 70% assets in natural gas in the Southeast Asia area. Because it was gas and far away, US was not consuming those gas. CNNOC would spin off any asset anywhere near or on the US soil. But CFIUS rejected it for national security reason. But for years, there was no objection over national security by the Southeast Asia countries when a US owned Unocal operated in their backyard.

Cisco equipment is in every Chinese telecom company. That seems to be OK with the Chinese. But Huawai wanted to buy 16% of a former partner-3Com, with equipment focused mainly on SMEs, and somehow the national security alarm bell is ringing. More importantly, majority of 3Com’s business without Tipping Pointing is already in China with Huawai being the biggest customer. So how is a Chinese company buying 16% of a company already doing most of its business in China become a national security risk to the US.

I am not saying that national security is not important, but CFIUS is a place for politicans to grandstand and give all of us a snow job.

Buzzly Wednesday, February 20, 2008 at 5:00 PM PT

Cisco lobbied well, don’t you think?

Sramana Mitra Wednesday, February 20, 2008 at 7:29 PM PT

This deal will be stonewalled by CFIUS no matter how hard the parties try to retool the deal because it isn’t about National Security. It’s about an inherent distrust and/or dislike of China by members of Congress. Thaddeus McCotter, a ranking House Republican and chair of the Republican Policy Committee, has equated China with pre-war Nazi Germany and says that our free trade with them is in line with Britain’s appeasement of Hitler in the late 30’s. Politicians who have never even been to China to witness the amazing growth and evolution of the country (which can only be compared to our own industrial revolution but on an accelerated scale) past Maoist devastation and into a free market powerhouse, yet continue to foster and vocally express outdated, xenophobic sentiments, are doomed to damn progress that can and should be made.

chrispy Thursday, March 6, 2008 at 11:47 AM PT

and yes, Cisco did some very aggressive lobbying. With their market share in Lat in jeopardy due to some execs who ended up on the wrong side of the law down there, you had to bet they would put on the full court press on this one. Huawei is the only company truly positioned to topple the great white elephant in the room…and this 3Com deal is an integral part of that strategy.

chrispy Thursday, March 6, 2008 at 12:04 PM PT

Cifius is under the control of USA intel services; no problem in reality existed concerning national security, except the fbi wanted to turn the Bain deal into an intel operation in order to put agents on the street and in the corp offices in China. The fbi failed in the intel coup because coms would not play ball; the Chinese are aware of the fbi’s spy games with respect to the 3Com-Huawei deal, and the parties ultimately gave up on the deal because the fbi would not stay out. Bain could have sold off Tipping Point, but Bain discovered too late that Tipping Point was only the tip of the intel ploy in play.
The fbi and the cia care not about the economic viability of USA companies; the fools in USA’s intel services are interested in blackmail, murder, torture,etc., of perceived adversaries of our corrupt government and cultule.

geral Monday, November 17, 2008 at 9:34 AM PT