Bain Capital Partners said it will submit for a national security review its proposed $2.2 billion buyout of networking equipment maker 3Com Corp.
Government scrutiny was anticipated ever since the acquisition was announced Sept. 28 because of a minority stake in the deal held by Chinese telecommunications company Huawei Technologies, which has close ties to China's government.
Companies usually submit deals to the federal Committee on Foreign Investment in the United States as a defensive measure. The government can unwind deals that were not reviewed if federal agencies later determine they pose a threat to national security.
"The government has the ability to stop a deal," said Craig King, an attorney at Arent Fox LLP. "So companies voluntarily submit to get assurances that the deal won't be stopped or unwound later."
CFIUS, a 12-member group of key economic officials at the White House and several Cabinet-level officials, was created in 1988, but has been much more active following the Sept. 11, 2001 terrorist attacks six years ago in investigating potential national security issues surrounding proposed deals involving foreign buyers.
Legal analysts say the government's review of the deal will center on whether Huawei, with its planned stake in 3Com of less than 20%, will have shareholder voting rights, seats on the board or access to technology.
In a statement, Bain Capital, a Boston-based private equity firm, said "we believe the U.S. government review in this matter will conclude that the company will be firmly controlled by an American firm, have only a small minority foreign shareholders, and the deal presents no risks to national security."
Bain was co-founded by former Massachusetts Gov. Mitt Romney, a Republican presidential candidate who retired as a partner in 1999. According to disclosure forms filed with the Federal Election Commission, Romney still receives modest annual income from Bain.
The pending transaction, which Wall Street is betting will close in the first quarter, requires both shareholder and regulatory approval.
Manuel J. Recarey, an analyst with Kaufman Bros., said investors believe the deal will go through as proposed because 3Com does not sell highly sensitive products to defense and intelligence agencies.
Huawei has encountered controversy in the past. In 2001, before the Sept.11 terrorist attacks, a Huawei executive denied U.S. government allegations that the company was helping Iraq rebuild its bomb-damaged military communications network, in violation of United Nations' sanctions.
Earlier this year, Kalimat Telecom, a state-run Iraqi telecom company, awarded Huawei a $275 million contract to build a nationwide wireless network for the government and Iraqi businesses and consumers.
Meanwhile, the company agreed in October 2003 to modify some of its products after a Texas judge ordered Huawei to stop illegally using patents of Cisco Systems, which had filed a patent infringement lawsuit against the company earlier that year.
This would not be the first transaction between Huawei and 3Com. Last November, 3Com said it would pay Huawei $882 million cash for its 49% stake in a three-year-old joint venture that was dissolved after 3Com's purchase.
In most transactions involving foreign-based investors, there are informal negotiations with CFIUS before it formally begins a 30-day review. For deals that need additional scrutiny, CFIUS can decide to investigate for another 45 days and file a report to the U.S. President, who has 15 days to act on any recommendations. Such 45-day investigations are required for state-owned companies.
Since CFIUS was created in 1988, more than 1,500 notices have been filed. Of those, 13 deals were withdrawn and 25 required an investigation. Of the 25 deals investigated, 12 were sent to the president with recommendations and one was prohibited.
Bain Capital and Shenzen-based Huawei, a privately held global provider of telecommunications networks, said they would purchase 3Com for $2.2 billion in cash, a 44% premium to the stock's closing price of $3.68 per share last Thursday. Shareholders would receive $5.30 in cash for each share of 3Com stock.