3com Nixes Deal with Chinese; Spying a Concern

Article excerpt

Byline: S.A. Miller, THE WASHINGTON TIMES

A Chinese telecommunications firm and 3Com Corp., a U.S. defense technology company, yesterday called off a proposed merger because they could not quell national security concerns in the United States.

The companies in the $2.2 billion deal - Chinese telecom Huawei Technologies, 3Com and the global investment firm Bain Capital Partners - struggled to no avail since September to win merger approval from the Treasury Department's Committee on Foreign Investment in the United States (CFIUS).

The national security threat, first reported last year by The Washington Times, involved potential Chinese government access to U.S. defense secrets, including 3Com's TippingPoint division that makes high-technology safeguards against computer hackers. Huawei in the past has been accused of economic espionage and violating U.N. sanctions.

"We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction," said Edgar Masri, 3Com president and chief executive officer.

The companies had offered to sell off TippingPoint and take other action to mitigate the defense threat but it was clear CFIUS would not approve the merger, said a business source close to the deal.

"Given rising concerns about the threat posed by the Chinese regime's cyber-espionage, it would have been a grave error for U.S. regulators to approve a deal that would have permitted minority ownership in 3Com by one of the least transparent companies operating in China, a firm with long-standing ties to Chinese army and intelligence services," said Rep. Ileana Ros-Lehtinen of Florida, ranking Republican on the House Foreign Affairs Committee, that called on the administration to block the merger.

Earlier this month, four persons were arrested in the United States on Chinese espionage-related charges, including a Pentagon official accused of passing high-technology military command and control systems to Beijing.

Chinese military hackers have attacked Pentagon, U.S. government and private-sector computer networks in recent months, part of what defense officials think is preparation for electronic warfare.

"In this instance, it appears the CFIUS process has worked," said Rep. Duncan Hunter of California, ranking Republican on the Armed Services Committee. …