3Com says Bain, Huawei deal not a security risk

Shareholders filing suits to block US$2.2 billion buy

3Com says its US$2.2 billion acquisition by Bain Capital and Chinese network giant Huawei Technologies will not pose a US national security risk.

In an 8-K filing with the US Securities and Exchange Commission (SEC), 3Com spelled out the deal's structure and rationale. Bain, an equity investment firm, will own 83.5 percent of 3Com and occupy eight of the new company's 11 board seats. Huawei will acquire a minority interest of 16.5 percent and have three seats on the board.

"Huawei can increase its equity by up to 5 percent (but no more), based on certain performance criteria, but cannot gain additional seats on the board or gain any measure of additional operational control," the 8-K states.

In early October, Bain agreed to subject the transaction to the review of the Committee on Foreign Investment in the United States (CFIUS). CFIUS is an interagency committee chaired by the Secretary of the Treasury that reviews foreign investments in US companies to determine whether they might pose a threat to US national or homeland security.

Bain and 3Com are confident the CFIUS will conclude the deal poses no national security risk.

"Huawei will not have any access to sensitive US-origin technology or US government sales as a result of this transaction," the 8-K states. "All of 3Com's sales to the US government are made through resellers or integrators; 3Com does not contract with the government directly. There are no products specially designed for the US government. There are no classified contracts or facility clearances."

3Com will also maintain internal control over intellectual property and export compliance programs to "prevent unauthorized transfers of controlled technology," the document states.

"As 83.5 percent owner, Bain Capital will be firmly in control of 3Com," the 8-K continues. "All Bain Capital private equity investments are controlled by 14 individuals, and all 14 are US citizens. Bain Capital will be able to make all operational decisions for the company, to set budgets, to spend money, to make investments, and to hire and fire personnel. Huawei will not have any control over the operation of the business."

In another SEC filing this week, 3Com said it is facing shareholder lawsuits seeking to block the deal. In a 10-Q filing with the SEC, 3Com says "several purported class action lawsuits have been filed since September 28, 2007 by 3Com shareholders against the Company, its current directors, a former director, Bain Capital Partners, and in some cases, Huawei Technologies."

The plaintiffs seek injunctions against the proposed sale of 3Com, contending that the sale price agreed to by the directors is insufficient, that the directors breached their fiduciary duties, and that Bain Capital Partners, and in some cases, Huawei Technologies, aided and abetted the alleged breaches, the filing states.

"The defendants intend to vigorously defend these suits," the 3Com filing states.

A 3Com spokesman said the company had no further comment on the matter. Bain was not immediately available to comment.

A driving force behind the transaction, according to the 8-K, is that 3Com's future success is highly dependent on its Chinese business unit, and the company's commercial relationship with Huawei is important to 3Com's growth and operations in China and other emerging markets.

The proposed transaction will continue the relationship between Huawei and 3Com, except that Huawei will have a minority interest in 3Com rather than a large or controlling interest in H3C, a joint venture the companies entered into in 2003 that 3Com eventually acquired control of for US$882 million.

Huawei and 3Com will amend and extend existing commercial agreements that otherwise would expire in 2008, the document states.

"These new agreements are expected to result in significant growth for 3Com in markets where Huawei has a strong presence," 3Com states in the 8-K.

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