US extends China 3Com probe

A US probe into a proposed $2.2bn buy-out of 3Com, a network equipment supplier, by a consortium involving a Chinese company is poised to enter a decisive second phase.

The Committee on Foreign Investment in the United States, a branch of the executive able to block sensitive inward investment, is this week expected to take the rare step of extending a month-long investigation into the deal by a further 45 days.

Cfius is studying possible national security implications of the 3Com takeover led by Bain Capital, the US private equity firm. Bain is trying to buy 83.5 per cent of US-listed 3Com with Huawei Technologies, a Chinese telecoms equipment maker, taking the rest.

The deal has sparked political concerns in the US because 3Com supplies intrusion prevention technology to the US defence department. The Pentagon believes that hackers in China conducted a massive cyber-attack on its systems in 2007.

Thaddeus McCotter, chairman of the US House of Representatives‘ Republican policy committee, has described the proposed deal as a “stealth assault on America’s national security” and urged US authorities to stop Huawei buying a stake in 3Com.

Probes by Cfius, which comprises representatives of 12 US government agencies, begin with a 30-day study and only rarely extend a further 45 days. Bain voluntarily submitted the 3Com deal for review in early December. It is understood that Cfius has signalled to Bain that it will begin a statutory 45-day investigation because it needs more time to decide whether to endorse, block or seek changes to the proposed buy-out. Cfius does not issue public statements.

The next six weeks are likely to feature some tough talks. Bain could be forced to commit publicly to a divestment of TippingPoint, the 3Com division which deals with the US military, or Cfius could recommend that Huawei reduces its proposed stake.

The decision to extend the investigation will not surprise many of those involved in the deal, given heightened sensitivities surrounding Chinese investment in to the US, especially in the run-up to November’s presidential election.

China believes that Huawei’s involvement in the consortium is a non-issue. Beijing is watching the probe amid concerns that Chinese investment into the US is being blocked.

Bain has strongly rebuffed claims that the deal endangers US national security, asserting that criticism ignores Huawei’s limited stake in the proposed buy-out vehicle and its previous role as a joint venture partner of 3Com in China.

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