Wednesday, February 20, 2008

USA - 3Com merger blocked

3Com withdraws buyout application

3Com Corp. on Wednesday said it was unable to satisfy the national security concerns of federal authorities reviewing the $2.2 billion sale of the network-equipment maker to a private-equity firm and Chinese telecommunications company.

3Com said it withdrew its application to the Committee on Foreign Investment in the United States but would continue discussing ways to structure the deal in a manner acceptable to the federal panel.

Shares of 3Com sank by more than 15 percent.

Marlborough, Mass.-based 3Com in September agreed to an offer of $5.30 per share from Bain Capital Partners and Huawei Technologies, which has strong ties to the Chinese government. The deal set off alarms in Washington, where lawmakers and Bush administration officials have expressed concerns that sensitive military technology could be transferred to China through a 16.5 percent stake held by Huawei.

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

Bain last week offered the U.S. government several concessions to win approval of the pending transaction, including the divestment of 3Com's Tipping Point subsidiary, which makes network-security software, according to a source familiar with the matter who is not authorized to speak publicly about the deal.

On Tuesday, 3Com said in a Securities and Exchange Commission filing that shareholders would receive between $4.50 and $5.00 for each share of stock, if it divested Tipping Point.

Shares of 3Com soared from $3.22 a share to $5.11 apiece in the weeks following Boston-based Bain's offer. Since then they have fallen, trading Wednesday at $3.15 a decline of 58 cents.

Paul Marquardt, a partner at Cleary Gottlieb Steen & Hamilton LLP in Washington, said he was surprised 3Com and Bain withdrew the application since the jurisdictional question appeared to have an obvious fix with the Tipping Point divestment.

"It's surprising that this hit a road block and it's unclear what the next steps are," said Marquardt, who has clients that are investors in 3Com.

CFIUS is a 12-agency group with the authority to recommend the White House block or alter terms of deals that involve national security. In most transactions involving foreign-based investors, there are informal negotiations with CFIUS before it begins a 30-day review. CFIUS can decide to investigate for an additional 45 days and file a report to the president, who has 15 days to act on recommendations. The 45-day investigations are required for state-owned companies.

"As the companies move forward, CFIUS will continue to monitor and engage appropriately based on the circumstances," said Rob Saliterman, a Treasury Department spokesman.

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