- The Washington Times - Friday, March 21, 2008

An investment firm ended the last possibility of a proposed merger between the telecommunications company 3Com and a Chinese firm by saying yesterday the deal would not be restructured and offered again for U.S. government review.

Bain Capital Partners, an international investment company that was brokering the merger, said in a statement it will not attempt to salvage the $2.2 billion merger agreement between 3Com and Huawei Technologies.

The deal fell through after the Treasury Department-led Committee on Foreign Investment in the United States (CFIUS) “said it intended to take action to prohibit that transaction,” Bain said in a statement.

“Bain Capital made several alternative proposals to 3Com that we believe could have satisfied the concerns raised by CFIUS,” the Bain statement said. “We regret that we were unable to agree upon an alternative transaction.”

Treasury Department and White House spokesmen declined to comment.

Bush administration officials said Deputy Attorney General Mark R. Filip was a key advocate for blocking the deal within the CFIUS, which includes representatives from Treasury, Justice, State, Defense, Homeland Security, Commerce and other agencies.

According to the officials, Justice Department officials expressed concerns that approving the deal might undermine prosecutions in the future related to Chinese high-technology theft.

A U.S. intelligence assessment of the 3Com-Huawei deal sent to CFIUS last year stated that allowing the proposed merger to go through would not be in the U.S. national security interest, according to officials familiar with the assessment.

The deal is a setback for Huawei, a Chinese state-run telecommunications equipment provider that has been described as the Cisco Systems of China.

Huawei, started by a former Chinese military officer, is linked to China’s military and was involved in violating U.N. sanctions against Saddam Hussein’s Iraq. U.S. military forces in 2002 conducted air strikes against Huawei-built fiber-optic communications networks that linked Iraqi air defenses.

Huawei also was linked by U.S. officials to economic espionage against Cisco, a U.S. network-equipment maker, and Japan’s Fujitsu. Additionally, the company sold telephone systems to Kabul, Afghanistan, for the Taliban when it ruled the country before being ousted in 2001.

Pentagon officials said there were concerns Huawei might gain technology from the deal that would boost Chinese military computer-warfare activities.

The Chinese military has been linked by the Pentagon to widespread computer intrusions that mimic potential computer-warfare attacks. The sophistication of the intrusions has led intelligence officials to conclude they are government sponsored, not by private hackers.

Frank Gaffney, a former Pentagon official, said Bain made a mistake with the attempted merger.

“Bain should have known better than to try to purchase a sensitive national-security asset like 3Com for a company tied to communist China’s army and intelligence services,” Mr. Gaffney said.

The defense and intelligence communities opposed the merger and were able to prevail within the CFIUS, which in the past often acted as a “rubber stamp for these sorts of transactions,” he said.

Last month, 3Com offered to sell off its TippingPoint subsidiary, which makes computer intrusion-detection gear used by the Pentagon and other government agencies as part of a “mitigation agreement.” However, the offer was rejected by the CFIUS.

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