Report: US intelligence deems Bain buyout a national threat

The Office of the Director of National Intelligence has reportedly found Bain Capital Partners’ $2.2 billion acquisition of 3Com a potential threat to security, due to involvement of a Chinese state-linked company.

Bain Capital’s $2.2 billion (€1.5 billion) acquisition of US networking hardware and software maker 3Com has reportedly been found a threat to US security interests.

The Washington Times reported the Office of the Director of National Intelligence has flagged the deal as a “threat” in its threat assessment report to the Committee on Foreign Investment in the United States (CFIUS), which is currently conducting a review of the proposed deal at Bain’s request.

3Com makes computer network intrusion-prevention equipment for the Pentagon and other US government agencies, equipment that some in the US government fear could be exploited by a minority investor in the deal, Chinese networking company Huawei Technologies.

Bain agreed to pay $5.30 per share to acquire a majority stake in the company in September. Huawei was to acquire a minority stake in the company as well for an undisclosed amount, but the company's alleged ties to bribes and espionage have attracted governmental scrutiny.

Shortly after the deal was agreed, Bain voluntarily submitted the deal to the CFIUS for review. “We believe the US government review in this matter will conclude that the company will be firmly controlled by an American firm, have only a small minority of foreign shareholders, and the deal presents no risks to national security,” Bain said in a statement at the time.

Subsequently, Ileana Ros-Lehtinen, a Republican from Florida, and eight other members of the House of Representatives passed a non-binding resolution stating that, “It would be a grave error for US regulators to approve a deal that permits minority ownership in 3Com by one of the least transparent companies operating in China, a firm with shadowy ties to Chinese army and intelligence services”.

The company’s chief executive, Ren Zhengfei, is a former officer in the People’s Liberation Army. Huawei has also been accused of accepting bribes related to cellular telephone contracts in Iraq, engaging in industrial espionage against Cisco Systems, and constructing a telephone system for Afghanistan’s Taliban government, according to the Times.

Huawei has been involved with 3Com before: in 2003 the companies formed a joint venture, though 3Com bought out Huawei’s stake in the partnership three years later. But the association has not dispelled US fears that Huawei could use its stake in 3Com to gain access to sensitive technology.

Foreign investment in sectors deemed vital to national security, such as energy and defence technologies, has aroused the ire of the US government before. One recent such example caused a private equity firm to benefit: When Dubai Ports World bought the UK’s P&O Holdings in February, it gained control of six major American ports; to assuage security concerns threatening the deal, DP World agreed to transfer ownership of the US ports to AIG Investments.