The China Factor: Bain-3Com Deal Withdrawn

Feb.21.08 | About: 3Com Corporation (COMS)

I reported on Bain’s proposed acquisition of 3Com (COMS) when it was announced in late September.

The deal has been withdrawn due to objections from the Committee on Foreign Investment in the United States (CFIUS). 3Com’s Tipping Point business unit supplies sensitive monitoring equipment to the U.S. Government’s Defense Department.

The Chinese company Huawei Technologies Co. was to be a minority owner of 3Com as part of this transaction, and clearly, the strategy had been to leverage the China cost-structure to compete against Cisco (NASDAQ:CSCO), especially in the emerging markets.

My understanding was that the plan was always to divest Tipping Point. It seems, everything would have been hunky dory if 3Com completed the divestiture before applying for the U.S. Government’s permission to clear the Bain deal.

This also raises a broader question, though. Most of the hardware and chips that the U.S. sells/uses comes from China. What are the security loop-holes in the entire eco-system of China-based manufacturing of mission-critical hardware and semiconductors?

Should the U.S. stop importing China-manufactured electronics altogether, especially where those products touch the networks and computers which in any way, shape, or form, touch the U.S. Government?

Where should the lines be drawn?