Security issues table acquisition of 3Com
Source LexisNexis
Not since the height of the Cold War have national security issues had such an impact on major foreign investment decisions. Bain Capital and 3Com's recent decision to withdraw their application before the United States government for approval of a $2.2 billion deal that would have see Bain and mainland networking giant Huawei Technologies acquire 83.5 and 16.5 per cent respectively of US networking company 3Com is a good example.
Bain and 3Com withdrew their application before the Committee on Foreign Investment in the United States (CFIUS), reportedly to buy themselves and Huawei time to address issues raised by the committee. It had voiced concerns about an entity with close ties to the central government taking part in the purchase of a firm considered part of the US's critical information technology infrastructure. Beyond that, 3Com also has a subsidiary providing network protection products to the Pentagon.
Recent reports indicate Bain, Huawei and 3Com may attempt to address the concerns in a resubmission by promising a divestment of network security subsidiary TippingPoint and structuring the deal to limit Huawei's access to core 3Com network technologies. How they will propose to do this is not yet clear.
In many ways, events surrounding the 3Com deal echo the failed takeover of Unocal by China National Offshore Oil Company (CNOOC) in 2006 and Hutchinson Whampoa's 2003 withdrawal from an attempt to buy Global Crossing in the face of a seemingly hostile CFIUS reaction.
Not surprisingly, the Chinese government in August 2006 introduced similar laws enabling the screening of foreign investment for national security issues by the Ministry of Commerce.
So what does all this mean for mainland and US businesses interested in acquisitive activity in each other's markets?
Not a lot if, like Haier or Lenovo, you are interested in white goods manufacturers such as Maytag or mature technology operations such as IBM's personal computer division. However, mainland companies interested in US assets that could arguably be considered part of "critical infrastructure", including energy assets, telecommunications and information networks, need to consider how the acquisition would be perceived by the committee.
The same situation faces US companies considering acquisitions on the mainland.
Future acquisition deals in sensitive sectors will have to be structured not only for profit, but also in a manner that minimises the perceived impact of the proposed acquisition or merger on the host country's national security interests.
M&A teams will require new skill sets to anticipate what governments might object to and how to structure deals to remove those elements.
It will also require US and mainland companies to work harder with policymakers to define national security concepts and balance these with the impact on foreign investment.
Samuel Porteous is the Asian managing director for Navigant Consulting's Dispute and Investigation Practice