Bain and 3Com deal stalled on Chinese stake

By Jessica Hall

PHILADELPHIA (Reuters) - Bain Capital Partners has withdrawn its application for U.S. security approval of its $2.2 billion purchase of 3Com Corp (COMS.O) with a Chinese investor -- killing the deal in its current form, a source familiar with the situation said on Wednesday.

Bain and 3Com announced the withdrawal after being unable satisfy the concerns of the Committee on Foreign Investment in the United States (CFIUS) about the deal, in which China's Huawei Technologies Co Ltd HWT.UL could hold as much as a 20.5 percent stake of the network equipment maker.

The deal "cannot proceed under its current structure," the source said.

The companies said they were still in discussions and the proposed transaction had not yet been terminated.

Shares of 3Com fell 73 cents, or 19.6 percent, in afternoon trading on Nasdaq to $3 as the possibility of the takeover proceeding seemed remote.

"We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction," said 3Com President Edgar Masri.

"While we work closely with Bain Capital Partners and Huawei to construct alternatives that would address CFIUS' concerns, we will continue to execute our strategy to build a global networking leader," Masri said.

"It's better to withdraw the application than to have it rejected, but it's a bad sign that they couldn't reach an agreement in the review window," said one arbitrageur who declined to be named.

Bain agreed in September to buy 3Com in a deal that would also give Huawei Technologies a 16.5 percent minority stake. Huawei could increase its stake in 3Com by up to an additional 5 percent.

The deal was subject to scrutiny by CFIUS, an interagency U.S. governmental panel that reviews corporate acquisitions involving foreign buyers.

In October, eight U.S. lawmakers were backing a bill suggesting that the planned buyout of 3Com "threatens the national security of the United States."

3Com previously said Huawei would not have access to sensitive U.S. technology or U.S. government sales and it would lack operational control or the ability to make decisions for the firm.

Last week, Bain offered various concessions. including one proposal under which it would divest 3Com's Tipping Point unit, which makes national security software, a source familiar with the situation previously said.

Tipping Point makes "intrusion prevention" systems to protect networks at large businesses and government agencies. 3Com acquired Tipping Point in late 2004 for $430 million.

Last year, 3Com had planned to spin off Tipping Point through an initial public offering, but that plan was pulled when the Bain deal was announced.