3Com rebuff may foretell Motorola troubles

By Sinead Carew

NEW YORK (Reuters) - The U.S. national security concerns that scuppered network gear maker 3Com Corp's (COMS.O) plan to bring in a Chinese investor could erase an already short list of foreign suitors for Motorola Inc's (MOT.N) handset business.

The largest U.S. mobile phone maker, which also supplies communications systems to governments and public safety groups, has seen no company yet emerge with a public bid for the unit, while analysts have said it could attract an offer from China's Huawei Technologies Co Ltd HWT.UL or ZTE Corp (0763.HK).

But Huawei and private equity firm Bain Capital Partners pulled their proposal to buy 3Com this week after failing to win approval from The Committee on Foreign Investment in the United States (CFIUS), a panel led by the U.S. Treasury Secretary that reviews corporate deals with foreign buyers.

So Huawei, or any foreign company from China to the Middle East, would likely think twice before talking to another firm such as Motorola with U.S. government contracts, analysts said.

"It's definitely a risk factor," said Stifel Nicolaus analyst Rebecca Arbogast, who was surprised the 3Com deal was not approved given that it had seemed ready to divest a sensitive unit that makes network protection systems for government agencies and large businesses.

Under Bain's proposal, China's top telecom equipment maker would not have had operational control of 3Com or access to sensitive U.S. technology. But several U.S. lawmakers complained the deal threatened national security due to Huawei's alleged ties to the Chinese military.

"There are definitely some extremely hawkish people in the Bush administration who see China as the enemy. A lot of Chinese companies don't understand some of the fear that goes on in the everyday American and the government," said Shaun Rein, managing director of China Market Research Group.

Fostering a more receptive U.S. attitude toward Chinese investment will take time, said Edward Yu, president of Beijing-based research firm Analysys International.

"No single silver bullet can solve this," he said.

Although Motorola handsets largely end up in the hands of consumers, the apparent increase in government scrutiny of companies with any security-sensitive operations made analysts worry Motorola could face similar roadblocks.

Arbogast said CFIUS scrutiny of the 3Com buyout suggested any foreign investment in Motorola "won't just get a free pass," adding: "I think CFIUS will take a close look."

DEAL DAMPER

Analysts had already been down on the prospects of Motorola finding a buyer for its loss-making handset division, which they value at between $9 billion and $12 billion.

Market leaders Nokia (NOK1V.HE) and Samsung Electronics Co Ltd (005930.KS) are already winning market share at Motorola's expense, they say.

Meanwhile, smaller players in Asia like ZTE, which could see Motorola as a quick way to beef up in the U.S. market, would have to contend with a business that has failed to come up with a strong successor to its aging Razr family of phones.

3Com's problems selling just a minority stake of up to 21.5 percent to Huawei could be the last straw for potential Motorola suitors, analysts say. Huawei maintains it is a private company owned by its employees, but founder Ren Zhengfei was a former People's Liberation Army soldier.

Motorola's enterprise mobility segment, which brought in about 22 percent of overall Motorola sales in the fourth quarter, has government and public safety as well as corporate clients, so Motorola may face similar scrutiny to 3Com.

"It certainly puts a damper on the idea," said Charter Equity Research's telecoms analyst Ed Snyder. "It would be something they're concerned about."

American Technology Research analyst Mark McKechnie said a foreign buyer would need U.S. government approval, but he noted that China's Lenovo Group Ltd (0992.HK) did get the green light to buy the computer unit of IBM (IBM.N) in 2005.

"If Lenovo could buy IBM's PC business, I don't see why ZTE or Huawei couldn't buy Motorola's handset business," he said.

However, since the IBM-Lenovo deal, other foreign investments have come under sharper scrutiny.

The CFIUS panel is still smarting from a storm of criticism two years ago when it approved state-owned Dubai Ports World's acquisition of several U.S. port operations.

Congress was so enraged by the approval that it enacted a tougher law requiring CFIUS to spend more time vetting deals and to keep lawmakers better informed. Dubai Ports later relinquished the port operations amid the political pressure.

Motorola declined to comment for this story.

(Additional reporting by Sophie Taylor in Shanghai; Editing by Braden Reddall and Lincoln Feast)