3Com: Another Buyout on the Brink

Bain and Huawei withdraw application after U.S. opposition surfaces to Chinese control of TippingPoint security-software unit.
Roy HarrisFebruary 20, 2008

3Com Corp.’s $2.2-billion buyout showed signs of unraveling as Bain Capital LLC and Chinese partner Huawei Technologies Co. withdrew their application to the Committee on Foreign Investment in the U.S. (CFIUS).

CFIUS had expressed worries about foreign control of 3Com’s TippingPoint security software unit, which services U.S. government agencies, according to a Bloomberg News report. In response, 3Com had filed a report with the Securities and Exchange Commission saying that if TippingPoint were divested, shareholders could receive between $4.50 and $5 for each share, rather than the $5.30 that had been in the LBO offer last September.

According to the Associated Press, which quoted a source familiar with the transaction, Bain had offered the U.S. government some concessions to win approval of the deal, including the divestment of TippingPoint. Withdrawing the application with CFIUS, however, put pressure on 3Com to move ahead quickly with divestment on its own, in the view of securities analysts.

“They have to sell the division, there’s no way around it. It sounds like Bain still wants to go through with it,” Morningstar analyst Alex Dannin told Bloomberg. Bain had told 3Com last year that it valued the company at $4.50 to $5 a share sans TippingPoint, according to this week’s 3Com SEC filing.

Bloomberg reported that a sharp falloff in 3Com share price because of the reports from Washington added to the doubt created about whether the LBO would join the list of recent LBOs that have hit rough patches — in most cases because of recession fears and reduced access to debt financing.

“We are very disappointed that we were unable to reach a mitigatioin agreement with CFIUS for this transaction,” 3COM CEO Edgar Masri said, according to Bloomberg, although he maintained that 3Com and its potential buyers “remain committed to continuing discussions.”