Nearly two years after Congress was roiled by the Dubai Ports World controversy, administration demands and congressional scrutiny appear to have foiled a merger that would have given a Chinese company a minority interest in the U.S. technology firm 3Com.
Normally this would be grounds for concern; as much as possible, government interference in private business deals should be avoided. If it isn’t, protectionism and xenophobia can get in the way of common sense and the free market.
But there should be exceptions, and the 3Com deal was one.
3Com was to be acquired by Boston-based Bain Capital, but Huawei Technologies of China, a Bain partner founded by a former official with the People’s Liberation Army, would have ended up with 16.5 percent of 3Com.
That drew scrutiny from members of Congress, particularly given 3Com’s business with the Pentagon. The company sells anti-hacking software to the Department of Defense, which has come under hacker attack in recent years from computers in China, a growing economic and military power that has also been accused of trying to infect computer systems in Great Britain and Germany with spyware.
Just two weeks ago, the chief marketing officer of Huawei used coarse language to dismiss congressional concerns that the deal could endanger U.S. national security. But the fears are not baloney.
China has engaged in an aggressive effort to obtain U.S. military and trade secrets. Just this month, federal investigators arrested a Pentagon official and a Chinese national in Virginia for espionage. Separately, in California, an official with Boeing was arrested for allegedly feeding the Chinese information about the U.S. military and the space shuttle.
Allowing a foreign country with a recent history of espionage to have a stake in a U.S. firm that sells software protecting the Department of Defense from computer spies at a minimum provokes questions. It certainly justified scrutiny by the inter-agency Committee on Foreign Investment in the U.S. (CFIUS), which reviews larger business mergers and acquisitions involving foreign companies for potential national security concerns.
Bain’s purchase of 3Com appeared to collapse last week because of demands by CFIUS, which can link its approval to conditions on mergers and acquisitions. In this case, the companies balked at those demands.
The CFIUS process is intended to remove politics from the process of reviews as much as possible. Congress overhauled it after the Dubai Ports World fiasco, in which CFIUS approved a complicated merger that would have allowed the United Arab Emirates firm to manage several U.S. ports.
That deal fell apart after Congress threatened to pass legislation preventing it from taking place, and Dubai Ports World voluntarily withdrew from the arrangement. That case rattled the business community because of dubious criticisms about the threat to national security. Several companies with foreign ties were and continue to operate ports in the U.S.
In this case, it’s difficult to argue the concerns are dubious. As a result, while the 3Com deal may give pause to other Chinese companies looking to enter the U.S. telecom market, it doesn’t seem to be creating the same level of panic that the U.S. is turning away from foreign investment.
That makes sense. This deal raised real issues, and the system in place worked to protect national security.