US government likely to block proposed 3Com sale unless division is divested

The proposed sale of 3Com to Bain Capital Partners and China's Huawei Technologies will only be given the green light by the US government if the firm's TippingPoint division is spun off, experts advised today.

Gartner notes that the proposed sale of 3Com – including potentially sensitive security technology – has attracted hostility from US legislators. On 17 October 2007, the Washington Times reported that legislation has been introduced in the US House of Representatives to block the acquisition of 3Com by Bain Capital Partners and affiliates of Huawei Technologies of China.

The legal block comes after the two companies earlier this month entered into a definitive merger agreement that set a price of $2.2bn for 3Com.

A Gartner advisory from analysts Greg Young, John Pescatore and Mark Fabbi notes that the Treasury Department Committee on Foreign Investment in the United States (CFIUS) will review this deal.

"At issue is the Huawei partner having ownership of the TippingPoint unit of 3Com, whose primary product is network intrusion prevention systems (IPSs). A similar review of the proposed sale of IPS vendor Sourcefire to Israel-based Check Point Software appeared to be the primary reason why that deal was not concluded," the Gartner report stated.

"Although Check Point subsequently acquired US-based IPS vendor NFR without much market attention, the concerns being voiced for the 3Com deal echo the precedent set by the termination of the Check Point/Sourcefire deal. Huawei will likely not be dropped from the deal, as the relationship is critical to 3Com business."

The report adds that 3Com has indicated previously that it wished to spin off the TippingPoint unit as a separate public company and make an initial public offering of its stock, but it did not carry out these plans before entering into the agreement with Bain and Huawei.

Gartner believes spinning off TippingPoint as a separate company would be the best approach to ensuring that TippingPoint's capabilities and installed base are maintained without a major disruption. However, the analyst firm notes that 3Com may be under financial pressures not to take that approach, given that TippingPoint is a valuable component of the company.

"Should TippingPoint not be spun out separately, Bain and Huawei must address all of CFIUS's concerns rapidly and thoroughly to ensure approval of the acquisition," Gartner stated.

According to Gartner, current or potential TippingPoint customers in the public sector or that work with US and affiliated government agencies should not expand TippingPoint investments until the status of TippingPoint is clarified.

Other TippingPoint customers are advised to not take any immediate action, but monitor events.