Doubting Bain’s 3Com excuse
By James Ledbetter
It wasn’t a huge surprise to learn Thursday that private equity firm Bain Capital is bailing on its plan to acquire 3Com Corporation (COMS). For months, the proposed $2.2 billion takeover of this once high-flying network equipment maker has been kicked around, debated, and renegotiated, which kept the stock artificially high. Some people in the U.S. government have a problem with the proposed deal because Bain’s minority partner in the deal, Huawei Technologies, is linked to the Chinese army. The deal had to be reviewed by the Committee on Foreign Investment in the United States (CFIUS), and Bain cited the group’s opposition in a press release as the reason for backing out of the deal. That claim has been uncritically accepted by most of the media; the New York Times headline on a Reuters story, for example, reads “Opposition Leads Bain To Call Off 3Com Deal.”
That’s sloppy journalism reflecting sloppy thinking. First off, the Reuters story contains no comment from the CFIUS, a division of the Treasury Department. Back in February, Bain and Huawei withdrew their application before the committee because they thought it might not pass muster. (Especially at issue is a 3Com unit called TippingPoint, which supplies online security software to the Pentagon.) But it also seemed pretty clear that selling that unit would probably have allowed CFIUS to pass on the deal (even if a few members of Congress continue to grumble), and by the end of February the companies had reportedly agreed to give it another go, especially because it it very rare for CFIUS to nix a takeover outright.
So did CFIUS actually kill the deal? The Bain press release says “CFIUS made clear that it intended to take action to prohibit the proposed transaction.” But I can’t find any statement from them to that effect. I’ve e-mailed the Treasury Department to check (will they respond on Good Friday? Don’t know). The Boston Globe’s coverage this morning was a little more skeptical, quoting an IDC researcher who said: “To me the national security concerns were overblown.” 3Com, for its part, says that Bain’s reasons were invalid and that it will pursue the $66 million termination fee in the deal’s terms.
Think about it this way: One of the big advantages that private equity shops are supposed to have is stellar risk management. Is it plausible that Bain’s high-charged analysts were unable to anticipate government opposition, and factor that into their takeover plan? Is it plausible that they couldn’t find some way - selling the TippingPoint unit pre-takeover, or finding a new partner altogether - to overcome government objections?
I don’t buy it. I think what happened is: In the months since this deal was announced, 3Com’s business - like that of many technology firms - has shown serious signs of weakness, and is simply not worth the amount originally offered. Bain calculated that the termination fee - or a few million in legal fees fighting it off - was a cheaper way out, and they used the government as an excuse. Which is actually pretty shrewd, but journalists ought to at least be poking at the cover story.
For you to make the speculation that it was all about te economics of money while stating that oppposition was not the case seems very hypocritical. Your statement is nothing more than speculation.
Frist thing, CFIUS rarely nix any deals but when a foreign entity controls or gain suppport infrastructure that could jeopardize national security with a huge publicity outcry to the situation… Just expect to be nixed or revamped. Great example is Dubai Port World over key US seaports. Though it might not turn out that way but with China cyberattacking US secrets and data infrastructure, the 3com deal will potentially (and/or) compromise our technological advances (or lack of now) with China.
If you look at any Chinese company (or partially controlled company by Chinese government), you will see the deals were nixed from Maytag and Western US power company called Unocal Corp .The only deal to go through with a Chinese entity was IBM with Lenovo and the government are having issues with national security issues (potentially and realistically).
Either case, the hype or publicity outcry (no matter how overblown it could be or not) shows that people do care about nationalism and protection of American interest over economics and growing business of globalization.
At the end, your arguments are shot down about CFIUS, etc. Do not get me wrong that your analysis might be correct for the situation but many Chinese companies were willing to buy these American companies at a loss which could contradict your analysis; eg Maytag (for brand), IBM (for the brand because IBM was losing profits in that division). I am just stating to get some information confirmed and checked before making your arguments.
Saying 3Com was on the block is ludicrous. Sure they have taken an analyst hit and were losing cash. But, those days are long gone. The company produces cash today and is cash rich. They also own and not just OEM a business that is booming in Asian markets. A very sought after position. Furthuremore they have a complete solution, unlike many nitch players and have been bringing me all new products to sell in my business. This article is full of comments like I have no proof but……..
Thanks for the comments. Joe, I think the Bain margin call scenario very plausible. And Harvey, you’re right about 3com’s business: I just think Bain woke up and realized they were going to be overpaying.
“In the months since this deal was announced, 3Com’s business … has shown serious signs of weakness …” Who are you kidding? 3Com’s business has shown signs of weakness for years. That’s why the company’s on the block in the first place and why Bain is interested in buying it out. Bain thought it could get 3Com at a good price, trim it down, turn it around, and make a profit.
maybe Bain had a margin call on other parts of their book. stranger things have been happening.
Hey, be nice! The analysis is not only plausible, it is very likely to be true. The only way to confirm that is to get Bain to admit it in written form. Saying that the journalist of this piece have no idea of the issue is simply not productive. Where’s the counter proof?
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See after the earnings call,its easy to see this article is not accurate. Record
growth, leading market share. Just some slowness in NA which every company is experiencing right now even the mighty Cisco.