Bain Capital Partners' $2.2 billion deal for 3Com Corp. is on the ropes after Bain and 3Com failed to satisfy a federal agency that the transaction wouldn't harm national security.
The deal, proposed in September, would take 3Com private and give a 16 percent stake in the company to Huawei Technologies, a company with close ties to the Chinese military.
The Committee on Foreign Investment in the United States, created by Congress in 1988, has the power to block foreign investments in American firms that could raise security risks.
In October, Bain, 3Com, and Huawei asked CFIUS to approve the deal, and expressed confidence it would be approved. But yesterday, the three companies withdrew their petition, having failed to come up with a formula for the transaction that would pass muster with the committee.
"Clearly, what we discussed to date has not satisfied their concerns," said 3Com spokesman John Vincenzo. "We're going to go back, work together, talk among ourselves, and determine if there's an alternative resolution to the transaction that would satisfy CFIUS."
Bain, a private-equity firm based in Boston, declined to comment.
A Huawei spokesman could not be reached for comment.
According to a report by the defense think tank Rand Corp., Huawei was founded by a former director of telecommunications research for China's People's Liberation Army.
The report adds that Huawei maintains close ties to the Chinese military.
Critics of the proposed deal note that 3Com's TippingPoint business unit is a major US government supplier of gear designed to prevent network intrusions. Members of Congress from both parties questioned whether a Huawei stake in 3Com could help Chinese spies bypass TippingPoint security systems.
Republican US Representative Thaddeus McCotter of Michigan, one of deal's most vehement opponents, hailed the companies' decision to withdraw from CFIUS review. "The collapse of the Huawei deal is a victory for America's cyber-security and national security," he said.
In documents filed Tuesday with the Securities and Exchange Commission, 3Com said its shareholders might receive less money than originally expected in the buyout if 3Com spins off the TippingPoint business. News reports last week said the companies were considering such a spinoff as a way to save the deal.
The deal's breakdown occurs amid heightened concern in the United States about Chinese spying. This month, US investigators arrested four people in two separate Chinese espionage cases. One case involves the alleged theft of information about US arms sales to Taiwan; another charges that a former Boeing Co. engineer gave up secret information on the space shuttle, the C-17 military transport aircraft, and the Delta IV rocket system.
US and other Western officials are also nervous about suspected hacking into government computer networks by Chinese operatives.
In December, the British intelligence agency MI5 warned top business executives in that country about Chinese computer hacking attacks aimed at stealing sensitive data.
Also, the US military has accused China of stealing vast amounts of data stored on their nonclassified networks.
The Bush administration has proposed spending $6 billion to harden US government computer networks against attack.
Abner Germanow, a networking analyst at IDC Corp. in Framingham, said TippingPoint is one of 3Com's strongest businesses, and spinning it off would have made the deal much less attractive.
In addition, he said that Bain may be finding it difficult to put together the necessary financing for the deal.
"The credit market's been pretty tough lately," Germanow said.
"The cost of debt has gone up . . . Given the amount of resistance, I think it's unlikely that the deal gets resurrected, and 3Com's got to figure out what to do next."
3Com shares fell 86 cents or 23 percent, to close at $2.87.
Hiawatha Bray can be reached at bray@globe.com.
