Critics: 3Com Merger Nearly a Red Army Sellout

U.S. tech firm 3Com and China’s Huawei Technologies are spinning the story that their proposed merger failed because of market "complexities.”

Yet experts tell MoneyNews that there are, in fact, legitimate Internet security and privacy concerns, problems big enough to kill the $2.2 billion corporate marriage.

Under the deal, brokered last fall, China's top telecom equipment maker would not take operational control of 3Com or have access to classified U.S. technology.

But, it would have owned 16 percent of 3Com, which makes networking equipment, and had access to its contract details, including deals with major telecom companies and the U.S. government.

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Last year, 3Com produced $1.27 billion in revenues, up 59 percent from the year earlier.

Several U.S. lawmakers complained the deal threatened national security, due to Huawei's alleged ties to the Chinese military. The U.S. Treasury Department late last week refused to agree to the merger.

Huawei and its partner, Bain Capital, are trying to portray the failure of the merger as simply a deal that didn’t pan out.

"Due to the complexity of the acquisition process, the increase in acquisition costs and the significant change in stock market conditions since last year, Bain Capital and Huawei have announced their intention to withdraw their application relating to the proposed acquisition,” Huawei said in a statement.

But market observers -- and technology stock experts -- tell MoneyNews that what probably killed the deal were real fears the government has not publicly admitted to, nor that the companies themselves would acknowledge.

"The golden age of young teen hackers has passed,” says Jesus Mena, a former computer consultant for the U.S. Department of Homeland Security.

"E-crime is the domain of organized groups from China. Today’s hackers have just one motivation – money. China is running a very aggressive and wide-ranging espionage operation aimed at stealing U.S. technology,” Mena says.

Mena is today a leading expert on IT security and is the chief strategy officer of a firm named InferX. He says that the federal government, especially the FBI, is "concentrated solely on the Chinese” for its commercial counter-espionage operations.

Huawei may well be a shill for nefarious forces in China, the experts say.

"Normally I am not one to advocate for restrictions on international investment, but this problem with 3Com is very real,” says William Gamble, president of Emerging Market Strategies, a business consultant and author.

"Although Huawei loudly insists that it is a private company, there is no free speech in China. There is suspicion the company is owned by the People’s Liberation Army. Huawei is not a normal, multinational corporation – it is an arm of China’s security services. These people are bad news,” Gamble says.

Gamble says that it is likely the company could have used the networking technology from 3Com to monitor Internet traffic – commercial and private – around the world.

"The Indian security bureau has already restricted Huawei’s expansion into India because of its military ties,” says Gamble.

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