Washington Shelve the 3Com Deal

--A closely watched Chinese investment in a U.S. network-technology company has fallen to political pressure in Washington, revealing new limits for deal makers who expected foreign buyers to invigorate a fallow deal market --The tech company, 3Com Corp., which agreed in September to be acquired by private-equity firm Bain Capital LLC and China-based Huawei Co. for $2.2 billion, said the three had withdrawn an application from the Committee on Foreign Investment in the U.S., or CFIUS, a 12-agency government panel that reviews the national-security implications of foreign-led deals. The decision signaled the government likely wouldn't have approved the deal, according to people familiar with the matter, fearing that Huawei's influence could put government secrets at risk. --The reverberations of the decision could be significant for deal makers, who are increasingly reliant on foreign capital for acquisitions as the debt-fueled buyout cycle has petered out. U.S. authorities have allowed banks, including Citigroup Inc. and Bear Stearns Cos., to accept billions of dollars in Chinese and other foreign funds to help shore up their balance sheets in the wake of the credit crisis. But the rejection of the 3Com transaction is a clear rebuke of Chinese designs on U.S. technology companies in some sensitive industries. --"There will be tremendous repercussions in China because of this," said Dan Harris, a Seattle lawyer who represents U.S. clients in China. "We should not be ignoring the impact that this might have on our own companies trying to do business over there." --The real pushback came from Washington, where the deal faced sharpened scrutiny over concerns about Huawei's ties to the Chinese government. Worries grew within the Bush administration, especially among security officials with a role in CFIUS. The proposed deal was given elevated attention and put through a 45-day investigation, beyond the standard 30-day review conducted by CFIUS. --Bain and Huawei said they would be willing to sell the 3Com unit that handles the government security contracts, but that wasn't enough to assuage the committee's concerns. --In a reflection of the tensions, a number of lawmakers on Capitol Hill stepped forward to voice alarm, most notably Michigan Rep. John Dingell, chairman of the powerful House Energy and Commerce Committee. --Mr. Dingell and Texas Rep. Joe Barton, the panel's senior Republican, put the White House on notice of the House committee's intention to probe the deal, a move that could have opened the door to an election-year debate about the economic competition posed by China and public concerns about globalization. Deals that raise national-security concerns are subject to review by CFIUS, which is led by the administration; this would have been a House-committee probe. In a letter sent to the administration in early February, the lawmakers said there was a "growing apprehension" in Congress about the wisdom of going forward with the transaction. --According to people familiar with the matter, the companies involved couldn't come to terms with the Bush administration on the details of a so-called mitigation agreement, which is meant to satisfy the government's security concerns. The request for CFIUS approval of the deal was pulled toward the end of the panel's 45-day investigation, individuals familiar with the matter said. --"China has lots of cash. American companies are in need of cash," Mr. Hunter said. "There's going to be a continuing conflict, between American security interest and the desire for ready cash. You're going to see this more and more."