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Latest China scare torpedos 3Com takeover

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3Com's proposed takeover by a US private equity firm and a Chinese rival lay in tatters today, with the three companies admitting defeat in their attempts to mollify US government national security concerns.

3Com stock plunged 20 per cent today on news that the company, along with wannabe owners Bain Capital and networking equipment maker Huawei Technologies, today withdrew their application to the Committee on Foreign Investments in the United States (CFIUS). This division of the US Treasury can block deals if "it believes the nation's security would be placed at risk", CNNMoney reports. So, no application means no deal.

The proposed takeover was an immediate cause for concern with US feds when Bain offered to buy 3Com for $2.2bn cash in September 2007. Under the original terms, Huawei would secure a 16.5 per cent stake in 3Com, while Bain took the rest.

Officials are uneasy about a Chinese manufacturer being granted access to 3Com's TippingPoint unit, which sells intrusion prevention technology to the US government. Critics of the deal also point out that Huawei's founder, Ren Zhengfei, is a former Chinese army officer.

Earlier this month, Xu Zhijun, chief marketing officer at Huawai, told the Financial Times that concerns over the deal are "bullshit."

Since then, Huawei has put back on its corporate game face.

“We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction,” said Edgar Masri, CEO of 3Com in a statement.

The 3Com takeover appeared to be back on track last week with an supposed offer to spin-off TippingPoint instead. But the negotiations have clearly not satisfied US feds.

Huawei and Bain said they are committed to continuing discussions, but it is difficult to see a way forward with this deal. ®

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