US Checks China's Tech Challenge

US veto of the Huawei/3Com deal could thwart China's security and storage ambitions

James Rogers, Contributor

February 21, 2008

3 Min Read

By James Rogers, February 21, 2008, 5:35 PM

The collapse of 3Com's $2.2 billion acquisition by Bain Capital and Huawei this week underlines the growing U.S. fear of China as a technology superpower armed with a wide range of security and storage IP.

National security concerns were said to be behind the decision by the Committee on Foreign Investment in the U.S. (CFIUS) to block the deal. Government reviewers homed in specifically on 3Com's links to the U.S. military following its $430 million acquisition of security specialist TippingPoint in 2004..

Huawei also has strong links to its own country's military, which in turn is rumored to support China's thriving hacker community.

Analysts have already warned that Huawei could suffer on account of its country's growing reputation as a hotbed for cyber-crime, something which appears to have added fuel to the U.S. government's unease over the 3Com deal.

Even an offer by 3Com to divest its TippingPoint business unit was reportedly unable to sway the federal committee, highlighting the government's nervousness about this deal.

CFIUS officials, who were involved in blocking Israeli security vendor Check Point's acquisition of Maryland-based Sourcefire in 2006, also vetoed the controversial U.A.E. ports deal in the same year.

This week's decision to target a $2.2 billion deal involving a Chinese technology powerhouse nonetheless reflects a growing climate of fear in Washington, according to Taneja Group analyst Arun Taneja. "At the end of the day, I think that there's China paranoia in both the Senate and the House of Representatives," he says. "There's a growing distrust of China."

At this stage, it is still not clear what impact, if any, the government's decision will have on H3C, the Hong Kong-based 3Com subsidiary that was initially set up as a joint venture with Huawei, selling IP SAN products and relying heavily on U.S. partners.

In China, H3C uses more than 2,000 distributors and resellers to sell its storage wares. Although these offerings are based on commodity storage hardware, the vendor also uses chips and controllers from Intel, Intransa, and Xyratex and software from FalconStor.

H3C has already talked about selling its wares in the U.S. and clinching more stateside partnerships.

Ironically, the failure of Huawei's 3Com acquisition may make it easier for H3C to partner with U.S. storage vendors, according to Taneja. "None of this should have any implications, if anything it can make things clearer and accelerate the deals."

Huawei, of course, is still eyeing other opportunities in the storage market, notably signing a joint venture deal with Symantec last year.

The China-based Symantec/Huawei venture is aimed at supplying security and storage appliances to carriers and enterprises worldwide, although the events of this week now make the prospect of M&A between the two companies extremely unlikely.

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