Navigation

In early October Bain Capital submitted their acquisition of 3Com to review by the Committee on Foreign Investment in the United States (CFIUS). The Organization for International Investment explains the review process:

After a transaction has been filed, CFIUS conducts an initial review, utilizing the full intelligence and national security infrastructure of the U.S. government, based on detailed information from the parties, which frequently receive questions and requests for clarification from CFIUS. The scope of these reviews focus on two key thresholds:

Test 1: Is there credible evidence that the foreign interest exercising control might take action that threatens national security?
Test 2: If yes, do laws other than Exon-Florio and the International Emergency Economic Powers Act provide adequate and appropriate authority for the President to protect national security?

If consensus exists that no credible threat to national security exists, or threat has been mitigated, CFIUS decides - within 30 days - not to open a further investigation.

If threats exist, or agencies are divided, CFIUS conducts an investigation for an additional 45 days, after which CFIUS is required to file a report with the President. The President will have 15 days to make a decision whether or not to block a transaction.

What’s the status of the review?
The Washington Times reports:

U.S. officials said the investigation is in the early stages and is being carried out under the rules governing past CFIUS investigations, meaning after the 30-day probe is done, a more in-depth 45-day probe could be carried out if the first inquiry finds problems with the deal.

Moving onto a second stage review could only be a bad thing. That means there were significant concerns that were not adequately addressed in the first round. There are eleven committee members reviewing the deal (Hank Paulson, the Secretary of the Treasury, recused himself based on his old firm’s, Goldman, Sachs, role in the deal). I would speculate that opposition to the deal is coming from the secretaries of defense and homeland security, the attorney-general, and the assistant to the president for national security affairs. No one has gone on record, but there have been numerous mentions of these organization’s opposition to the acquisition.

If at first you don’t succeed, move the goalposts closer
As the review process continues, the Bush administration has proposed changes to the CFIUS approval process. The Washington Times:

A draft presidential order on foreign investment in U.S. companies would limit government security reviews and give more power to such pro-business agencies as the Treasury Department, The Washington Times has learned.

The draft order is opposed by the Defense, Justice and Homeland Security departments as contrary to the intent of a law created in response to the uproar that killed a bid by a United Arab Emirates company to operate several U.S. ports.

…According to a national security official involved in the debate, “under the proposed order, Treasury will reserve to itself the final power to approve or disapprove foreign acquisitions and mergers.”

The article points out that while the president has signed the law, he has yet to sign the executive order. This means the law is not yet in effect.

What’s missing in all this is transparency. Trade is a sensitive political topic in America in the best of times. In next year’s elections it will be a critical issue for candidates and voters from across the political spectrum. The 3Com acquisition is tiny in the world of private equity buyouts, but its political significance will be much larger. China’s economic growth and importance to the world economy engenders the same sense of economic insecurity as Japan did in the 80s. Elements of both the political right and left in America loathe China for its trade policies and its human rights policies. The lack of substantive information on what aspect of national security is at stake, what process is used to assess the threat level, and how compliance is judged leaves the discussion to the hysterical grandstanders. Political posturing on national security supersedes a rational discussion of trade and investment policy.

No one in China or America, not their citizens, not their companies, not their governments, are well-served by an opaque process of private committee meetings, anonymous leaks, and obscure rule changes. The best antidote to knee-jerk reactions is a lucid explanation of an issue, its salient points, and the consequences of the potential decisions.

A more open process would reveal that the security concerns are minimal and, at the extreme, could easily be rectified if Bain were to sell the unprofitable TippingPoint unit that makes the technology in question. Furthermore, people may realize that the acquisition represents about US$2 billion of Chinese/Asian money flowing into America. That’s a good thing.

3Com’s joint venture with Huawei was the only operation that has kept it a going concern for the past few years. This is far from being the loss of a technological crown jewel, it’s really just the unloading of a faltering brand.

How is this playing out on the hustings?
The current political actor with most invested, as it were, in this is Mitt Romney, the Republican presidential candidate. He founded Bain Capital and remains an investor. Not surprisingly, he has had little to say on this. But Duncan Hunter, the California Republican, means to make this an issue.

From CNN, via Free Republic:

Congressman Duncan Hunter, R-California, who is running for President, called on Mitt Romney, another GOP candidate, to take a public stance on the proposed partnership between the private equity firm Romney founded and a Chinese-based company.

…Hunter says that 3Com has contracts with the U.S. Dept. of Defense. However, Bain Capital tells CNN 3Com does not contract with the U.S. government directly, and the Chinese company will not have access to sensitive U.S.-origin technology or U.S. government sales as a result of this transaction.

In a letter addressed to Romney, provided to CNN by Hunter’s campaign, Hunter claims the Chinese company has ties to Saddam Hussein and the Taliban and asks Romney to come forward with a “clear statement” in opposition to the deal sealed last October.

The Bain Capital deal in question “can only be characterized as irresponsible,” Hunter said in a written statement.

Romney’s response?:

Romney’s campaign provided CNN the following statement in response to the request from Hunter, “Governor Romney is no longer involved in Bain Capital and their investment decisions.”

So far the issue has little traction. The party primaries for the presidential campaign begin with Iowa in January. The latest Rasmussen poll there shows Romney leading at 29%. Hunter is in last place at 2%.

So much for this being on the front burner of the political hot stove. As entertaining as I find Mr. Hunter’s grandstanding, this issue is getting him nowhere.

ShareThis