The US$2.2 billion offer for 3Com Corp made by a private-equity group and Chinese telecommunications company is no longer on the table, according to a person familiar with the matter.
"The deal is not going to proceed," this person, who was not authorized to comment publicly and spoke on condition of anonymity, said yesterday.
Shares of 3Com, a Marlborough, Massachusetts-based maker of network equipment, plunged by 23 percent.
Early Wednesday 3Com said in a press release that it was unable to satisfy the national security concerns of federal authorities reviewing the sale of the network-equipment maker to Bain Capital Partners LLC and China's Huawei Technologies Co, which has strong ties to the Chinese government.
"We are very disappointed that we were unable to reach a mitigation agreement," said 3Com CEO Edgar Masri.
The proposed acquisition immediately set off alarms in Washington when it was announced in September. Lawmakers and Bush administration officials have expressed concerns that sensitive military technology could be transferred to China through the 16.5 percent 3Com stake that would be held by Huawei.
Bain last week offered several concessions to the Committee on Foreign Investment in the United States in order win approval of the pending transaction, including the divestment of 3Com's Tipping Point subsidiary, which makes network-security software, according to the person familiar with the deal.
On Wednesday, 3Com said it withdrew its voluntary CFIUS application but would continue trying to structure the Bain-Huawei deal in a way acceptable to the federal panel. CFIUS is a 12-agency group with the authority to recommend the White House block or alter terms of deals that involve national security.
"We have not terminated the agreement," 3Com spokesman John Vincenzo said in an interview. "We have taken it out of the CFIUS process."
But the person familiar with the matter who spoke on condition of anonymity said "another deal possibly could (be reached) but it's not going to be some small revision of that (original) deal. It would be a new and different transaction."
Under the CFIUS process, companies are allowed to voluntarily withdraw from the review and refile after changes are made to its original proposal, restarting the clock on the entire process.
"If Tipping Point remains the focus of controversy, it is curious that the deal has gone so long without resolution," said John Reynolds, a partner at Wiley Rein. "We had informally understood that the parties had offered to spin off Tipping Point, either through an IPO or a sale to a third party. If such an offer was genuinely made and deemed insufficient, it would be a development of substantial concern among dealmakers."
Kaufman Bros. senior analyst Manuel J. Recarey said 3Com's deal is not dead.
Based on last week's concessions, Recarey believed the sale of Tipping Point would have been enough to alleviate national security concerns held by the government. He said Huawei's minority stake, which could reach up to 20.5 percent over time, may have been the deal-breaker.
Rep. Ileana Ros-Lehtinen, a Florida Republican, who co-sponsored a resolution to get the government to block the deal, lauded 3Com's withdrawal.
"Given rising concerns about the threat posed by the Chinese regime's cyber-espionage, it would have been a grave error for US regulators to approve a deal that would have permitted minority ownership in 3Com by one of the least transparent companies operating in China, a firm with long-standing ties to Chinese army and intelligence services," said Ros-Lehtinen, in a release.
Shares of 3Com soared from US$3.22 a share to US$5.11 apiece in the weeks following Boston-based Bain's offer. Since then they have fallen, trading Wednesday at US$2.87, a decline of 86 cents.