Busted Buyout Alert: 3Com

Updated Bain Capital’s proposed $2.54 billion buyout of 3Com is effectively dead (at least in its current incarnation), after the two sides announced today that they have withdrawn their application to the Committee on Foreign Investment in the United States (CFIUS). At issue is Bain’s decision to partner on the deal with China-based Huawei Technologies, and how national security interests could be compromised if a Chinese company had ownership access to TippingPoint, a 3Com unit that makes security software for the U.S. government.

It seemed last week that concerns had been allayed, when Bain said it was willing to make concessions in order to secure CFIUS approval. A source says that Bain made several mitigation proposals (including the sale or spinoff of TippingPoint), but CFIUS promised to block each of them. Withdrawal of the application was basically like saying “I quit,” just before you’re about to be fired.

In a formal statement, 3Com president Edgar Masri said the following: “We are very disappointed that we were unable to reach a mitigation agreement with CFIUS for this transaction. While we work closely with Bain Capital Partners and Huawei to construct alternatives that would address CFIUS’ concerns, we will continue to execute our strategy to build a global networking leader.”

But it’s unclear what the alternatives are at this point. Bain could try to launch a new bid for 3Com either alone or with a U.S. partner, but its original deal theory was that Huawei could help 3Com tap the lucrative Chinese market. It also relied on debt from Asian banks, which were brought in largely thanks to the Huawei participation. Another possibility could be that Bain would team up with Huawei to buy a different network equipment company, but I’m really just spit-balling here. The short story this morning is that the deal is toast.

Update: 3Com has retained Goldman Sachs to sell TippingPoint, and Dow Jones is reporting that bidders include Bain and Thoma Bravo. The price range is between $150 million and $250 million.