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February 23, 2011

Huawei Withdraws Deal to Take Over US-Based 3Leaf Systems
By Ed Silverstein
TMCnet Contributor

Huawei (News - Alert) Technologies Co., decided to drop its bid to take over U.S.-based 3Leaf after a vocal chorus of American critics urged that a federal regulator stop the controversial deal.

The Committee on Foreign Investment in the United States (CFIUS) recommended against the deal, which would have let the Chinese company acquire assets and technology from 3Leaf Systems, according to a report from the Wall Street Journal.

Huawei had said earlier that it would wait for a ruling from President Barack Obama, instead of abiding by the non-binding suggestion from the CFIUS.

But the “controversy” prompted the company to drop the deal altogether, the Journal reported.

"This was a difficult decision, however, we have decided to accept the recommendation of CFIUS to withdraw our application to acquire specific assets of 3Leaf. The significant impact and attention that this transaction has caused were not what we intended," the company said in a statement that was reported by the Journal.

CFIUS reviews select deals by foreign businesses which want to purchase U.S. companies. They review whether the deals could have implications for U.S. national security, according to The Journal.

Huawei said it did not ask CFIUS for approval initially because it was not acquiring the company outright.

In May, Huawei paid $2 million for intellectual property, some assets and some employees from 3Leaf.

When it found out about the deal, Pentagon officials asked Huawei to request a retroactive review from CFIUS.

In response to the incident, a spokesman for China's Commerce Ministry said the United States should make national-security reviews more transparent, according to The Journal.

In addition, China's Ministry of Commerce said “relevant parties" in the United States should "abandon prejudice, avoid adopting protectionist measures and treat properly investments from China and other countries," The Journal added.

However, Huawei has allegedly has dealt with known terrorists, according to reports cited by TMCnet.

A letter from U.S. Senators Jim Webb (D-Va.) and Jon Kyl (R, Ariz.) said that the sale of 3Leaf to Huawei posed a “serious risk” for national and economic security.

They explain in the letter, which was sent to Obama Administration officials, that the Chinese firm has a “history of illegal behavior and ties with the People's Liberation Army, Taliban and Iranian Revolutionary Guard,” reports TMCnet.

Several lawsuits have been filed in U.S. courts against Huawei that allege it has taken part illegal activities “from patent and trademark infringement to fraudulent inducement,” claimed the Senators in their letter.

The Senators further suspect that Huawei’s acquisition of just parts of 3Leaf was designed to avoid increased scrutiny by U.S. regulators, according to the letter.

“Allowing Huawei and, by extension, communist China to have access to this core technology could pose a serious risk as U.S. computer networks come to further rely on and integrate this technology,” the Senators said.

William Plummer, vice president of government affairs for Huawei, had said the letter "rehashes unfounded innuendo in a seeming attempt to undermine the integrity of the CFIUS process," quoted the Journal. "As Huawei has stated in the past, the company is 100-percent employee-owned and has no ties with any government, nor with the PLA."

More recently, Plummer told The Journal, the company did not want to put Obama in a difficult position.

There will be steps taken to cancel the deal, but specifics were not known this week, TMCnet reports, citing a Chinese news agency.

Ed Silverstein is a TMCnet contributor. To read more of his articles, please visit his columnist page.

Edited by Tammy Wolf


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