In September 2007, China’s No. 1 network-equipment maker and Bain Capital launched a $2.2 billion takeover bid for 3Com. The deal stipulated that Huawei would receive a 16% stake in 3Com, leaving the rest to Bain. However, complications arose when the U.S. government expressed reservation about the deal and the possible breach of national security.

The fact that Shenzhen-based Huawei was founded by Ren Zhengfei, a former officer in the Chinese army, raised suspicion about the company’s intentions for 3Com, which has its own ties to the Pentagon.

3Com’s Tipping Point unit makes security software for the U.S. government, and policymakers worry that 3Com’s networking technology would allow China to eavesdrop on U.S. domestic conversations. Another concern was that the company’s encryption technology would make Chinese networks harder to tap.

Bain broke off a deal with China’s Huawei Technologies in March when it became apparent that their application to the Committee on Foreign Investment would not be approved. Now, 3Com is suing for a $66 million breakup fee.

“3Com now seeks the benefit of the bargain that was struck, and to require Bain Capital’s Newco to live up to its commitments in the merger agreement by paying the termination fee,” lawyers for Marlborough-based 3Com said in a statement.

Source: 3Com Sues Bain Capital for $66 Million Failed Takeover

Unicom will also pay $24 billion to take over fixed-line operator China Netcom Group Corp. Ltd. (ADR: CN) by issuing more than 10 billion new shares, Reuters reported.

These asset swaps are the first since the government announced a little over a week ago that the country would undergo a high-profile industry overhaul that will meld China’s six main wireless providers into just three – China Telecom, China Netcom and China Mobile Ltd. (ADR: CHL).

The reason: China needs to catch up with the rest of the world in adopting third-generation, or 3G, wireless services that quicken increasingly popular Internet services such as music and video downloading.

A day before the deal’s announcement, China’s state-controlled Xinhua news agency reported that China Mobile – the world’s fourth-largest company and largest mobile phone company – said it would take over China Tietong Telecommunications Corp. for an undisclosed amount.

“The government is the owner of all the players and the umpire and determines the playing field,” Duncan Clark of Beijing-based consultant group BDA told Reuters. “This is the first step toward 3G, but does it mean 3G will come sooner? That remains to be seen.”

Industry analysts expect each of the giant telecom companies to employ different versions of 3G technologies, The Wall Street Journal reported. One of those will include China’s own 3G standard, called TD-SCDMA.

But other 3G providers such as Paris-based Alcatel-Lucent (ADR: ALU), China’s Huawei Technologies Co. and Ericsson Telefon AB LM are hoping for a shot at what could be windfall profits via contracts with China’s new telecom kings.

“This restructuring is key to a 3G rollout, and there will be lots of opportunities for domestic and foreign equipment providers,” Ian McGuinn, managing director for JL McGregor & Co., a China-focused consulting company, told The Wall Street Journal.

Source: Phase One of China’s Telecom Overhaul: China Unicom, China Telecom