Updates to this story
Huawei Technologies, a Chinese telecom equipment manufacturer, has angered the US government for buying a small technology company without seeking prior approval first.
The acquisition was of 3LeafSystems, a San Francisco Bay Area firm that specialises in linking up servers to make more powerful computers and networks which Huawei paid $2 million for.
All was above board except for the fact that the Committee on Foreign Investment in the US (CFIUS) should have been notified to allow a review, which both Huawei and 3Leaf said was a rule they were not aware of, according to the Wall Street Journal.
The Pentagon has asked Huawei to retroactively clear the deal with CFIUS, which Huawei has agreed to. The company said it submitted an application to CFIUS last week.
Not many acquisitions have been allowed a retroactive review, so Huawei may be lucky this time. However, it may be forced to sell the company if CFIUS believes the deal is a threat to the national security of the US.
“From the outset, we've been very transparent,” said Bill Plummer, Vice President of External Affairs for Huawei USA. “At that time the perception was because of the unique nature of the activity and the acquisition of the patents that it simply wouldn't trigger a CFIUS review.”
Part of the contention over the necessity of a review is because Huawei didn't buy the entire assets of 3LeafSystsems which has received several million dollars in investment from Intel and LSI. The acquisition only accounted for the intellectual propety, such as patents, of 3LeafSystems, and only 16 of its 50 employees. The buildings and equipment of the company were not part of the deal.
Had Huawei made separate purchases of patents and then hired some of 3LeadSystems staff, the problem may never have arisen, but CFIUS views the deal as a purchase of the company, regardless of whether or not large parts of it were left out.
A major factor in this debacle is Huawei's overall image in the US. It has previously been accused of being closely involved with the Chinese government and military, making a larger foray into the US market a potential threat to national security.
Huawei has denied the links and said it will open itself to third-party inspection. It has been attempting to strengthen relationships with the US for some time now and has attempted deals and acquisitions with other companies -, some of which have also been blocked.