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Huawei Loser in SoftBank-Sprint Deal Over Alleged Spying

The U.S. national-security clearance of SoftBank (9984) Corp.’s $20.1 billion acquisition of Sprint Nextel Corp. (S) imposes the first restrictions on a third-party supplier over allegations of Chinese spying.

Tokyo-based SoftBank and Overland Park, Kansas-based Sprint yesterday said they’d been notified their proposed deal was cleared by the U.S. Committee on Foreign Investment, an interagency group that vets non-U.S. acquisitions. The deal needs one more U.S. regulatory clearance.

The companies earlier gave assurances they’d limit use of telecommunications gear made by Huawei Technologies Co., a Shenzhen, China-based company named in a congressional report as a cybersecurity risk to U.S. companies because of ties to the Chinese military. SoftBank and Sprint, as a condition of the national-security clearance, agreed the U.S. could compel Sprint to remove “certain equipment” and approve future vendors, according to a filing by Sprint.

“It’s not where you build it, it’s how you build it,” Trey Hodgkins, a senior vice president for TechAmerica, a Washington-based trade group that represents Verizon Communications Inc., AT&T Inc. and CenturyLink Inc., said in an interview. “It’s a false assumption to think you secure the supply chain by saying you’re not going to buy equipment from one particular company or another.”

Photographer: Chris Ratcliffe/Bloomberg

Huawei Technologies Co. is a Shenzhen, China-based company that is a focus of U.S. unease over potential spying. Close

Huawei Technologies Co. is a Shenzhen, China-based company that is a focus of U.S.... Read More

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Photographer: Chris Ratcliffe/Bloomberg

Huawei Technologies Co. is a Shenzhen, China-based company that is a focus of U.S. unease over potential spying.

Huawei and ZTE Corp., China’s largest phone-equipment makers, have disputed allegations in an October report by the House Intelligence Committee that their expansion may boost U.S. exposure to cyber attacks and spying.

President Barack Obama plans to discuss cybersecurity when he meets Chinese President Xi Jinping on June 7-8 in Rancho Mirage, California, Jay Carney, the White House spokesman, said in a May 28 press briefing.

Supply Chain

Japanese mobile carrier SoftBank and Sprint’s wireless partner Clearwire Corp. (CLWR) use Huawei gear, which includes base stations, servers, routers and switches. SoftBank and Sprint have said they won’t integrate Huawei equipment, according to U.S. Representative Mike Rogers, a Michigan Republican who is chairman of the House Intelligence Committee.

The panel’s report in October recommended that U.S. companies doing business with Huawei and ZTE find another vendor.

“We’re the committee that produced the report that expressed to the world our strong concerns about Huawei,” Rogers said in an interview yesterday. “I don’t think any of those concerns have been mitigated. We all should be worried from a national security perspective about Huawei gear being in the United States.”

Precedent Setting

A government move to rein in use of Chinese gear “may cause companies that are looking at a potential acquisition to scrutinize their supply chain and their vendors well in advance,” Mark Plotkin, a partner at Covington & Burling LLP in Washington who has handled cases before the foreign-investment committee, said in an interview.

“It certainly sets a precedent,” Darrell West, vice president of governance studies at the Brookings Institution, a Washington-based policy group, said in an interview. “Once you’ve established these rules for one business they may try and do that elsewhere.”

William Plummer, a spokesman for Huawei, in an interview called an exclusion from doing business with a U.S. carrier “a non-remedy for a legitimate concern.”

“Pull any of the major global vendors out of the question and you have solved nothing, because they all rely on common global supply chains and they are all subject to common global vulnerabilities,” Plummer said.

Back-End Concern

U.S. policy makers and lawmakers have pointed to a growing body of evidence the Chinese government is behind coordinated cyber attacks aimed at stealing American trade secrets and disabling computer networks that operate banks, power grids and telecommunication networks.

The Pentagon this month for the first time accused the Chinese military of intruding into U.S. computers to steal sensitive data. The Alexandria, Virginia-based computer security company Mandiant Corp. released a report in February concluding that the People’s Liberation Army in China may be behind the hacking of at least 141 companies worldwide since 2006.

“What concerns federal regulators is the Chinese design, programming and manufacture of the back-end telecom infrastructure equipment,” said Afzal Bari, a senior technology analyst for Bloomberg Government.

The decision by the foreign-investment committee in the Softbank-Sprint merger was “widely expected” and won’t have much of an impact on U.S. telecommunication companies, Bari said in an interview.

“Most telecoms in the U.S. already avoid purchasing network infrastructure from Chinese manufacturers like Huawei and ZTE,” he said.

Dish, FCC

Winning national-security clearance shores up SoftBank’s effort to ward off the $25.5 billion counteroffer for Sprint from Dish Network Corp. (DISH), the Englewood, Colorado-based satellite-television supplier seeking to expand into smartphones.

“The U.S. government should proceed with deliberation and caution in allowing assets of national strategic importance -- such as the Sprint fiber backbone and wireless networks -- to be owned and operated by a foreign company with significant ties to China,” Stanton Dodge, Dish’s general counsel, said in an e-mailed statement.

“Congress should take a close look” at the review process, Dodge said.

Holly Shulman, a spokeswoman for the foreign-investment committee, declined to comment.

The national-security clearance leaves the Federal Communications Commission as the last U.S. agency examining the SoftBank bid for Sprint.

To contact the reporters on this story: Todd Shields in Washington at tshields3@bloomberg.net or Chris Strohm in Washington at cstrohm1@bloomberg.net.

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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