Huawei, China’s largest telecommunications and equipment provider, has pulled out of its $2 million acquisition of US enterprise virtualisation vendor 3Leaf Systems after the US government raised security concerns about the deal.

3Leaf Systems’ technology allows up to 16 physical servers to be operated as a single system with a single instance of an operating system. Huawei might have used the technology to provide public cloud computing services, or sold it to telecommunications providers to support their cloud services, or perhaps even to enterprise customers building their own ‘private clouds’.

Huawei, the world’s second largest telecommunications company, announced its intention to acquire 3Leaf Systems in May 2009, but at the time did not receive approval from the US Committee on Foreign Investment (CFIUS).

The committee launched a retroactive investigation into the deal, and has since “recommended” that Huawei reverse the deal. The committee does not have the authority to veto acquisitions, but can in theory recommend that the President does so if security concerns are raised.

“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 Chinese company said in a statement on Saturday.

Huawei was founded by a member of the People’s Liberation Army of China and like all large companies in the country has close links to the government. CFIUS has “recommended” that Huawei drop a number of US acquisitions, most notably that of networking equipment vendor 3Com. The committee opposed that deal on the grounds that 3Com, now part of Hewlett-Packard, is a supplier to the US military.

Aside from the general suspicion about Huawei itself, it is not known how exactly the company’s acquisition of 3Leaf would have compromised US national security. However, according to the Wall Street Journal a group of US congressmen last year called for “close scrutiny” of the deal, “saying it would likely transfer advanced computing technology to China”.

Major themes

Although a minor deal when measured by value, the Huawei / 3Leaf acquisition sits at the intersection of some of the most significant themes shaping the global IT industry.

The first is the convergence of telecommunications and cloud computing. Cloud computing represents a growth opportunity for telcos, as the utility pricing of public cloud services fits with their existing business model. This explains the recent acquisitions of Terremark by Verizon Business, and of NaviSite by Time Warner Cable.

The second is the emergence of Chinese technology companies on the world stage. China is becoming an increasingly important source of research and development services for global IT companies, and arguably represents the greatest challenge to the US’ technology leadership.

Thirdly, skeptics might see the CFIUS’ recommendation to block the deal as an invocation of security concerns to protect commercial interests, something that some experts believe lies behind much of the current fanfare around cyber security. That said, many of the most high-profile cyber attacks in recent times at least appear to have originated in China.