When a Chinese state-controlled semiconductor company acquired Acuity’s US-based client this January, the deal made headlines on both sides of the pond for a very specific reason: this was the first Chinese-backed deal cleared by CFIUS since Trump took office.
CFIUS – the Committee on Foreign Investment in the United States – is no longer an obscure regulatory hurdle, but increasingly something that everyone looking to make a deal in the US needs to consider. As powerful as CFIUS is, it remains an opaque process. The panel is tasked with considering foreign transactions from a national security perspective, but exactly how it operates remains unclear. CFIUS is chaired by the Treasury secretary and includes the heads of the Departments of Defense, Homeland Security, Commerce, and Energy, to name some, and also draws input from intelligence agencies. The deliberations are classified, and the whole process has been described as a “black box”.
Acuity served as financial advisor to Akrion in the Naura acquisition, including the process of navigating CFIUS which was completed within the standard 75 day review window. As is usually the case for anyone involved in a CFIUS process, Acuity is bound by confidentiality regarding the details. But the completion of this successful CFIUS navigation has attracted a lot of attention:
“This accomplishment is especially significant in light of the US government’s noted concerns about Chinese acquisitions in general, and semiconductor company acquisitions in particular. To make the CFIUS approval even more noteworthy is that Naura is also a state-owned company,” a spokesperson for Gibson Dunn law firm, which represented Naura, told the Financial Times.
Dealmakers looking to clear CFIUS were again reminded of the tricky nature of this hurdle in March, when Broadcom’s dream of buying competitor Qualcomm to create a semiconductor superpower was stopped by CFIUS. Tentatively, the $142 billion megadeal looked like it might be welcomed: President Trump had seemed supportive of the idea of Broadcom becoming US-domiciled when he met with the company in November, as the Singapore-based company said it would move upon a successful purchase of US-based Qualcomm.
While the details of the Broadcom deal again remain confidential, reports do provide some useful insights into how this panel might be thinking. A letter written by Aimen Mir of the Treasury suggests CFIUS’s reasons for blocking the transaction could in part be quite speculative. Mir wrote that Broadcom’s intent to take a “private equity-style” direction should the deal go through might lead to a reduction in long-term R&D investment in favour of short-term profitability:
“Reduction in Qualcomm’s long-term technological competitiveness and influence in standard-setting would leave an opening for China to expand its influence on the 5G standard-setting process,” Mir wrote. “Given well-known US national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.”
What does CFIUS mean for dealmaking?
CFIUS is not a new factor for doing business in the US, however its powers were extended in 2007 to extend to any deal potentially relevant to “national security”. The Broadcom example shows just how broadly this interpretation can be drawn. Broadcom does not even have a direct Chinese link, however CFIUS has proven to be particularly concerned with any deal that has a China connection – and in this case seemed to have erred on the side of caution.
CFIUS appears to have become particularly active since President Trump took office, not only reviewing more deals, but also increasing the number of rejections (such as Infineon Technologies’ bid for Cree; Canyon Bridge’s move for Lattice Semiconductor; and Ant Financial Services’ pursuit of MoneyGram). But having a Chinese link does not lead to an automatic no from CFIUS, as unlike Broadcom, most companies seeking to pass this regulatory hurdle will not be in the market to change the future of an entire industry.
It is unclear how many deals have been blocked by CFIUS, as applications are not made public, and companies may choose to walk away should the conditions prove too harsh. The Naura-Akrion deal is not big by Broadcom-Qualcomm standards, however CFIUS is not overly concerned with deal sizes – it cares more about influence. Generally, the process starts with a voluntary submission, made by the two companies if there is strong reason to think CFIUS will want to be involved – the panel can request information if none is forthcoming. A joint voluntary notice is then filed to explain the deal, the company histories, as well as providing a host of other information as listed in the rules. CFIUS may then decide to not intervene, or it can issue a recommendation to the President to block. If national security concerns are raised, the agency has wide powers to set conditions.
The future of M&A under CFIUS
CFIUS “is the number one weapon in the Trump administration’s protectionist arsenal, the ultimate regulatory bazooka” – that is how Hernan Cristerna, co-head of global mergers and acquisitions at JPMorgan Chase, put it to The New York Times.
For the US government, this is certainly an issue of strategy: in its latest National Security Strategy, the US labelled China a “strategic competitor”. Looking back over the record of the past year, CFIUS has become something of a battleground, determining which US companies get to link up with Chinese interests and which do not. The reasoning for rejecting the Broadcom deal shows that this is not strictly just a business problem, but a far bigger issue: a battle for who will dominate the next wave of technological progress.
Right now, US Congress is considering proposed legislation that could greatly expand the number of deals that come under CFIUS purview. The bill could mean thousands of additional cases being required panel oversight, including joint ventures, minority stake sales, and real estate deals near sensitive facilities. The argument to expand the powers of CFIUS is to stop “potential adversaries” of the US from impacting the country’s military advantage by investing in cutting edge companies. However major companies such as IBM have spoken out against the changes, arguing they would limit US firms from doing business abroad, and actually leave the field open for other countries to get ahead by creating business ties across borders that exclude the US.
The proposed bill could also give CFIUS heightened powers to review transactions that could lead to cybersecurity vulnerabilities in the US, or potentially hand over personally identifiable information (PII) about Americans to foreign investors.
“What this means in practice is that deals in sectors like health care, insurance, gaming, finance and e-commerce are all going to get more scrutiny given the amount of PII at issue,” John Carlin, Partner at Morrison & Foerster law firm, and former Assistant Attorney General for the US Department of Justice’s National Security Division, told the National Law Journal. “Already my clients are surprised to hear that these kinds of transactions raise ‘national security’ concerns that need to be mitigated, just as if they were a defense contractor.”