Putting The Brakes On Consolidation

Oversight by government agencies is rising, putting a damper on future deals—particularly those involving China.


China’s efforts to reduce its trade deficit by acquiring technology outside of its borders—particularly in the areas of process technology and memory—are hitting some snags. Any proposed acquisitions are being closely monitored by government agencies around the globe, and in many cases they have been quietly derailed.

The Committee on Foreign Investment in the United States (CFIUS) is particularly active in this regard. For example, a letter to the committee, dated Dec. 6, and signed by 22 members of Congress from both parties, argues against the acquisition of Lattice Semiconductor by Canyon Bridge Capital Partners. The letter states, in part: “Over the past year, there has been a significant increase of attempted Chinese acquisitions of U.S. Semiconductor Firms, which we believe illustrates China’s strategic effort to bolster its own capabilities with U.S. technologies, as well as disrupt the American military supply chain. Moreover, China’s Five-Year Plan lays forth the goal for the PRC to become a worldwide leader in semiconductor production by 2030.”

Those concerns are only increasing. DJ Rosenthal, associate managing director of Kroll—a high-powered, behind-the-scenes consulting firm (it specializes in corporate risk mitigation), and co-chair of the group’s CFIUS practice—believes that CFIUS will change over the coming years in ways that make it even tougher for foreign buyers.

“There is increased agita about the rising number of bids by foreign buyers,” said Rosenthal, who worked for CFIUS until about a year ago. “Semiconductors are used in all technologies, and the cost to build that technology is more than the cost of buying technical know-how.”

He said a new report suggests broad categories of changes that the government could make in a variety of industries, not just semiconductors. But there are limits and loopholes, which are potentially significant in the high-tech world.

“Currently, CFIUS reviews investments in U.S. businesses or international business in the U.S., but it does not have the authority to look at green-field technologies,” Rosenthal said. “So if it’s a new semiconductor company, there is no CFIUS review. It also has no authority to review a business where all operations are overseas but they sell into the U.S.”

One possible change involves presumptions that CFIUS uses to assess deals or transactions, he said. “There is a laundry list about national security. One area involves critical infrastructure, which constitutes a security risk, but where it’s not about an individual transaction. If the government were to assume it was a national security risk, that would create a higher hill to climb.”

He said the committee, which has representatives from the U.S. Departments of State, Justice, Homeland Security and Commerce, also could ensure a very strict compliance with “no national security concerns.” Simply put, any speculation about national security could lead to a rejection by the committee.

“The solution for different industries is to be proactive with the Committee, but that’s more difficult for semiconductors. There may be an option for passive investment. But for active investment, no,” he said.

CFIUS also has the power to require security officers, policy and procedures, and employee procedures in companies with multiple product lines if one of them is deemed vital to U.S. national interests. And it can make unannounced visits, conduct audits, or hire third parties to ensure compliance.

How all of this affects the ongoing consolidation in the semiconductor industry remains to be seen. There are enormous funds being created in China, but far less is being spent out of those funds on M&A than one might expect.

The U.S. isn’t alone in regulating M&A, of course. All major economic regions where a company does business can do their own audits and raise barriers to acquisitions, including China. But awareness and sensitivity is growing everywhere, particularly as security and breaches become almost daily occurrences. Even with cheap capital and willing buyers, consolidation is becoming much more difficult.

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