China Inc’s hunger for foreign companies received another blow this week, after US regulators blocked Sanan Optoelectronics’ $226 million takeover of a California-based semiconductor company.
Sanan Optoelectronics was forced to cancel the buyout of Taiwan-listed Global Communication Semiconductors (GCS) three months after announcing the acquisition. The Committee on Foreign Investment in the United States (CFIUS) turned down the proposal, the company said in an exchange filing on Tuesday.
CFIUS, an inter-agency committee that reviews inbound transactions that could potentially threaten US national security, has been a bugbear for other Chinese companies hoping to close acquisitions in the US. It has only rejected one other Chinese acquisition this year, but other companies have pulled deals after CFIUS confirmed it was looking into them.
The decision to block the takeover suggests the US government is worried about giving a Chinese company access to sensitive military and communication technologies, even when that company is itself a small-player.
GCS manufactures semiconductor wafers that are used in the fabrication of integrated circuits and other micro devices. In a statement two years ago, the company said it has developed a mobility transition process that is capable of meeting the performance requirements of most high frequency commercial receivers and military radar systems.
Heightened scrutiny
Chinese companies are experiencing an M&A boom, breaking all records with more than $150 billion of deals so far this year. But Sanan’s fate shows the difficulties some Chinese executives face when trying to win approval for US deals.
This especially applies to technology companies. The four deals pulled this year due to fears over CFIUS approval — or due to a direct block from CFIUS — have all been in the technology sector.
In January, CFIUS blocked a Chinese consortium’s attempt to purchase a majority stake in electronics group Philips’ Lumiled LED lights unit. Philips is a Dutch company, but the subsidiary was based in California.
A month later, state-owned Chinese company Tsinghua Unisplendour withdrew its $3.8 billion offer for a 15% stake in US storage technology company Western Digital amid fears that CFIUS would object to the deal.
The uncertainty has turned off sellers. American chipmaker Fairchlid Semiconductor rejected an offer from a Chinese consortium led by China Resources Microelectronics and Hua Capital Management in February, citing a significant risk of failing to get CFIUS approval. The US company has subsequently accepted a lower offer from its local rival On Semiconductor.
A Chinese consortium led by internet duo Qihoo 360 Technology and Beijing Kunlun Tech withdrew a $1.2 billion full takeover of Norwegian online browser developer Opera Software in June and instead paid $600 million for a partial stake. The alternative proposal was said to relieve some of the concerns over the deal’s impact on US national security and privacy, although CFIUS has never revealed that it has launched a review into the transaction.
Ongoing deals
Increased scrutiny by the US regulator over Chinese acquisitions may have a spillover effect to ongoing transactions, particularly high-profile deals. Foreign companies can voluntarily notify CFIUS about their deals but in any case the agency is authorised to intervene into transactions that are not submitted.
China National Chemical Corporation, or ChemChina, said in June it had voluntarily submitted for CFIUS to review its $43 billion bid for Swiss agrochemical company Syngenta, the largest-ever announced outbound acquisition by a Chinese company.
Industry experts argue that while the probability of a CFIUS rejection out of national security concerns is low, the deal could face reviews from other government bodies, particularly antitrust regulators from relevant jurisdictions.
CFIUS is also reviewing Chinese home appliance maker Midea's $5.2 billion offer for German robot manufacturer Kuka, and state-owned Sinochem Group's $300 million bid for Singapore-listed Halcyon Agri Corp.
The US is not the only country that raises national security concerns over the acquisitions of Chinese companies. China’s Tsinghua Unigroup pulled out of an agreement to buy a 25% stake in Taiwanese chip assembling giant Siliconware Precision Industries (SPIL) in April, citing uncertainties over the new Taiwanese government’s policies and a possibility that the government could block the transaction due to national security reasons.
Promising outlook
These problems are, at the moment, blips in an otherwise booming market. M&A bankers and lawyers remain hopeful about the second half of the year for Chinese outbound deals as Beijing continues to encourage local companies — both state-owned and private firms — to actively seek foreign acquisitions.
“There seems to be more cases being rejected by foreign governments, but you have to take into account the overall increase in deal volume,” a Chinese M&A banker told FinanceAsia. “You will somehow find one or two rotten apples in a big basket, but that does not mean that the overall quality has decreased.”
China is set for a record-breaking year in terms of outbound M&A, with total volume of nearly $150 billion in the first seven months of the year, according to data provider Dealogic.
“We expect the growth in Chinese outbound M&A to continue during the remainder of 2016 and beyond, driven by a variety of factors including a slowdown of China’s domestic economy and a transition from a low-cost manufacturing economy to one driven by consumption and technology,” British law firm Freshfields Bruckhaus Deringer said in a report earlier this year.
“Against this background, we would expect industries such as healthcare, leisure, technology and consumer products to continue to be attractive to Chinese investors,” the firm said.
