The fate of a highly-watched Chinese buyout of a US chipmaker is now in the hands of US President Donald Trump, but FinanceAsia can reveal the Chinese bidder has given up its hope of the deal possibly getting through.
Lattice Semiconductor, a chip manufacturer and Portland, Oregon’s largest tech company by market cap, wanted to sell to Beijing-backed private equity house Canyon Bridge Capital Partners for $1.3 billion. The deal, announced in November, had been expected to close in early 2017.
The process of getting regulatory approval has, however, dragged on. Lattice and Canyon have three times referred the case to the Committee on Foreign Investment in the United States (Cfius), which said the buyout potentially raised national security concerns – a claim Lattice executives fiercely reject.
Cfius “has indicated that it will recommend that the President of the United States suspend or prohibit the proposed merger,” the chipmaker said in a filing to the US SEC on September 1, adding it “remains of the view that the proposed transaction does not raise any national security concerns that cannot be addressed by the comprehensive mitigation measures that Lattice and Canyon Bridge have proposed to implement".
Although the announcement said the firm would continue discussions with Cfius and Trump, a source with direct knowledge of the matter told FinanceAsia on Thursday the Chinese buyer had already “given up” hope of the transaction being approved. This is due to intensified Sino-US trade disputes and the fact it is clear Cfius has become extremely “politicised” under the Trump administration, especially on deals involving semiconductors.
Cfius also knew Canyon Bridge did not want to take the deal to Trump, according to the source, as the private equity firm had “passed a message” to the US government panel on its stance.
Lattice, however, isn’t quite giving up yet. Its chief executive Darin Billerbeck was earlier spotted in Washington, DC meeting Cfius officials in a last pitch to save the sale, and has also taken the “unusual” step of taking the deal to the President in the hope of getting his back, according to reports.
The move to go direct to Trump surprised many lawyers and dealmakers, as the reputational damage of a presidential rejection would be much bigger than falling at the Cfius hurdle. They say the move underpins how desperate management are to seal the deal, and that they see little to lose after the case dragged on - but big gains if Trump gives the OK.
“Usually, if Cfius gives the ‘negative’ sign, you just withdraw the application,” said a lawyer. This is what China’s aluminium products maker Zhongwang did with its purchase of US Aleris Corporation, a deal that was poised to be China’s biggest-ever of an overseas metals processor.
“He [Billerbeck] is a true Trump believer…and it’s even more surprising that the board went with him,” said the source with knowledge of the deal, who asked not to be named.
Market observers view it as highly unlikely Trump would back the transaction given his often fiery political rhetoric on China, but Lattice said in the filing it believed “if the matter is referred to the President of the United States, the President will decide to allow the proposed Merger to be consummated”. There is no precedent, however, for a US president to go against the recommendation of Cfius on a proposed deal.
“I know that President Trump is a really intelligent businessman. I know that if you had 10 minutes to explain this deal to him, he would say it’s a good deal,” Billerbeck told the Wall Street Journal in an earlier interview.
He already brought up the idea of taking the deal to Trump after the second attempt to seek Cfius approval hit backlogs, according to the source with knowledge of the deal. But the transaction's counterparties compromised, instead deciding to “withdraw and refile” its application to Cfius, as Canyon Bridge strongly opposed going to Trump. “If a third time [filing] doesn't [work], that's it,” said the source of the situation then.
Lattice and Canyon Bridge filed their first formal notice with Cfius in late December 2016 and Cfius accepted the application in January, starting its review clock of 75 days. With no chance of securing approval before hitting the 75-day deadline, Lattice and Canyon Bridge withdrew the first filing and re-filed in March. The third filing occurred on June 9 for the same reason.
Under the amended Defence Production Act of 1950, Trump has 15 calendar days upon receiving the Cfius recommendation to decide to either suspend or prohibit, or approve the transaction.
‘Politicised’ Cfius
This quagmire, as FinanceAsia analysed earlier, has so much more to do with politics rather than real national security issues, which Cfius was created to consider. “Cfius is so politicised now” and that is putting every Chinese deal under a very unfortunate spotlight, said the source.
Charles Martin, managing director at East Asia Group, who advises on cross-border deals by East Asian countries in the US, observes: “China has as many very long Cfius reviews as Japan, South Korea, Taiwan, and Hong Kong combined." The committee does not disclose its review processes to the public though.
Another problem is a significant shortage of Treasury representatives, or supporters of closer Sino-US relations, on the Cfius panel as Trump has been slow to get key appointments approved by lawmakers. The inter-agency committee, chaired by the secretary of the treasury, includes representatives from 16 US departments and agencies, including the defence, state and commerce departments, as well as the most recent addition, the Department of Homeland Security.
“What happened is now Cfius is largely run by the defence people, who always bring up issues…but in the past, when there was treasury people, especially guys like Henry Paulson, in office, at least they would balance the view” with implications on trade and commerce, said the source.
Also, “nobody [at Cfius] is willing to recommend a Chinese deal at the moment…because if the deal went wrong [proved damaging] to US national security – or industry – that person is going to be in trouble,” said another US lawyer.
The Department of Defence raised concerns about the Lattice acquisition this time, two US officials told Reuters.
Besides the Lattice transaction, another deal that’s being closely watched is the acquisition of MoneyGram International by Alibaba’s affiliate Ant Financial.
Dealmakers say if Cfius blocks this deal, it would deter any further attempts for Chinese buyers to do acquisitions in the US and for bankers to spend months advising or financing the deals.
Looking for small, and elsewhere
What is getting popular, and making more sense for Chinese buyers, is minority interest investment, especially when it comes to tech deals in the US.
At present, Cfius does not consider foreign investments covering less than 10% of a company or investments into start-ups. Senior US Senator John Cornyn, a major supporter of stronger powers for Cfius, is working on legislation to expand government reviews of foreign deals to include joint ventures and other structures commonly used in tech acquisitions.
However, lawyers and deal advisors say the legislative process will be lengthy and even if the Texas lawmaker eventually gets his way, plenty of deals will have had time to get around Cfius.
Another area to look at is European companies. Although European Commission President Jean-Claude Juncker wants a new rulebook to strengthen its power to stop Chinese takeovers of Europe’s strategic companies, the fact European countries have many different ways of contemplating takeovers means dealmakers are confident they won’t meet as many roadblocks as they now do in the US.
This is in line with Canyon Bridge’s case. A source says the private equity house now wishes to focus on minority interest investment in the US and European deals.
“We are focused on fast-growing technology segments where our collaborative investment approach can help mid-size companies drive innovation, grow revenue and expand their market reach…accelerate their growth strategies into new markets, particularly in China,” a Canyon Bridge spokesperson wrote in an email exchange with FinanceAsia on Friday.
This article has been corrected in paragraph six to more accurately reflect what Cfius knew about Canyon Bridge's intentions for the deal
