The Committee on Foreign Investment in the United States (CFIUS) appears to be putting more inbound US M&A deals on hold than at any time in its history. The inter-agency committee, tasked with reviewing the national security implications of foreign investments in US companies, has increased its scrutiny of foreign investment transactions, which has coincided with a drop in inbound activity M&A targeting US firms.
Both deal value and volume have slid throughout 2017, with 229 deals worth US$47.5 billion plummeting 75 percent compared to a record Q3 2016, while volume dropped by 14 percent.
The fall of inbound M&A from China
The most recent data reported by the Committee, which addresses CFIUS filings in 2015, showed China as the most represented investor country in CFIUS reviews (20 percent of notices filed in 2015, followed by Canada at 15 percent and the UK at 15 percent), a trend that has continued since.
The number of CFIUS reviews has been at a record pace in 2017, with around 200 CFIUS filings as of November. As deal delays and withdrawals related to CFIUS have increased, however, inbound M&A activity from Chinese firms has fallen. M&A investment from Chinese firms had developed in recent years to become a major source of inbound M&A into the US. An internal clampdown from the Chinese government to limit capital flight, combined with increased CFIUS resistance to certain Chinese transactions, have likely contributed to the drop in both the number and value of deals in 2017. In Q3, there were just 11 deals worth US$1.66 billion targeting the US—the lowest quarterly value since Q1 2015.
One example of such CFIUS scrutiny is the US$1.2 billion bid for Lattice Semiconductor Corp. by China-backed Canyon Bridge Capital Partners, which was blocked by President Trump on CFIUS’s recommendation in September. Advisers working on the deal reportedly refused to abandon the transaction despite CFIUS’s objection to it, and instead asked President Trump to step in. Not surprisingly, he refused to deviate from the Committee’s recommendation.
The prohibition of the Lattice acquisition highlights a common thread linking deals under scrutiny by the CFIUS: to preserve sensitive technology from leaving the US and becoming a potential threat to national security. Under this outlook, the semiconductor space has been a particular focus of CFIUS. US semiconductor firms Western Digital, Micron and Fairchild have all seen investments from or acquisitions by Chinese bidders abandoned after objections from CFIUS.
Yet is it not just Chinese firms that are under the microscope. German-based Infineon Technologies was forced to abandon its intended US$850 million acquisition of Wolfspeed, a US semiconductor company.
The Trump factor
The failure to fulfil—and in some cases even nominate—political appointee positions at CFIUS member agencies has been cited as one of the reasons CFIUS has been taking a more conservative stance when reviewing deals.
Legislation was also recently introduced that would make some significant changes to the CFIUS process, including broadening CFIUS’s jurisdiction and making notification to CFIUS mandatory for certain transactions. This legislation was reportedly coordinated carefully with Trump administration officials and is expected to be endorsed by the administration.
The new legislation follows growing concern from congress and observers about the ability of the CFIUS process to adequately address evolving threats. In January, a report published by the President's Council of Advisors on Science and Technology advocated using CFIUS in concert with export control laws to curtail Chinese progress in semiconductor technology—the goal being to protect the US position as the world’s leader in semiconductor technology. And in November 2016, the US-China Economic and Security Review Commission produced a report to Congress recommending amendments to the CFIUS statute so that it could block Chinese state-owned enterprises from acquiring US companies.
In addition to security concerns, some in congress are seeking to implement an “economic security” review for cross-border transactions. Senators Chuck Grassley and Sherrod Brown—a republican and a democrat, respectively—have put forward a bi-partisan bill that empowers the Commerce Department, which is a CFIUS member agency, to examine the economic impact of certain transactions.
The CFIUS process is also taking longer, in part due to heavier scrutiny on numerous complex transactions, and also due to a significant increase of notified transactions. The Committee reviewed 172 deals in 2016, a number which topped the previous modern-era high of 155 deals reached in 2008. Filings in 2017 have come in at an even faster pace, and could top 250 before the end of the year.
In addition to notified transactions, CFIUS is also proactively looking for deals that it deems worth reviewing, even if the parties involved have not made a voluntary notification. This increases the number of reviews by capturing companies who thought a transaction was not relevant for CFIUS, only to be “invited” by the Committee to make a filing.
At the same time that the number of filings is growing, CFIUS has also had to assess a broader range of issues than in the past, as the range of industries considered relevant to US national security has expanded. CFIUS has taken interest in transactions relating to cybersecurity, big data, food security, real estate, technology, financial services and intermediaries, as well as proximity to US military or intelligence assets, among others.
Assistant Secretary of the Treasury Heath Tarbert has stressed that although the CFIUS’ role is to ensure national security interests over considerations of commerce, its position in the Treasury Department indicates a desire to encourage foreign investment. The new CFIUS legislation also emphasizes that the United States remains open to foreign direct investment.
Yet despite this general policy, if winning CFIUS approval continues to be a lengthy and challenging process, investors may be deterred from looking to snap up US assets. This would cause inbound M&A into the US to continue to slide, at least in the short term. Dealmakers looking to acquire US assets will be watching Trump’s policies and his relationship with CFIUS closely over the coming months, as well as the progress of the new CFIUS legislation.
Savvy dealmakers should factor the lengthy CFIUS process into their timelines, and also seek advice during the negotiation stage to ensure a proactive strategy best designed to achieve a successful transaction.