Cross-border tech M&A and the regulatory chilling effect

Inbound M&A into the US tech sector has dipped following heightened scrutiny on Chinese deals, while Germany and the UK are looking to follow suit

Technology M&A targeting US firms appears to be bearing the brunt of the US administration's protectionist measures. Since President Trump took office, the Committee on Foreign Investment in the United States (CFIUS), the body responsible for reviewing the national security implications of foreign investments in US companies, has been more active than ever in challenging deals, often technology-heavy assets pursued by Chinese acquirers. 

The enhanced scrutiny coincides with the value of inbound activity targeting US tech assets dropping. In the first half of 2018, US$10.7 billion-worth of such transactions were announced, a full 68.5% drop in value compared with the second half of 2017. Meanwhile, deal volume fell by 24.3%, from 115 to 87 deals over the same period. Of that total, as little as US$470 million in deals originated from Chinese investors, with Asia's largest economy—and the second largest in the world after the US—claiming just five transactions.

CFIUS clampdown

No country has been more affected by security-related actions by CFIUS and other US regulators than China, making China the go-to example for the rising government hurdles for cross-border dealmaking.

China has ambitions to transform itself from an export-led manufacturer to a leading high-technology nation, as part of its Made in China 2025 program. It hopes to dominate mobile technology, supercomputing, artificial intelligence and other cutting-edge industries the nation considers crucial to its economic and military success. Underpinning those aspirations has been a strategy of picking up tech companies in the US and Europe and patriating their intellectual property and technological knowhow.

The US government is looking to hamper this effort by putting in place even greater curbs on Chinese inbound dealmaking. In August, the President signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA). The new law expands the scope and authorities of CFIUS, giving it jurisdiction to review certain real estate transactions as well as non-passive, non-controlling investments in US businesses involving sensitive personal data, critical infrastructure or critical technology. It also gives the Committee more time to review deals.

In the meantime, China is responding in part by redirecting its activity into Asian countries such as Korea and Japan, where national security controls on investment are less stringent, and by investing in domestic R&D.

Europe follows suit

The US is not the only country to have raised its guard to China. On August 1, the German government announced that it had vetoed a Chinese takeover, the Yantai Taihai Group’s attempt to buy machine tool manufacturer Leifeld Metal Spinning. Germany’s move can be seen as symbolic and politically motivated; Leifeld is relatively insignificant, with sales of just €40 million. This is the first time that Germany has taken such action, after updating its takeover laws last July to give its government greater powers to stop foreign deals.

Ostensibly, Leifeld was protected for security reasons—it produces high-strength metals for the car, space and nuclear industries. The prospect of giving up control of such a company, however small, would naturally trigger national security concerns. But some believe that the decision was made because deal flow has become lopsided. While China has been eager to acquire strategic assets overseas, it is far less willing to allow foreign buyers to acquire its own companies, exercising strict and often predictable merger rulings.

In June, the UK introduced its own new merger control rules to expand the government's powers to stymie overseas investments into companies with certain technologies that have applications for national security. The law—which applies to military and dual use, quantum technology and multipurpose computing hardware—significantly lowers the review threshold, from companies with revenues of £70 million to those taking in just £1 million. A further increase in the government's jurisdiction is the removal of the requirement that any merger or takeover in these sectors lead to an increase in the parties’ combined share of supply of relevant goods or services before the government can intervene.

Looking ahead

It is too early to tell whether recent developments in the UK and Germany will cause inbound tech M&A in these countries to fall, but if the correlation between recent dealmaking figures into the US and CFIUS's stricter approach of the last 18 months is any measure, a drop is probable. Our figures show that in 2016, the year prior to President Trump taking office, Chinese investment into US tech was valued at more than US$7 billion; a year later it had sunk by 68.6%, to just US$2.2 billion.

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