China wants to in­vest in your com­pany? Trea­sury may have some­thing to say about that

▶ A Trea­sury com­mit­tee scours pur­chases for se­cu­rity is­sues ▶ “Such scru­tiny of Chi­nese com­pa­nies ... is un­fair”

Bloomberg Businessweek (North America) - - Contents - Bruce Ein­horn

In China, “no” is an an­swer that Ts­inghua Unis­plen­dour doesn’t usu­ally hear. The Bei­jing-based tech power has deep political con­nec­tions: It’s owned by Ts­inghua Univer­sity, China’s top tech school and the alma mater of Pres­i­dent Xi Jin­ping. Unis­plen­dour last year paid $2.3 bil­lion for a con­trol­ling stake in HP’S Chi­nese server busi­ness. Af­fil­i­ated com­pany Ts­inghua Un­i­group spent over $2.2 bil­lion to buy two Chi­nese chip de­sign­ers in 2013 and last year un­veiled plans to in­vest $2.7 bil­lion in three Tai­wanese chip as­sem­blers and testers. In Septem­ber, Unis­plen­dour said it would in­vest $3.8 bil­lion in Western Dig­i­tal, the Irvine, Calif., hard drive maker. The pur­chase would have made it the com­pany’s largest share­holder, and would have been the big­gest tech in­vest­ment by any Chi­nese buyer ever.

On Feb. 23, Unis­plen­dour an­nounced it was walk­ing away from Western Dig­i­tal rather than un­dergo a re­view by the Com­mit­tee on For­eign In­vest­ment in the U.S., or CFIUS. The com­mit­tee’s nine-mem­ber panel is chaired by Trea­sury Sec­re­tary Ja­cob Lew and also in­cludes the heads of the de­part­ments of Jus­tice, Home­land Se­cu­rity, Com­merce, De­fense, State, and En­ergy, as well as the Of­fice of the USTR and the Of­fice of Sci­ence and Tech­nol­ogy Pol­icy. Since it has the au­thor­ity to block deals it con­cludes pose a threat to na­tional se­cu­rity, it ex­erts great in­flu­ence

on which U.S. com­pa­nies can be ac­quired by for­eign cor­po­ra­tions. The Trea­sury Depart­ment wouldn’t com­ment on CFIUS’S re­cent re­views.

Unis­plen­dour isn’t the first Chi­nese com­pany to re­treat from a fight with CFIUS. A $2.8 bil­lion sale to a Chi­nese pri­vate equity firm of the light­ing com­po­nents busi­ness of Philips fell apart in Jan­uary af­ter the Dutch gi­ant said CFIUS had “con­cerns.” A sub­sidiary of the busi­ness is in San Jose, giv­ing CFIUS the right to re­view the deal. On Feb. 16, San Jose-based chip­maker Fairchild Semi­con­duc­tor re­jected a Chi­nese bid. Bloomberg In­tel­li­gence an­a­lyst Woo Jin Ho wrote in a Feb. 24 note that the com­pany re­jected the bid be­cause of reg­u­la­tory con­cerns. “Such scru­tiny of Chi­nese com­pa­nies plan­ning to in­vest in the U.S. is un­fair,” the Global Times, a state-con­trolled news­pa­per in Bei­jing, wrote on Feb. 25, “and not in the in­ter­est of the U.S.” Fairchild didn’t re­spond to a re­quest for com­ment.

CFIUS ac­tu­ally does au­tho­rize Chi­nese deals. Last year it signed off on a $1.9 bil­lion Chi­nese ac­qui­si­tion of Santa Clara-based Om­nivi­sion Tech­nolo­gies, which makes cam­era sen­sors used in the iphone. An­other Chi­nese group in De­cem­ber suc­cess­fully con­cluded its $790 mil­lion pur­chase of Mil­pi­tas, Calif.-based chip de­signer In­te­grated Sil­i­con So­lu­tion.

Such com­pleted deals sug­gest the U.S. govern­ment isn’t sin­gling out all trans­ac­tions in­volv­ing Chi­nese buy­ers, says Thilo Hane­mann, di­rec­tor of Rhodium Group, an eco­nomic re­search firm. “CFIUS has been quite con­sis­tent,” he says. “It’s just that there have been a num­ber of deals with po­ten­tial na­tional se­cu­rity im­pli­ca­tions.”

As the pace of Chi­nese over­seas in­vest­ment picks up, “there is a real ques­tion of whether CFIUS has the ca­pac­ity to con­tinue to man­age its work­load,” a Feb. 22 re­port from law firm Cov­ing­ton & Burl­ing con­cluded. The flood of Chi­nese money into the U.S. is strain­ing the bu­reau­cracy. Of the 147 pro­posed pur­chases the com­mit­tee re­viewed in 2014 (the most re­cent year for which sta­tis­tics are avail­able), two dozen were Chi­nese, ac­cord­ing to the com­mit­tee’s Feb. 19 an­nual re­port. That made China the lead­ing source of re­views for the third year in a row.

In Jan­uary and Fe­bru­ary, Chi­nese com­pa­nies an­nounced plans to spend more than $77 bil­lion on for­eign deals. On Jan. 12 bil­lion­aire Wang Jian­lin’s

Dalian Wanda Group agreed to spend as much as $3.5 bil­lion for Leg­endary

En­ter­tain­ment, the Hol­ly­wood com­pany be­hind Juras­sic World.

Qing­dao Haier on Jan. 15 agreed to a $5.4 bil­lion pur­chase of Gen­eral Elec­tric’s ap­pli­ance busi­ness. On Feb. 17, Tian­jin Tian­hai In­vest­ment, a ship­ping and lo­gis­tics com­pany, said it would spend $6.1 bil­lion for In­gram Mi­cro, a Cal­i­for­nia dis­trib­u­tor of com­puter hard­ware, net­work­ing equip­ment, and soft­ware prod­ucts.

CFIUS has the right to re­view not only any ac­qui­si­tion of an Amer­i­can com­pany by for­eign in­ter­ests, but also “any deal that could re­sult in con­trol of a U.S. busi­ness by a for­eign per­son,” ac­cord­ing to its web­site. An es­pe­cially sen­si­tive topic is the pur­chase of Amer­i­can know-how in semi­con­duc­tors by Chi­nese in­vestors. The Chi­nese are de­ter­mined to build a world-class chip­mak­ing in­dus­try.

The U.S. ap­proval process will be­come even more fraught as political scru­tiny in­creases with the ap­proach of the Novem­ber elec­tion and the tran­si­tion to a new pres­i­dent, Cov­ing­ton warned. “We are see­ing a tip­ping point emerge with re­spect to the flex­i­bil­ity and ca­pac­ity of the U.S. reg­u­la­tory and political pro­cesses to ab­sorb the grow­ing flow of Chi­nese in­vest­ment.”

The bot­tom line China’s plans to spend $77 bil­lion on for­eign in­vest­ments so far this year will in­clude ma­jor moves in the U.S.

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