China chip hopes thwarted as Fairchild rejects bid

US chipmaker Fairchild Semiconductor rejected a $2.6 billion bid from a Chinese consortium citing national security concerns.

China’s huge acquisitive interest in foreign semiconductor assets is not going as smoothly as it would wish after Fairchild Semiconductor turned down a $2.6 billion joint bid from a Chinese consortium on Tuesday.

The American chipmaker rejected a $21.7-per share bid from a consortium formed by China Resources Microelectronics and Hua Capital Management, casting some doubt over whether it would be approved.

“The board concluded that there is some non-negligible risk of a failure to obtain an approval from the Committee on Foreign Investment in the United States,” Fairchild said in a statement filed with the US Securities and Exchange Commission.

The Committee on Foreign Investment in the United States, or CFIUS, is an inter-agency panel led by the Treasury Department that assesses major foreign investments into the US that might potentially harm national security.

Instead, Fairchild looks set now to proceed with a merger deal agreed in November with US peer On Semiconductor at $20 per share.

After taking into consideration the risk that CFIUS approval might not be forthcoming, Fairchild said it had concluded that the Chinese bid “is not superior to Fairchild’s existing agreement with On Semiconductor.”

"Specifically, the board believed that the consortium’s proposed $108 million CFIUS reverse termination fee would not adequately justify risking the company stockholder premium present in the ON Semiconductor transaction," Fairchild said in its filing.

Reuters, citing an anonymous source familiar with the matter, reported that Fairchild's board is open to another offer by the Chinese.

National security concerns

The failure of the Fairchild bid is another example of the growing concerns in the US as China Inc ventures overseas in search of technical expertise and assets it can buy in sensitive sectors such as technology and communications.

Such concerns have also arisen in Taiwan, a frequent destination for Chinese semiconductor buyers.

Silicon Precision Industries (SPIL) last year entered into an agreement to sell 25% of its enlarged share capital to China’s state-owned Tsinghua Unigroup. The deal was strongly opposed by industry competitors, government officials, and some prominent politicians including current president-elect Tsai Ing-wen, who claimed the sale posed a serious threat to Taiwan’s semiconductor industry.

Tsinghua Unigroup has also offered to purchase a 25% stake in each of Taiwanese memory chipmaker Powertech Technology and Chipmos Technologies.

China’s huge foreign acquisitive interest in overseas semiconductor assets stems from Beijing’s desire to reduce its reliance on foreign semiconductor suppliers.

In October 2014, Beijing established the National Integrated Circuitry Industry Investment Fund and encouraged local companies to acquire foreign chip making companies by offering capital support. 

Tsinghua Unigroup and Hua Capital are considered the most aggressive buyers.

“Regional governments have specific mandates to acquire foreign semiconductor assets,” George Chang, head of regional technology research at Yuanta Investment Consulting, told FinanceAsia. “Many of these companies are placing bids without considering the chance of success because it is simply a way to showcase their work to the central government.”

Supported by cheap financing and government initiatives, Chang believes the likes of Tsinghua Unigroup and Hua Capital will continue to target US and Taiwanese semiconductor companies despite their setbacks.

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