China’s chip M&A hopes continue despite scrutiny

Chinese state-backed investment fund offers to take Xcerra private for $580 million, defying increased regulatory scrutiny on Chinese outbound acquisition of chipmakers.

A Chinese state-backed investment fund on Tuesday made a $580 million bid to acquire US semiconductor testing firm Xcerra, sending a clear signal to the market that its interest in foreign chipmaking assets remains despite increased scrutiny from foreign regulators.  

Xcerra, a Massachusetts-based and Nasdaq-listed company, has received a $10.25-per share cash offer from a subsidiary of China Integrated Circuit Industry Investment Fund, the country’s leading industry fund. The fund was set up in October 2014 to support the development of the domestic semiconductor industry.

While the transaction size is not as large as some of the fund's previous deals, it is sure to draw attention from industry experts and investors alike, since it is the first major Chinese approach for US technology assets since Donald Trump was elected president of the United States.

Despite Trump's tough talk on trade — and on China — it is far from clear that he will be a stauncher critic of Chinese acquisitions than former US president Barack Obama. Obama took a firm stance on Chinese acquisitions of global semiconductor companies, in particular, fearing these deals would give China access to advanced technologies that could threaten US national security.

Last December, Obama ordered the Committee on Foreign Investment in the United States (Cfius) to reject the acquisition of German semiconductor equipment maker Aixtron by a Chinese fund, saying the transaction posed a risk to national security that could not be mitigated.

Cfius’ increased scrutiny on acquisitions involving Chinese funds has caused other deals to falter. Last February, Fairchild Semiconductor backed away from a $2.6 billion offer from a Chinese consortium, while Global Communication Semiconductors also pulled its proposed $226 million takeover by Shanghai-listed Sanan Optoelectronics. Both decisions were linked to likely problems with Cfius approval.

All eyes will now be on Trump. Cfius’ decision on the Xcerra deal will offer a glimpse on whether the new US president will continue the stance of his predecessor when it comes to global technology acquisitions.

During his election campaign Trump promised to get tough on China, criticising Beijing for pulling jobs away from the US and hurting its exports by deliberately devaluing the renminbi. He has also urged local companies to stay in the country instead of moving to locations with lower labour costs.

In this context, there appears to be a good chance that Trump will block the bid. The risk is exacerbated by the fact that Xcerra's offer is made directly by China's state investment fund, suggesting the deal has national rather than purely financial motivations.

China IC Fund is certainly aware of the possibility that Trump or Cfius will block the deal. In a statement, the national industry fund said it will keep Xcerra’s headquarters in Massachusetts and will work closely together with regulators, including Cfius, in the hopes that they will see the merit of the transaction.

Xcerra’s shares jumped 7% to $9.63 on Tuesday after the takeover announcement but were still 6% below the offer price, indicating the market is pricing in a significant risk the deal will not go through.

Xcerra said it will continue to solicit rival bids for the next 35 days, and has agreed to a termination fee of $22.8 million after that period.

The transaction is expected to close before the end of the year.

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