Bankers and lawyers were optimistic that the decision by the Committee on Foreign Investment in the United States (Cfius), which came in the face of fierce criticism in the United States over the deal's impact on food security, would bode well for future deals.
That excitement faded and was replaced by concern when Donald Trump won the November presidential election on a platform full of protectionist rhetoric and anti-China tub-thumping. A handful of law firms and investment banks moved quickly to call in Chinese acquirers and warn of likely delays and the potential for deals to collapse as the Trump administration's version of Cfius took a tougher line.
Five months in, decisions are already being delayed. In part that's because the Trump administration has yet to fill key vacancies at several of the government agencies that make up Cfius. Meanwhile doubts over whether Trump's Cfius will approve deals has increased uncertainty among both buyers and sellers in US-China transactions.
Life under Trump
There is a widespread feeling that the Cfius process is slower in the age of Trump, according to George Grammas, a Washington-based partner at law firm Squire Patton Boggs. “Numerous political appointees are not yet in place, and this will slow the review and clearance,” said Grammas, who heads the firm’s international trade practice, which covers Cfius clearance matters.
Among the Cfius-related posts Trump has yet to fill is that of assistant secretary of the Treasury for international markets and development. Trump nominated former banking regulator Heath Tarbert for the post in April, but lawmakers have yet to approve his appointment.
According to US Senator Mike Crapo, chairman of Committee on Banking, Housing and Urban Affairs, a critical part of Tarbert’s job – and the reason his position was created – is to “marshal the procedures and processes of the multi-agency, Treasury-led Cfius in a timely manner”.
Dealmakers behind some transactions are counting on a quick resolution to the Cfius delays.
For example, Canyon Bridge Capital Partners – a previously obscure private equity firm funded by China Venture Capital Fund which, according to corporate filings cited by Reuters, is closely tied to Beijing – will submit for the third time its application for approval to buy US chip-maker Lattice Semiconductor Corporation for $1.3 billion.
It first sought Cfius approval in January, then refiled in March in order to reset the clock on Cfius review period, which runs for up to 75 days. Lattice announced in a June 12 regulatory filing that it and the buyer would be making a third filing to Cfius. The deal becomes one of the only a handful that have ever been referred to Cfius three times.
The expanded timeline creates another problem for dealmakers: increased uncertainty over whether a transaction will go through.
US electronics maker Inseego Corporation, for example, dropped a $50 million sale of its marquee MiFi mobile hotspot business to Chinese home appliances and mobile technology provider TCL Industries Holdings. Inseego cited “delays and uncertainty of securing approval” as the reason. TCL had refiled twice for Cfius review.
“Cfius is the most Chinese of US regulations, and it’s totally a black box,” said a Hong Kong-based M&A director covering Asia Pacific. “Nobody has any insight into the practicality of what’s going on,” he added, referring to the fact that the Cfius review process is confidential.
“My feeling is that the whole US-China trade thing is the bigger picture, and although Cfius is not supposed to be politicised – other than the fact it reports to the president – the practical reality is that it’s Trump, and we are all new to [this situation],” he said.
The key lessons for Chinese acquirers, according to Grammas, are to “compare the contemplated transaction with prior Cfius review and results and be able to distinguish on the basis of facts and reasoning from the precedent that is detrimental, or to show how the proposed transaction is consistent factually with positive precedent".
For years, there have been calls to expand the scope of Cfius inquiries. For example, lawmakers from Trump's Republican Party last year called for reforms that would see Cfius treat food safety as a security issue, and specifically named Chinese and Russian state-owned enterprise investments as a source of concern.
Such suggestions have not yet materialised, although lawyers and bankers believe Trump, with his "America First" agenda, is more likely to use his executive powers to implement them.
But in certain industries like semiconductors and aerospace, Cfius had been scrutinising deals ever more tightly even before the Trump administration, according to James Hsu, Los Angeles-based partner at Squire Patton Boggs.
On June 9, 27 US lawmakers wrote to Cfius's chairman, Treasury Secretary Steve Mnuchin, demanding he block a Chinese acquisition of a US aluminium products manufacturer.
China Zhongwang Holdings, China’s largest producer of industrial aluminium extrusion products, agreed to buy US aluminium and alloys maker Aleris Corporation for $2.33 billion in August.
“It would be a serious strategic misstep to permit a company like Zhongwang Holdings Ltd to take control of a US aluminium firm like Aleris,” they wrote, according to a Reuters report on Saturday.
“Chinese entities, including state-owned or state-controlled enterprises, often maintain relationships with China’s military, compounding the risk that US technologies will fall into the wrong hands,” they wrote.
Now, said Grammas: “In addition to normal national security review, special attention is given to whether the technologies or the capabilities of the US company that will be acquired are the technologies or capabilities that the US government would support being in China."
Zhongwang announced the deal in August. And in November, a dozen US senators wrote to the then-treasury secretary Jack Lew, pressing him to launch a Cfius review.
Some companies have walked away from transactions amid concerns about Cfius. Last year, Tsinghua Unisplendour, a unit of China's state-backed Tsinghua Holdings, decided to terminate a $3.78 billion purchase of 15% of Western Digital shares after Cfius launched an investigation.
In February last year, US chipmaker Fairchild said it had rejected a $2.46 billion buyout offer from China Resources Microelectronics and Hua Capital Management, over doubts about Cfius approval.
Additional reporting by Jill Mao