A US national security watchdog’s refusal to approve Ant Financial’s $1.2 billion acquisition of Dallas-based money transfer firm MoneyGram on Tuesday shows its deep mistrust of how China’s largest technology firms would use data they collect from citizens.
This stance by an arm of the US government can only hinder China’s major data aggregators such as Alibaba, the owner of Ant Financial, Tencent, Baidu and Ping An as they seek to expand overseas, say financial sources.
It also throws up a major roadblock for China’s policymakers who made the acquisition of technology a major plank of their agenda at the 19th Party Congress in October.
Securing MoneyGram would have given Ant Financial, the world’s most valuable fintech company, a significant foothold in the US and Latin America. But those plans were shattered on Tuesday.
MoneyGram’s chief executive officer Alex Holmes said in a press release that the two parties failed to close the transaction because they were unable to secure approval from the Committee on Foreign Investment in the United States (Cfius), the interagency body that reviews foreign investments and studies their national security implications.
The US regulator ultimately feared the Chinese government might find a way to access MoneyGram’s 2.4 billion bank and mobile accounts, according to a source with knowledge of how Cfius makes decisions. It was also loathe to cede responsibility for preventing a cyberattack to a foreign entity, given a potential leak of such a large volume of personal financial data could pose a national financial security threat.
The massive Equifax breach in September, which compromised the data of 145 million Americans, has heightened awareness in the US about data security.
In addition, foreign control of MoneyGram would also undermine the US government’s ability to investigate anti-money-laundering processes in the fight against terrorism since the US would lose direct access to information related to cross-border currency transfers, the source said.
Ant Financial has strongly protested that the data it collects is immediately made anonymous. “In the big data age we understand you very well but we don’t know you – you are like a familiar stranger,” Ant Financial’s chief strategy officer, Chen Long, told FinanceAsia in November.
Cfius has rejected deals involving Chinese money before. In September it blocked Chinese-funded Canyon Bridge’s $1.3 billion buyout of Lattice Semiconductor citing concerns over a potential transfer of US technology know-how and intellectual property to China.
China's Fosun International sold a unit of US insurer Ironshore after Cfius raised questions about its use of data. The unit in question, Wright & Co, provided professional liability coverage to US government employees.
But this is the first time Cfius has blocked a major deal by one of China’s leading internet firms. The watchdog’s move is being widely interpreted as a template of President Donald Trump’s regulatory approach towards mergers and acquisitions involving Chinese companies in the future.
In December there were around 27 offers by Chinese companies for US firms awaiting approval including: China Oceanwide’s $2.7 billion buyout of US mortgage insurer Genworth Financial and Sino IC Capital’s $580 million acquisition of chip testing firm Xcerra.
Key for securing a green light will be picking battles in non-sensitive sectors and taking steps to mitigate regulatory concerns, expert dealmakers said.
A case in point: China Oceanwide is working hard to prove to Cfius it would not have access to Americans' data if it were to own Genworth. It has extended its deal deadline twice to try to win Cfius’ approval. Genworth said in December its additional mitigation approach was designed to protect US citizens' private personal information by using the data administration services of a US third-party service provider.
Mitigation to this extent was never feasible in the case of MoneyGram, said one acquisitions specialist in China. “This was always a deal too far,” he said.
It's not as if MoneyGram has a squeaky clean record to date. The Texan firm was found guilty of consumer fraud by the Department of Justice and is subject to a deferred prosecution agreement dating from 2012.
Tuesday’s announcement put an end to 11-month deal process since the proposal was tabled in January last year, a week after the inauguration of Trump as US president.
While some experts have pointed out that the rejection is the latest sign of Trump’s greater scrutiny over Chinese investment in the US, one lawyer familiar with antitrust issues pointed out that Trump’s impact on cross-border M&A deals may have been exaggerated.
“Given the scale of MoneyGram and the highly-sensitive money transfer business, the case is unlikely to go through even in the Obama or the Bush administration,” the lawyer told FinanceAsia. “But there is a trend to attribute the result to Trump given his hard stance on China.”
Cfius has allowed some deals to pass involving Chinese money. In May last year, the watchdog approved the $500 million sale of Analogix Semiconductor to a consortium that includes state-backed China Integrated Circuit Industry Investment Fund.
Also the US is not alone in its concerns over big data aggregators. There is a growing international awareness of how data can be misused, a rising backlash against Big Tech and a clampdown on cross-border transfers of information.
China is also increasingly wary about the protection of personal information and individual privacy and introduced a new cybersecurity law on June 1.
Foreign enterprises that collect sensitive personal data in China must now store it domestically.
THE DEAL IS DEAD; LONG LIVE THE DEAL
For Ant Financial, the attention now turns to whether it will look for alternative targets to bolster its money transfer and remittance capabilities overseas, a priority for the Alibaba-affiliate amid tougher competition in the domestic e-payment market.
The $3.5 billion syndicated loan Ant Financial took out partly to pay for MoneyGram will still be available to the Chinese firm and could be used for another acquisition, financial sources told FinanceAsia.
The company is also keen to strengthen its overseas presence as the number of Chinese travellers, as well as demand for cross-border money transfer services, increases. That means Ant Financial is no longer able to fulfil customer demands with its mainly domestic-only payment services.
Ant Financial and Moneygram said in the press release they would explore ways to work together in money transfer services. That would depend on Moneygram continuing to be independent.
US-based Euronet Worldwide put in a rival bid for MoneyGram on March 14, forcing Ant Financial to raise its offer to $18 a share. Euronet, led by Michael Brown, may or may not come back with a bid for MoneyGram and it would not be subject to Cfius’ foreign clearance requirements.
Ant Financial’s latest overseas push was in April last year when it acquired Hellopay, the payment unit of Singaporean e-commerce firm Lazada Group. It also has a stake in Indian payment company Paytm and South Korean internet-based lender K-Bank.
However, while the scope of these investments is much smaller than MoneyGram, they are less likely to boost Ant Financial’s global presence since they are very much confined to Asia.
But the highly-fragmented global remittance market means there are still a lot of potential opportunities out there. MoneyGram is the world’s second largest money transfer services provider (behind the near-ubiquitous Western Union) but has only a 5% share of the global market.
Ant Financial, which is estimated to be worth around $75 billion after a record $4.5 billion equity raise in April 2016, is tipped go public in one of the world's biggest initial public offering in one or two years' time.