It's no secret US President Donald Trump has tapped his ability to review cross-border mergers and acquisitions as a tool in curbing China’s expansion globally. As the trade war heats up, it's no surprise China is looking to do the same too.
Beijing's new tactic emerged clearly in late July when, after nearly two years of work on the deal, US chipmaking giant Qualcomm terminated its proposed $44 billion acquisition of Dutch chipmaker NXP Semiconductors after failing to get regulatory approval from the Chinese authority.
A green light from China’s Ministry of Commerce (Mofcom) was the last regulatory hurdle for Qualcomm after it received approval from eight other antitrust regulators, including the Committee on Foreign Investment in the US (Cfius), Japan Fair Trade Commission and the European Commission.
Although Mofcom did not officially reject the acquisition, it declined to grant an approval before Qualcomm’s deadline to close the transaction on July 25. Qualcomm had applied to Mofcom when it announced the takeover in October 2016.
That the Chinese antitrust watchdog failed to come up with a decision for as long as 20 months was highly unusual; in the past it has given a clearance decision in as little as 30 calendar days for simple cases. Mofcom has never before reviewed any case for more than 16 months.
The prolonged review of Qualcomm/NXP was particularly intriguing given Mocfom has been making efforts to speed up its clearance process.
Last year, Mofcom’s average acceptance time for M&A deals fell 14.2% year-on-year, while deal closing time was also shortened by 8% compared to 2016, according to law firm Davis Polk.
In addition, Mofcom is not known for rejecting deals, even for US firms. In one of the many cases it approved last year, the antitrust watchdog gave conditional clearance for the merger between US chemical giants Dow and DuPont, despite clear concerns that it would hurt local chemical manufacturers.
Since China enacted the anti-monopoly law in 2007, the regulator has only banned two deals – Coca-Cola's $2.4 billion acquisition of Chinese juice maker Huiyuan Juice in 2009 and the proposed alliance between shipping giants Maersk Line, Mediterranean Shipping and CMA CGM in 2014.
Mofcom spokesperson Gao Geng insisted the decision was based purely on the antitrust review — but that didn't stop widespread criticism and accusations that Beijing's actions had its trade spat with the US in mind.
Qualcomm’s failure deals a massive blow to the US in its pursuit of 5G, the next-generation mobile technology that is capable of disrupting multiple industries. Beijing’s decision on Qualcomm will give it a further lead in the race to 5G, according to CTIA, a trade association representing the US wireless communication industry.
For their own part, Donald Trump and the US are no stranger to the antitrust battleground.
Since Trump became president in January last year, Cfius has rejected 15 transactions involving Chinese buyers. They include high-profile deals such as Ant Financial’s proposed acquisition of MoneyGram, Canyon Bridge’s bid for Lattice Semiconductor and Sino IC Fund’s offer for Xcerra.
The US inter-agency committee has clearly made a huge impact on how Chinese buyers and US targets approach M&A opportunities.
It is increasingly common for target companies to charge a reverse breakup fee on the buyer, which will be paid if the transaction cannot clear Cfius approval, among other factors. In order to reduce the risk of paying a substantial breakup fee, many Chinese buyers now seek insurance coverage against possible Cfius rejection.
While Beijing appears to take a tougher stance against US mergers and acquisitions, it is unlikely to make an impact as significant as Cifus, one corporate lawyer told FinanceAsia.
“It all comes down to the fact that there are a lot more Chinese buyers than US buyers,” the corporate lawyer said. “Mofcom’s impact is limited because there are not many large Chinese inbound acquisitions by US firms.”
In addition to reviewing inbound M&A transactions, Beijing also needs to sign off mergers involving non-Chinese firms if they pose a significant impact on Chinese companies in the same industry. However, Beijing is hardly on the driving seat in such cases and has to consider the decisions by other jurisdictions, according to the corporate lawyer.
BEIJING UPS ITS GAME
Beijing appears conscious of the fact Cfius is more influential than Mofcom in the antitrust battle and is prepared to take the game to the next level.
In a statement issued on July 30, Mofcom announced it planned to require a national security review for strategic investments by foreign investors in listed Chinese companies. The proposed regulation is part of a broader amendment to rules governing foreign investment in public companies.
The proposed amendment underscored Beijing’s effort to expand the scope of its national security review. Apart from mergers and acquisitions, strategic investments will also be subject to Mofcom review when the amendment is implemented.
China is not alone in setting a higher bar on foreign investment reviews.
Germany is taking a more hostile approach to Chinese investment, banning the proposed acquisition of machine tool manufacturer Leifeld Metal Spinning by Chinese firm Yantai Taihai Group on Wednesday, the first time Angela Merkel’s government had blocked a Chinese takeover of a German firm.
It came just three days after Berlin rejected China’s purchase of a 20% stake in German power transmission system operator 50Hertz Transmission.
In June, the British government published proposals to extend its power to scrutinise mergers and acquisitions with national security implications.
Australia’s Foreign Investment Review Board said it would tighten scrutiny of foreign investment in residential real estate sector. The increased scrutiny came after Chinese buyers snapped residential properties and large plots of residential land in recent years, driving up Australia’s housing prices to unaffordable levels.
Increased scrutiny of cross-border dealmaking is a global trend. And it isn't going away any time soon.