In the age of President Donald Trump, Chinese M&A dealmakers need no reminder that doing business in the United States will be a gruelling, soul-destroying and, perhaps, fruitless experience – especially when it comes to buying technology assets or companies that handle US citizens' data.
The fearsome regulatory hurdle they must clear, the Committee on Foreign Investment in the United States (Cfius), has the power to review any transaction that could result in foreign “control” of a US business – be it an American company or a foreign firm that has operations in the US. If a deal is considered "sensitive", it can recommend the president to block it – and its words are always heeded.
One option Chinese buyers had – or so they thought – was to keep deals small, buying only minority stakes to fall under the Cfius radar. The failure of one recent deal – which would have seen Chinese investors own less than a tenth of a foreign company, with little chance to exercise control – firmly put that idea to rest.
On September 26, an Asian investor consortium comprising Beijing-based digital map provider NavInfo, China’s tech giant Tencent, and Singapore’s sovereign wealth fund GIC had to terminate its acquisition of 10% of HERE Technologies, a Dutch digital mapping and navigation software developer, after failing to win clearance from the multi-agency panel headed by the US Treasury Department.
According to a statement (Chinese only) by NavInfo, which is listed in China, “the buyer group and sellers involved actively cooperated as per overseas regulatory requirement, and rolled out a lot of works". It and HERE collectively responded to more than 10 rounds of Cfius questions, actively communicated with the agency, and revised the investment plan, according to NavInfo, which announced the deal in December and received anti-trust approval from Germany in January.
NavInfo further explained that Cfius “divided the review into two stages, spanning five months,” likely indicating that the application was withdrawn and refiled, as regularly happens when Cfius hits the 75-day deadline for its review process.
To be sure, there is precedent for the US agency rejecting deals outside of the US. In December, outgoing president Barack Obama followed a Cfius recommendation and issued an order blocking a Chinese acquisition of Aixtron SE, a German semiconductor manufacturer which supplies the US market.
But the rejection of the HERE transaction saw Cfius draw the line of “foreign control” at a completely unprecedented level, according to veteran advisors on the matter. In this deal, big German companies are staying as majority shareholders and putting heavy counterweight to a tiny 10% stake, co-invested by a US ally’s sovereign fund.
“The HERE case involved a European target with strong majority investors and very little prospect that the Tencent group could control anything. This is the broadest instance of the exercise of [Cfius] jurisdiction of which I am aware,” said Scott Flicker, a lawyer who has dealt with Cfius matters for over 30 years, including representing the Chinese buyer in the Aixtron case.
HERE – owned by BMW AG, Mercedes-Benz’s parent Daimler AG and Volkswagen AG’s Audi unit among other investors – develops detailed 3D maps for location-based services and driver-less vehicles and operates a development site in Chicago.
One concern in the transaction was the use of mapping location data, as Cfius gets more wary of China after a data breach at the US Office of Personnel Management in the US in 2015, in which the US reportedly suspected Chinese military involvement.
“Are there going to be any reasonable limits to what constitutes ... sensitivity,” Flicker, who chairs law firm Paul Hastings’ Washington DC office, questioned. “If you take an overbroad view, every company is sensitive.”
Now some relief for the Chinese bidders – HERE will continue its cooperation, as planned, with NavInfo and Tencent to sell digital mapping services in China and elsewhere; and NavInfo has obtained clearance to set up a joint venture in China with HERE.
To Tencent and NavInfo, the stakes are low. But it might be another story for others if an acquisition fails.
To walk away or test water
Another notable Chinese tech company caught in a Cfius quagmire is Alibaba’s fintech affiliate Ant Financial, which has been delaying its $1.2 billion purchase of MoneyGram International due to Cfius woes.
Ant Financial has filed for a third time to Cfius, Reuters reported in September, after two previous attempts proved in vain. If this deal – a high-profile case with clear commercial synergies – fails to get through, investor willingness to attempt cross-border deals “will disappear”, an investment banker earlier said of his concerns.
In the present atmosphere, Cfius is unlikely to approve a Chinese deal it has considered more than twice, according to a person familiar with one such deal – namely Beijing-backed Canyon Bridge Capital's bid for Lattice Semiconductor. In that case, Lattice opted to appeal directly to Trump – only for the president to back Cfius's negative verdict.
Flicker, however, disagrees. For one, he argues, the fact Trump has been slow to nominate candidates to seats on Cfius means that, in some cases, reviews have hit their 75-day deadline without being fully considered.
Secondly, the United States is conducting a massive review of its general approach to China which goes far beyond the question of investment – addressing issues of trade and foreign policy.
The net result, for Chinese investors, is that the picture could actually become clearer, with more transparent channels for settling issues than the notoriously opaque Cfius process.
“There are other tools than Cfius,” Flicker said, citing export control laws as one example. “Cfius can be a blunt instrument – it is non-transparent and always creates tension,”’ he said, adding the policies were expected to be solidified by the end of the first quarter next year.
To dealmakers, that means you need to “be comfortable with the uncertainties” for now, Flicker said. “It’s one or the other: you either wait, or you get into the game and see whether you have some success.”