Trump card kills chip deal, alarms Chinese dealmakers

While the US president's decision to block a Chinese-backed buyout of semiconductor firm Lattice surprised no one, it does bode poorly for a host of other purchases.

The curtain falls, and the dust settles.

US President Donald Trump frequently astonishes with his rhetoric, but he played it by the book when he considered a $1.3 billion buyout of US chipmaker Lattice Semiconductor by a Beijing-backed private equity house.

The White House and Department of Treasury confirmed on September 13 that Trump had acted on a recommendation from the Committee on Foreign Investment in the United States (Cfius) to block the acquisition over national security concerns.

Trump's call bodes poorly for several other Sino-US deals that are pending regulatory clearance in the States – not least Ant Financial's purchase of payments provider MoneyGram.

FinanceAsia revealed earlier this week that Lattice bidder Canyon Bridge, a Silicon Valley-based fund which raised the bulk of its funds from the Chinese state, had already given up all hope of pushing the deal through. It is now focusing its resources on minority interest investment in the US – which falls out of Cfius’ scope – as well as deals in Europe.

Lattice Semiconductor’s management took the unusual decision to go to Trump after its third attempt to secure Cfius approval within the panel's 75-day review period. The move was certainly bold; never has a US president overruled a Cfius recommendation – indeed the White House rarely needs to make a judgment, as the reputational risk means deals not accepted by Cfius are usually scrapped.

Winning support from Trump was always going to be “an uphill climb,” one person involved in the deal said ahead of the announcement.

But Lattice chief executive Darin Billerbeck wanted to bet on Trump’s nature as a businessman and dealmaker, hoping he would be convinced by the prospect of saving US jobs. Instead, the Trump administration has maintained its tough stance on Chinese takeovers, even at a time when he needs China’s political support to deal with North Korea.

“The transaction with Canyon Bridge was in the best interests of our shareholders, our customers, our employees and the United States. We also believe our Cfius mitigation proposal was the single most comprehensive mitigation proposal ever proposed for a foreign transaction in the semiconductor industry and would have maximised United States national security protection while still enabling Lattice to accept Canyon Bridge’s investment and double American jobs,” Billerbeck said in a September 13 filing to the US SEC.

In addition to blocking this proposed buyout, Trump’s executive order also prohibits the buyer from “any substantially equivalent transaction, whether effected directly or indirectly” to acquire Lattice. He gave the order under Section 721 of the Defence Production Act, which governs Cfius. Like the Lattice deal, the three previous deals blocked under Section 721 revolved around concerns over China.

In December, outgoing president Barack Obama issued an order blocking the acquisition of Aixtron SE, a German technology company that provides semiconductor equipment globally. He issued another order in 2012 against the Chinese acquisition of wind farms near a sensitive military facility centre. And the first such order came from President George Bush in 1990, ordering China National Aero-Technology Import and Export Corporation to divest all of its interest in MAMCO, an aerospace parts manufacturer. 

Were it not for the bidder's financial ties to the Chinese government, the Lattice deal might have gone through, many observers say. In the concurrent announcements by the two US authorities, they bluntly put “the Chinese government’s role in supporting this transaction” as a source of the “national security concerns”.

Canyon Bridge’s ultimate financier is the $30 billion China Venture Capital Fund, a state-controlled fund launched last August to "support innovation and upgrading of China’s centrally-administered firms", according to state news agency Xinhua. It was set up with money from China Construction Bank, China Reform Holdings, Postal Savings Bank of China and Shenzhen Investment Holding.

Among other concerns of the US regulators is the potential transfer of intellectual property to China, which according to FinanceAsia’s earlier research, is leaving Chinese outbound investors between a rock and a hard place; authorities at home want them to focus on overseas tech assets that can improve the real economy of China.

In fairness, Lattice produces low-end programmable chips and has entirely exited the US military defence market. But many US lawmakers including 22 members of Congress, as well as Lattice’s US rivals, argue the deal could give China too much headway in the chip industry, and given its products are used in making high-end equipment, the sale risked giving away US cutting-edge technologies.

“If the Chinese government really meant to steal US technologies via such acquisitions, a better to do it would be: set up a new company and offer hefty money to lure top scientists and engineers from US firms, which would naturally bring the skillset and IP,” said the person close to the transaction.

On the other side of the world, the termination of the deal has certainly caught the attention of Chinese authorities.

Gao Feng, deputy director general of the General Office of China’s Ministry of Commerce, told a press briefing on Thursday the ministry had “taken note of the matter” (link in Chinese only).

“We believe it is the legitimate right of a country to conduct security reviews of investment in sensitive sectors, but it shouldn’t become a tool to expand protectionism,” Gao said, citing reports Chinese firms had made more than $100 billion of direct investments in the US since 2000 and created more than 140,000 jobs as a result.

“We urge the countries concerned to objectively and impartially view the overseas acquisitions by Chinese enterprises and give fair treatment to such normal business practices,” he said.

As market confidence in the prospects of other pending Chinese deals whithers, the share price of MoneyGram, which is seeking Cfius approval to sell to Ant Financial, fell as much as 4.4% in after-market trading on September 13, according to Bloomberg. Dealogic data shows the deal is subject to a $82 million acquiror termination fee.

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