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Cross-border mergers involving acquirers in China and targets in the U.S. plummeted this year as both countries’ regulators disfavor such deals.
China is cracking down on overseas investments in general, while the U.S. government is looking more skeptically at Chinese acquirers in particular.
The total value of proposed Chinese acquisitions involving U.S. targets reached about $40 billion over the first three quarters of 2017, a 51 percent decline compared with 2016 totals, according to data compiled by Bloomberg Law. In the first three quarters of last year, Chinese bids for U.S. companies totaled almost $78 billion.
“Chinese outbound deal activity was more focused on the U.S. over the last couple of years, so the drop-off has had a more pronounced impact on the U.S. market compared with other regions,” Joe Gilligan, head of the U.S. Corporate Practice Group at Hogan Lovells LLP, told Bloomberg Law.
Beyond China, the market for U.S. targets in general has dropped significantly so far in 2017. Uncertainties in the U.S. since Donald Trump’s election may explain that trend, at least in part, according to analysts.
The Federal Trade Commission continues to be led by an acting chairman with three unfilled vacancies, and Makan Delrahim was only recently confirmed to become head of the antitrust division at the Justice Department after months of delay.
Despite declines in the U.S. market, overall worldwide cross-border merger activity remained strong in the third quarter of 2017, according to the Bloomberg Law data. More than 7,600 cross-border deals totaling $1.7 billion have been announced so far in 2017, on pace to exceed the annual cross-border deal volume in the previous three years.
But activity in the U.S. and China has declined, and analysts say it’s because of government actions in both countries. The Chinese government has been closely watching “irrational” outbound purchases in sectors such as entertainment and real estate. The government announced rules in August to rein in such investments.
Meanwhile, Chinese acquirers are increasingly concerned about being closely scrutinized by the Committee on Foreign Investment in the U.S. (CFIUS), particularly when it comes to deals that are technology or defense-related, according to Gilligan.
“It’s really a dual problem,” he said. “Even in circumstances where there may be funding available for outbound Chinese transactions, there might be real hurdles to meet in getting the transaction closed,” he said.
CFIUS is a multi-agency panel headed by the Treasury Department that reviews national security implications of acquisitions of U.S. businesses. In September, President Donald Trump blocked a $1.3 billion deal between U.S. chipmaker Lattice Semiconductor Corp. and Canyon Bridge Capital Partners, a private equity firm backed by a Chinese investor. The president opposed the proposed acquisition based on CFIUS’s recommendation.
That decision “made very real the concern that everyone had seen brewing,” Mark Ostrau, chair of the antitrust and trade regulation group at Fenwick & West LLP, told Bloomberg Law.
Broadcom Ltd.’s $5.9 billion purchase of Brocade Communications Systems Inc. and Genworth Financial Inc.’s $2.7 billion deal with China Oceanwide Holdings Group Co. are among the transactions that have been delayed pending CFIUS approval.
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Bloomberg Law subscribers can access quarterly data on cross-border M&A activity at http://src.bna.com/tq4
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