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Lattice Semiconductor Corp.'s unsuccessful bid to sell itself for $1.3 billion to a Chinese investment fund shows how challenging it is for some foreign buyers to acquire U.S. companies.
Lattice worked for over nine months to convince the relatively unknown and secretive government agency, the Committee on Foreign Investment in the United States (CFIUS), that its acquisition by Canyon Bridge Capital Partners LLC was in the nation’s best interests. The Portland-based software developer submitted three filings to the committee, restarting the committee’s 75-day review period multiple times, but to no avail.
Lattice dropped the proposed deal after it was blocked by President Donald Trump Sept. 13.
The stretched out timelines and numerous refilings in Lattice’s troubled deal are now the norm for the committee’s approval process. The reviews may not be thorough enough for the Senate Banking Committee’s chairman, Sen. Mike Crapo (R-Idaho). Crapo said at a hearing Sept. 14 that CFIUS could be missing risky transactions and suggested providing the committee additional resources. The senator’s concerns may raise the level of scrutiny for companies currently undergoing CFIUS review.
MoneyGram International Inc.'s sale to Ant Financial, an affiliate of China’s Alibaba Group, and HNA Group’s proposed bid to buy a stake in New York-based SkyBridge Capital are among other transactions involving Chinese buyers that are being reviewed.
CFIUS is an inter-agency tasked with reviewing any foreign transaction involving a U.S. company to determine if the sale or merger poses a national security threat. Particularly if you are a foreign acquirer, “CFIUS clearance provides a safe harbor as once CFIUS has cleared a transaction, it is then barred from taking action, including unwinding the transaction, requiring a divestiture, or imposing other forms of mitigation action,” said Melissa Mannino, an attorney in Wilson Sonsini Goodrich & Rosati’s Washington office who specializes in regulatory law.
As of this summer, the committee is on pace to set a new caseload record this year with almost 250 cases expected, said Shawn Cooley, a Washington-based CFIUS attorney at Freshfields Bruckhaus Deringer. Last year the committee reviewed 173 cases.
With the considerable increase in cases, the committee now faces a large backlog, stalling many multimillion-dollar mergers and buyouts. To even begin the review process, the committee must accept the filing, which starts the official review clock. CFIUS is taking longer to even clear this first step, Cooley told BNA.
Once a filing is accepted, the committee has 30 days for a national security review and then 45 days for a national security investigation. In total, CFIUS has a 75-day review period to either approve, block, or work to resolve national security concerns with the merging parties.
U.S. companies and their foreign buyers have been forced to refile cases or completely withdraw deals when the committee can’t reach a consensus after its 75-day review. Longer timelines and lengthy delays are compounded by the effects of a short-staffed committee. There is an absence of first-level political leadership at the assistant secretary level, further slowing the speed of the approval process.
“Each agency should have a dedicated presidentially-appointed and Senate-confirmed assistant secretary that is responsible for [the] majority of cases,” Cooley told Bloomberg BNA. “The reality of that means that there are non-political senior career officials acting in that capacity who don’t have enough experience in CFIUS matters and they are naturally risk adverse,” he said.
The committee is struggling to clear even relatively easy cases. “If you go back several years to the implementation of the last reform effort in 2007, it [CFIUS] was on average clearing 90 percent of its cases within 30 days,” Cooley said. “Last year that number was approaching 30 percent. Now it is struggling to complete 20 percent of its cases within the first 30 days.”
Cooley said CFIUS’s backlog impacts even deals involving ally countries and repeat foreign investors.
Despite the new reality of an extended approval process, CFIUS’s caseload increase signals foreign confidence in the U.S. economy, said Linda Ji, a Boston-based partner at McDermott Will & Emery who specializes in cross-border corporate and commercial transactions. The increase in filings “shows the increase in foreign investments in the U.S. and their [foreign investors] confidence in the U.S. economy, or otherwise they wouldn’t come here,” Ji told Bloomberg BNA in an interview.
With no immediate signs of a slowdown in foreign acquisitions and mergers, companies seeking CFIUS approval are taking extra steps to try to ensure a smoother process. “Previously, the parties didn’t really have to articulate how the proposed acquisition would be beneficial to the U.S. economy,” Ji said. Now, some parties are spelling out the economic benefits of their combinations, and the “economic benefits are being taken into account by CFIUS in its review.”
It is also important for companies to disclose how the foreign transaction came to be, Mannino said. “If the U.S. business initiated the transaction, i.e., went out and actively sought potential acquirers or investors, and can clearly articulate the benefits to the U.S. business from the sale or investment, such as job creation or the business’ need for capital, then they can be important factors in CFIUS’s review ,” she said.
Chinese acquisitions of U.S. companies, specifically in the semiconductor sector, have recently been under increased scrutiny due to a January report by the president’s Council of Advisors on Science and Technology. The report said that China is threatening U.S. competitiveness in the semiconductor industry, which poses a national security risk.
Lattice’s failed bid doesn’t signal increased difficulty for all Chinese investors, attorneys said. “This decision shouldn’t be broadly interpreted to mean that any acquisition or investment by a Chinese investor will be blocked by CFIUS or the president,” Ji said.
Noting China’s dominance in U.S. transactions, Cooley said that “CFIUS has reviewed more Chinese transactions than any other.”
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