The latest CFIUS report to Congress in November shows a dramatic increase in the number of inbound US acquisitions that are being reported to the US government since Trump took office.
The odds of deals being pulled out for investigation or blocked have also increased.
Reviews have become a four- or five-month process.
CFIUS stands for the Committee on Foreign Investment in the United States, an interagency committee of 16 federal agencies, headed by the Treasury Department, that reviews potential foreign acquisitions for national security implications. It is supposed to report annually to Congress.
Filing of transactions with CFIUS used to be voluntary. Filings are made only in a fraction of acquisitions. The danger of not filing is that the government could force the transaction to be unwound later if it has national security concerns. However, some filings are now mandatory after a recent change in the statute. (For more detail, see “Scrutiny for Inbound US Investments” in the October 2019 NewsWire.)
The committee makes recommendations. The president has ultimate authority to block a transaction. Presidential action to block a transaction is rare.
Most transactions that raise problems are voluntarily withdrawn. Many are later resubmitted on revised terms. In some cases, transactions are approved after the acquirer agrees to mitigation measures.
The latest report covers 2016 and 2017.
During 2016, notices were filed in 172 acquisitions. Of that number, 46% went into an investigation phase. Ten percent of the 172 acquirers had to agree to mitigation measures to address national security concerns. Another 16% ended up withdrawing their transactions. A little less than half (7%) of transactions that were withdrawn were ultimately abandoned and a little more than half (9%) were restructured and resubmitted to CFIUS in new filings.
One 2016 transaction was referred to President Obama. He blocked the sale by Aixtron SE, a German company, of its US businesses to Grand Chip Investment GmbH, another German company that is Chinese owned.
In 2017, the first year Trump was in office, 237 notices were filed, a 38% increase. The volume of US inbound M&A deals increased by only 9.79% over the same period. US inbound deal value fell from $506.04 billion in 2016 to $235.88 billion in 2017.
Of the 237 deals filed with CFIUS in 2017, 73% moved into an investigation phase. Twelve percent of acquirers had to agree to mitigation measures to address national security concerns. A sizable 31% of deals were withdrawn. Of that number, more than half (19%) were refiled after being restructured. Thirteen percent of acquisitions were abandoned.
One transaction was referred to President Trump. He blocked the acquisition of Lattice Semiconductor Corporation by Canyon Bridge Merger Sub, a Delaware subsidiary of China Venture Capital Fund Corporation.
The report lists deal elements that raise potential red flags in acquisitions of US companies. These include where the target company has access to classified or sensitive US government information or the foreign acquirer is controlled by a foreign government, especially where the foreign country has a poor record on nuclear non-proliferation or other national security matters or the country has a coordinated strategy of trying to acquire critical US technologies.
CFIUS is also more likely have issues with acquisitions of projects with offtake contracts with federal, state or local government agencies that have functions related to national security, and projects that “involve various aspects of energy production, including extraction, generation, transmission, and distribution” or that are near US military bases or other sensitive US government facilities.
In 2016, 10% of proposed acquisitions submitted to CFIUS for review were in the “mining, utilities and construction” sectors. The figure was 12% in 2017. The majority (13 of 18 in 2016 and 18 of 28 in 2017) involved the utility sector. Of those, 11 in 2016 and 15 in 2017 involved electricity.
Buyers from the following countries made the most filings in 2016: China (54), Canada (22), Japan (13), France (8), the United Kingdom (7), South Korea (6), Germany (6), British Virgin Islands (6) and Cayman Islands (5). There were few filings by buyers in the Middle East: Kuwait (1), Lebanon (1), Turkey (2) and the United Arab Emirates (1).
Filings in 2017 were concentrated among buyers from a similar, but not identical, list of countries: China (60), Canada (22), Japan (20), the United Kingdom (18), France (14), Cayman Islands (8), Switzerland (7), Germany (7), Holland (7), South Korea (6), Sweden (6) and Singapore (6). The few filings by buyers in the Middle East were from Kuwait (2), Saudi Arabia (1) and the United Arab Emirates (2).