In-Bound Acquisitions

In-Bound Acquisitions

September 15, 2010

In-bound acquisitions of US businesses with potential national security implications by foreign investors have run into trouble on average 14% of the time since 2006.

Two investments by Chinese companies were effectively blocked in the last 10 months — including one in the solar sector — after CFIUS, a federal panel that reviews such acquisitions, raised questions. The parties cancelled the transactions.

In one case, Emcore, a US manufacturer of components for fiber optics and solar panels, proposed to sell 60% of certain of its businesses to a Chinese company, Tangshan Caofeidian Investment Corporation, for $27.8 million. The Chinese company planned to invest another $27 million in the business after the initial purchase. Emcore planned, as part of the deal, to establish a photovoltaic manufacturing facility in China. The company announced in late June that it was withdrawing the transaction after CFIUS expressed “certain regulatory concerns.”

Last December, CFIUS forced another Chinese investor, the Northwest Nonferrous International Investment Company, to drop plans to acquire a 51% interest in FirstGold, a mining company based in Nevada. FirstGold holds leases to use more than 8,000 acres of federal land. The government felt the deal would bring the Chinese too close to a sensitive Naval air base and other military facilities whose locations are classified.

The withdrawals are a reminder to submit proposed in-bound acquisitions of interests in US businesses that might raise security concerns for approval. CFIUS was formed by President Gerald Ford in 1975. It is an inter-agency committee, headed by the Treasury Department, on which 16 agencies sit. Submission of proposed deals is voluntary. However, the committee has authority to set aside transactions after the fact that were not submitted for review.

The committee makes recommendations. The US president has ultimate authority to block a transaction. Only one transaction has been formally rejected by the president. The first President Bush rejected a proposed acquisition of MEMCO Manufacturing Inc., a supplier to Boeing, by the China National Aero-Technology Import and Export Corporation in 1990.

Transactions that run into trouble are usually withdrawn before they reach the need for a presidential decision.

Before 2006, at most one or two transactions a year were withdrawn. During the period 2006 through 2009, 64 transactions were withdrawn, or roughly 14% of the 469 transactions submitted to CFIUS for review during that period.

CFIUS still approves most requests, including a purchase by EdF, which is owned partly by the French government, of a minority stake in nuclear plants owned by Constellation Energy.

In July, 50 members of the House steel caucus sent Treasury Secretary Timothy Geithner a letter urging him to “thoroughly investigate” a proposed investment by the Anshan Iron & Steel Group of China in the Steel Development Company in Mississippi. Terms of the investment have not been announced but are believed to involve investments in as many of five steel mills owned by the US company. The congressmen charge that the investment could distort the US market because of the Chinese company’s access to “massive Chinese government subsidies” and cost American steelworkers their jobs.

Virgin Galactic, a company formed by Richard Branson to engage in commercial space travel, sold 32% of the company to Aabar Investments in Abu Dhabi for $280 million in July 2009, subject to regulatory approvals. Late in 2009, the company agreed to withdraw and resubmit its application to give CFIUS more time to review it. The government is reportedly concerned about possible spread of missile-based weapons delivery systems. The company plans to build a spaceport in New Mexico. More than 340 people have paid deposits of $20,000 a piece toward tickets costing $200,000 each. A company spaceship is expected to make its maiden voyage in two to three years.

Keith Martin