Getting past the US’s M&A doorman

Posted on October 4, 2016

Philips Lumileds light bulbs are seen at the company's stand at the Light and Building Fair in Frankfurt, Germany, on Monday, April 12, 2010. The industrial fair opened to the public today. Photographer: Ralph Orlowski/Bloomberg©Bloomberg

In January the Committee on Foreign Investment in the United States rejected, on the basis of unspecified national security concerns, the $3.3bn sale of a European-controlled consumer lighting business to a private consortium that included Chinese investors.

Seven months later, Cfius chose not to stand in the way of a Chinese state-owned conglomerate’s $44bn purchase of Syngenta, the Swiss crop science company with extensive operations in the US.

    These are not the outcomes that most observers — including lawyers with extensive US mergers and acquisition experience — would have predicted. The sale of an 80 per cent stake in Philips’ California-based Lumileds division, which manufactures lighting components used in everything from cars to smartphones, seemed far less sensitive than a transaction with global food-security implications involving one of China’s biggest companies.

    We do not know why the Syngenta deal cleared the Cfius hurdle while the Lumileds one fell short. Nor are we ever likely to know.

    “Cfius is like the bouncer at a club that is very popular,” said Nima Amini, a partner with US law firm O’Melveny. “They don’t give you a reason why. They just say no, you can’t come in.”

    And therein lies a big problem with Cfius, which brings together the heads of eight US cabinet departments and is chaired by the Treasury secretary. When it comes to bouncing investments from the world’s largest economy, the transparency standards of nightclub doormen are just not good enough.

    On its website, Cfius admits that “because [our] analysis often involves sensitive and classified information, [we are] often unable to share the precise national security risk with respect to a transaction”.

    But it goes on to argue that “in most instances the parties to a transaction will have an understanding of the national security risk that is driving [our] action”.

    “Only in exceptional instances are the parties unaware of the national security concern at stake,” the committee adds, in a circular bit of logic worthy of Kafka. “In those instances, revelation of the concerns would itself create a risk to national security.”

    Cfius is like the bouncer at a club that is very popular. They don’t give you a reason why. They just say no, you can’t come in

    – Nima Amini, US law firm O’Melveny

    One of the reasons Cfius’s secret concerns are usually not actually a secret to the companies involved is that the committee will usually invite — or recommend — certain changes to a transaction before formally rejecting it.

    The rest of the world, however, is kept in the dark. Buyers and sellers are not allowed to disclose the reasons a deal was rejected by Cfius — or the remedies that were required for approval of a modified transaction.

    It also does not help that Cfius statistics are published with a two-year lag; its report for 2015 will not be available until next year.

    As a result, media and public attention focuses on the few deals that are either rejected, like the Philips Lumileds disposal, or are abandoned in the middle of a Cfius review, as happened in February when a Chinese company withdrew its $3.8bn bid for a 15 per cent stake in Western Digital, a data storage company.

    Cfius could do a few simple things to change the growing perception that it is inherently hostile to Chinese investors. First, it should publish its statistics in a more timely fashion. People should not have to wait until 2016 to learn that Cfius did not formally reject any of the 24 China-related transactions that were submitted for its consideration in 2014.

    Second, Cfius could list the transactions that it decides not to challenge. These greatly outnumber the ones it does investigate. In 2014, the committee examined only 52 of the 147 deals that were submitted for potential review.

    And finally, in those rare instances when it rejects a deal, Cfius should give some indication of the reason behind the veto. It surely cannot endanger US national security to note that a given target company’s technologies have potential military applications — or that a senior executive at a Chinese acquirer is the son of a People’s Liberation Army general.

    When people get turned away at the door of that hot new club, knowing that there was a plausible reason for the denial helps damp speculation that the bouncer is biased.

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