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New Deal Frontier: Road bump or full stop? What the blocked Lattice acquisition means for other China-US deals

James Marshall Deals Research and Insights Leader, PwC US 22 September, 2017

When President Donald Trump recently blocked a Chinese-backed investor from buying a US semiconductor firm, the move was rare: It was only the fourth time in more than a quarter century that a president stopped such a deal. But it wasn’t entirely unexpected. As tensions rise between the US and China, the case raises questions of how certain deals involving Chinese firms and US technology companies could fare going forward.

What CFIUS is and how it works

Trump followed the recommendations of the Committee on Foreign Investment in the United States (CFIUS), a government panel led by the US Department of the Treasury and by officials from the Defense, Homeland Security, Justice and State departments and other agencies. CFIUS screens foreign investments for national security concerns, and reviews include an investigative period in which the committee may ask applicants for more information.

If a deal isn’t approved during that window, applicants can voluntarily withdraw from the review process, modify their plans to address the committee’s concerns and re-file for another review. If concerns can’t be mitigated, CFIUS ultimately can recommend the president block a deal. But the process rarely gets to that point since most applicants would rather drop their application and avoid outright rejection.

In the case of Canyon Bridge Capital Partners’ $1.3 billion bid for Oregon-based Lattice Semiconductor, the companies went through three 75-day review cycles before seeking presidential approval. With that bid now denied, it’s fair to ask what it means for other attempts by China-based buyers to acquire US companies.

Why the deal was blocked now

The Canyon Bridge-Lattice deal signals that Washington is very serious about protecting America’s high-tech industry, particularly semiconductors. The president’s block doesn’t spell the end of all Chinese deals for US companies, but given the evolving geopolitical situation, it’s likely that CFIUS will examine certain deals through a more conservative and risk-averse lens.

A few factors are at play in this. For one, as the CFIUS caseload has grown, the administration remains short of senior policymakers to review applications. The committee is on track to consider more than 200 cases this year, compared with a previous high of around 170. Yet officials who typically would help drive policy and conduct these reviews are among the many positions that remain unfilled in the Trump administration. Until people are nominated for those roles and confirmed by the US Senate, the committee will likely hesitate signing off on any potentially questionable deals.

The other reality is that while the Chinese government reins in overseas investments in certain sectors after a record $225 billion in deals last year, some US lawmakers have said they plan to introduce CFIUS overhaul bills. These would be aimed at increasing scrutiny of foreign investments, particularly those involving Chinese deals in advanced technology and other sensitive industries.

Some officials have suggested changing the bar as well, suggesting an economic benefit test be added to the national security lens. If that happens, CFIUS reviews may take longer, and the committee would also need to expand, as it currently doesn’t have the expertise, budget or resources to broaden its scope.

Deals continue, but path is rockier

For reasons we have discussed in other blogs, we expect Chinese deal-making in the US to continue. Not every China-related CFIUS transaction will be blocked, and not every bid by a China-based or -backed buyer should expect to run the CFIUS gantlet.

Deals in sectors that don’t pose a threat to US national security won’t be subject to CFIUS review and will be more concerned with other US regulatory issues. But as technology becomes more intertwined with various industries, and China’s appetite for bringing tech expertise within its borders remains strong, certain deals will need to carefully navigate US government review to avoid rejection.