October 23, 2018
South China Morning Post
US deal makers back away from deep-pocketed Chinese investors as Washington brands Beijing a national security threat
- Chinese buyers shunned as Trump administration accuses Beijing of gaining access to critical technologies and infrastructure through asset acquisitions
- Law expanding national security review process means there is ‘no point’ in trying to find a Chinese buyer
Just two months after the US moved to tighten controls on foreign investment, citing national security concerns, American deal makers are losing their appetite for selling assets to Chinese buyers – who had proven to be a gold mine because of their penchant for outbidding other suitors. From Anbang’s US$1.95 billion acquisition of the iconic Waldorf Astoria hotel in New York to Tianjin Tianhai’s US$6 billion takeover of information technology company Ingram Micro, the Asian acquirers’ cheques kept getting bigger.
In 2016 alone, Chinese buyers invested US$51 billion in the US through 65 deals, according to data from Mergermarket. On average, they paid at least 20 per cent more than their American counterparts were willing to bid, according to multiple people involved in the purchases, who asked not to be named because details about the bidding are not public. The heyday is over. Chinese buyers are being shunned as the country becomes the primary national security focus for the Trump administration, which accuses it of gaining access to critical technologies and infrastructure through asset acquisitions.
In a number of recent deals, US sellers favoured domestic buyers over the traditionally high-bidding Chinese ones, according to four people involved in the transactions who could not disclose specifics because of confidentiality rules. A primary reason, they said, was the desire to avoid potential delays due to the additional review process and the risk of the deal failing. “When we sell US businesses nowadays, there is no point contacting” Chinese buyers, said Euan Rellie, co-founder of BDA Partners, a New York-based global investment bank focused on cross-border deals with Asia. “US sellers used to hold out hopes for deep-pocket Chinese buyers. That has changed in recent months. They are no longer holding out.”
In 2017, BDA Partners, which has been in the business for 22 years, helped sell a 48 per cent stake in information technology service provider Netas to China’s ZTE, and advised on the sale of SunGard Kingstar Data System to the Chinese investment firm Zhongping Capital. The firm helped broker a total of US$850 million in US asset sales to Chinese buyers in 2017 and US$350 million in 2016. But such transactions have dropped to zero this year, Rellie said.
US President Donald Trump’s escalating concerns over the alleged Chinese theft of US technology helped provoke a trade war between the countries and prompted the quick passage in August of a new law that greatly expands the national security review role of the Committee on Foreign Investment in the US, an inter-agency body known as CFIUS. Without singling out China as the country of concern, the new law makes clear that it is the main reason the US has broadened the range of review for the first time since 2008. Even before the new law, CFIUS – which was established in 1975 – had a history of investigating and blocking Chinese investments in the US.
In 2012, President Barack Obama ordered the Chinese-owned Ralls Corporation, a developer of wind turbines, to divest itself of four small projects located near a US Navy facility in Boardman, Oregon. The Chinese owner of four US wind farms was forced to divest its assets after orders by President Barack Obama in 2012. But Chinese buyers still managed to invest a significant amount in the US before the expansion of the CFIUS review, bypassing it by creating joint ventures with US counterparts instead of buying a controlling stake in a company.
The new law, which will not take full effect for another 18 months or so, was broadened to make joint ventures, non-controlling stake purchases as well as real-estate lease acquisitions subject to review, limiting the options for workarounds.
Details of a pilot programme that were released this month included a list of 27 critical technologies – including the aviation, defence and semiconductor industries – that will trigger mandatory CFIUS reviews if a foreign buyer plans an acquisition. The pilot programme is expected to go into effect in November. “The options for China to go around [the new CFIUS] are narrowing,” said James Mendenhall, a lawyer in the international trade and dispute resolution group at Sidley Austin in Washington and a past general counsel for the Office of the United States Trade Representative.
To work around the new review process, a buyer that wants to buy assets “can restructure the company so that the division you are buying doesn’t need to go through the review,” said Jeffrey Houle of the law firm DLA Piper, who advises on cross-border deals. “You unscramble the egg.” But such corporate restructuring takes time and incurs extra cost for the sellers. “In the deal world, time is the enemy of all transactions,” Houle said. The challenge is that the tighter review “presents a timeline that is uncertain. That is a huge complication from an M&A perspective,” he said.
Congressional negotiators softened the law’s language after major US companies – including IBM, Facebook and Intel – complained that harsher treatment of Chinese investment would hurt their sales.
Despite the modifications, the new CFIUS law is harmful, said Gary Horlick, a Washington-based lawyer who has served as international trade counsel to the Senate Finance Committee. “This is the largest government intervention [against Chinese investment] since Nixon,” he said. Such headwinds have led to caution. “We advise [our buyers and sellers] to wait until things clear up,” said Amiad Kushner, chair of the litigation practice at Dai & Associates, a law firm that often represents Chinese clients in transactions.
BDA Partners’ Rellie agreed that, for now, there is no easy way around the new law. “People will try to be creative, but they will chart into untested areas and therefore make deals more complex and more risky,” he said. “Why not just sell to American buyers for now and make things a lot simpler?”