The U.S. is toughening its scrutiny of Chinese deals, throwing a number of high-profile takeover bids into question and helping spur a huge case backlog, according to people familiar with the process.
[ Kate O’Keeffe and Julie Steinberg | July 21, 2017 |The Wall Street Journal]
The Committee on Foreign Investment in the U.S. has signaled there are significant obstacles facing the proposed $1.2 billion purchase of Dallas-based payments firmMoneyGram International Inc. MGI -3.26% by Ant Financial Services Group, controlled by Chinese billionaire and Alibaba Group Holding Ltd. BABA +0.25% co-founder Jack Ma, some of the people said.
The committee, known as CFIUS, didn’t green-light the deal by a recent deadline, the people said. Ant refiled its application, and Mr. Ma has continued a charm campaign that included a meeting Tuesday with 20 U.S. and Chinese executives at the U.S. Department of Commerce.
The backers of at least four other Chinese deals have recently refiled or said they would refile applications to the committee after failing to get approval within the roughly two-and-a-half-month review period, according to public disclosures.
At least two of them have taken the unusual step of refiling twice to try to address the committee’s concerns— China Oceanwide Holdings Group Co., which last year announced a $2.7 billion takeover of Richmond, Va.-based insurer Genworth Financial Inc., and Chinese-government backed Canyon Bridge Capital Partners, which last year announced a $1.3 billion plan to take over Portland, Ore.-based Lattice Semiconductor Corp.
Though refiled deals can still be approved, delays can be symptomatic of committee concerns, said people familiar with the process. At least one smaller Chinese deal to buy a U.S. Wi-Fi hotspot business collapsed last month after failing three times to get approval.
Reviews are stretching on for many deals, including one by Chinese conglomerate HNA Group Co. to buy a controlling stake in hedge-fund investing firm SkyBridge Capital from financier Anthony Scaramucci, who on Friday was named White House communications director. People involved in the CFIUS process say many of their deals are facing monthslong delays.
Deal makers say CFIUS—a multiagency committee led by the U.S. Treasury whose task is to screen foreign investments for national-security concerns—is growing increasingly wary of Chinese companies. A recent buying spree pushed China’s announced overseas investments to a record $221 billion last year, including $66 billion in the U.S., according to Dealogic.
Critics in Congress and some government agencies say Chinese investment poses disproportionate risks to national security because it may be directed and subsidized by the government of China, a chief U.S. rival both economically and militarily.
The concerns began growing under the previous administration as investment surged, with then-President Barack Obama taking the rare step of blocking a Chinese technology deal on his way out of office, and have only continued to intensify during the current administration.
Lawmakers and the Treasury are considering changes to the review process that could further tighten scrutiny on Chinese investment. Chinese deal makers are battling similar concerns from European regulators as well.
Rising trade tensions between China and the U.S. also could be contributing to increased hesitation by the committee, lawyers and bankers say. High-level trade talks between the two countries ended Wednesday without any concrete agreements, and President Donald Trump has said he would consider leveraging trade to get China’s help reining in North Korea.
“A deal that might not otherwise raise much concern could raise serious concern if it’s being done by a Chinese company,” said Peter Alfano, a lawyer at Squire Patton Boggs who maintains a database of publicly disclosed CFIUS activity.
The committee is also receiving record numbers of filings while still lacking key personnel, including political appointees, as well as clear direction from Mr. Trump. Career professionals see no reason to risk recommending a Chinese deal that could later prompt the ire of administration officials or members of Congress, say people familiar with the process.
A Treasury spokesman said: “The Treasury is fully engaged in the CFIUS process and provides guidance and discusses the issues with the capable career staff whose job it is to protect national security.”
John Reynolds, a partner at Davis Polk & Wardwell LLP, a law firm that handles CFIUS cases, estimates the committee is on track to review more than 250 cases this year, versus around 170 in 2016 and more than 150 in 2015. Chinese deals are expected to comprise about 30% of the committee’s reviews this year versus a typical maximum of around 10% in the past, estimates another person familiar with the process.
Reviews take a maximum of 75 days, including an investigative period in which the committee may ask for more information. If companies don’t get approval in that period, they can tweak their deals to address concerns and refile their submissions. Preliminary discussions with the committee are dragging on too, lasting as long as six weeks, said a person familiar with the process.
For the Ant and China Oceanwide deals, the committee is concerned about the prospect of giving Chinese companies access to Americans’ personal data, said people familiar with the discussions. In the past, the committee likely would have approved such deals without much disruption, but it has grown more sensitive to personal data issues after a cyberattack on the U.S. Office of Personnel Management that U.S. intelligence said in 2015 they suspected China was behind, these people said. China has denied the accusation.
Ant and MoneyGram officials have said MoneyGram would continue storing what little personal data it collects at a secure facility in Minneapolis.
Most sensitive are Chinese investments in technology, particularly semiconductors—seen by the U.S. as a potential economic and military threat. In December, Mr. Obama nixed the purchase of German semiconductor-equipment supplier Aixtron SE by a Chinese investment fund, following an investigation by CFIUS, which was looking into the deal because Aixtron has U.S. assets.
That doesn’t bode well for Canyon Bridge’s deal for Lattice, even though Lattice has said it doesn’t make military-grade technology. After recently failing again to win CFIUS approval, the companies discussed taking the deal to Mr. Trump to test his views on Chinese investment, according to people familiar with the matter. They ultimately decided to refile their application.