Deal-Makers Must Adapt to Review Process

U.S. inbound M&A is facing increasing intervention from the Committee on Foreign Investment in the U.S. (CFIUS), a multi-agency government panel that reviews investments in U.S. businesses by foreign entities for potential national security implications. Although CFIUS reviews can apply to investments from any foreign country, scrutiny of Chinese investments has been pronounced recently. With Congress now considering legislation to expand the jurisdiction of CFIUS, Baird’s Global Investment Banking team expects this trend to continue and possibly accelerate, potentially causing U.S. sellers to reconsider seeking overseas investors.

Despite the increased activity of CFIUS, Baird believes sellside processes of U.S. targets should still include the global universe of buyers, though targets drawing international interest, including from China, will require realistic modifications to deal execution.

An Increasingly Active CFIUS

As the primary means for the U.S. federal government to regulate foreign investment, CFIUS focuses its reviews on transactions where a foreign entity’s control of a U.S. company involves issues of national security. As a result, the panel is most likely to scrutinize investments in semiconductors, telecommunications, artificial intelligence, data mining, aerospace/defense, and transportation infrastructure. For example, President Trump recently blocked Singapore-based Broadcom’s attempted takeover of Qualcomm on the recommendation of CFIUS, which determined the proposed acquisition could curtail U.S. investments in semiconductor and wireless technologies.

CFIUS reviews can be initiated either at the request of the transaction parties through voluntary notice given to the panel or when CFIUS independently starts a review, often due to perceived concerns over national security risks. As needed, the panel completes a 45-day investigation, which can result in requirements for the transaction parties to agree to changes that limit foreign control or access to sensitive U.S. technologies before potential deal clearance after further review. Transaction parties typically withdraw deals if unable to mitigate the national security concerns of CFIUS in order to avoid the alternate scenario of the panel referring the transaction to the President of the U.S. with a recommendation to reject the deal (as we saw in the Broadcom/Qualcomm example).

CFIUS was especially active in 2017, significantly increasing both the number of transaction reviews, re-filings, and refusals, as well as the length of time needed for a review. Last year, CFIUS reviewed about 240 cases, well above the 2016 level and more than double the amount in 2013. In one respect, last year’s increase was a function of the record level of inbound M&A transactions into the U.S. during 2017. Recent growth can also be attributed to proactive requests for CFIUS reviews from M&A dealmakers, keenly aware of the risks related to not obtaining CFIUS clearance under a new presidential administration.

CFIUS Reviews by Year

CFIUS Reviews by Year
Source: U.S. Department of the Treasury. 2017 value is approximate.

Greater CFIUS activity in 2017 included:

  • An estimated 20 deals being blocked or abandoned – including some that were never announced publicly – up from a total of 10 in the 2014-2016 period;
  • Initiation of a 45-day investigation period in about 70% of cases, up from 46% in 2015 and far above the percentages in most prior years;
  • Mitigation steps being proposed by transaction parties in nearly 20% of cases, compared to less than 10% in 2008-2015;
  • More transactions – including some abandoned deals – undergoing a CFIUS review cycle multiple times due to reviews not being completed within 75 days after CFIUS accepted the case; and
  • Longer CFIUS review processes due to the increased caseload and the higher number of mitigations and re-filings.

Focus on China

While applying broadly across geographies, the increased CFIUS activity of recent years has included inbound deals involving China-based entities, with such transactions representing the largest number of reviews. From 2013 to 2015 – the most recent years with comprehensive CFIUS data – 20% of reviews involved investors from China, more than for any other country. Since 2016, an increased number of proposed outbound acquisitions by Chinese entities have been abandoned or blocked following reviews by CFIUS. The wide range of deal sizes in the table below reflects the extent of the panel’s reach.

Selected China Outbound M&A Blocked by CFIUS

Target Target Sector Proposed Acquiror Deal Value
($ in millions)
Mar 2018 Waldo Farms Biotechnology/Genetics Beijing Dabeinong Technology $17
Jan 2018 MoneyGram Digital Payments Ant Financial Services $1,200
Sep 2017 Lattice Semiconductor1 Semiconductors Canyon Bridge
Capital Partners
Dec 2016 Aixtron2 (company with U.S. subsidiary) Semiconductors Grand Chip Investment $560
Feb 2016 Western Digital Data/Information Unisplendour $3,775

1Lattice / Canyon Bridge transaction was blocked by President Trump.

2Aixtron / Grand Chip transaction was blocked by President Obama.

Source: Capital IQ.

It’s no secret why 2016 was a turning point for greater CFIUS interest in Chinese deals. Peak levels of Chinese investments in the U.S. during 2016 triggered concerns over national security, with the perception that Chinese investors act on behalf of China’s government. Adding to that factor were the political shifts that began in Washington due to the change in presidential administrations.

More Scrutiny to Come

As a further reflection of the current political environment, Congress recently introduced legislation that would broaden the reach of CFIUS. The Foreign Investment Risk Review Modernization Act (FIRRMA) would increase the jurisdiction of CFIUS to include greater explicit authority to review to minority-stake deals while expanding the definition of emerging technologies seen as sensitive to national security threats. The legislation also specifies more national security factors to be considered by CFIUS, lengthens the review timeline, enhances the ability of CFIUS to review closed transactions, and adds a filing fee, among other features. It seems a near certainty that passage of the legislation would only accelerate the recent trend of increasing CFIUS activity. 

Recommendations for Deal Participants

Despite the increased challenges of achieving CFIUS clearance and the possible passage of FIRRMA into law, U.S.-based sellers should not let the panel’s review processes deter them from including buyers from all countries, including China, in sellside processes. This is particularly true for the sale of U.S. businesses that are less relevant to national security and/or do not involve advanced technologies, sensitive data, or proximity to U.S. government facilities. Indeed, despite intensified scrutiny from CFIUS, the vast majority of foreign investments in the U.S. are being completed, including nearly 1,500 majority-stake M&A transactions that closed during 2017, with 100+ coming from China.

In the early stages of navigating the CFIUS process, transaction parties must identify any U.S. national security risks, conduct due diligence on such risks, and develop effective mitigation tactics to manage these risks. Transactions that are not submitted proactively to CFIUS for review can experience rather significant negative consequences – particularly related to unflattering media exposure – if later unwound in the public domain.

Specifically, it’s critical for transaction parties to:

  • Identify all potential connections to the U.S. and national security issues;
  • Assess CFIUS requirements and transaction risks;
  • Seek the committee’s views by conducting pre-consultation with CFIUS before filing a formal voluntary notice
  • Respond to all CFIUS requests promptly and completely;
  • Agree to mitigation measures, such as maintaining facilities in the U.S., restricting foreign access to technology/information, and implementing related compliance mechanisms; and
  • Devise and execute on a coordinated media, legal, and government relations strategy.

In short: current regulatory trends should not deter M&A market participants from pursuing the best strategic and/or financial outcomes. But realizing those paths forward requires a realistic and tailored approach that recognizes the existing environment.

For more information, contact:

Chris McMahon
Chris McMahon
Head of Global M&A

Lydia Xu
Lydia Xu
Head of China Investment Banking
  +86-185-182- 3759

Mike Lindemann
Mike Lindemann
Managing Director


©2018 Robert W. Baird & Co. Member SIPC.