The Tsinghua Group paid a hefty 33 percent premium for a minority stake in Western Digital Corp. recently but the Chinese company appears to be getting two deals for the price of one. It may have also found a way around the stiff opposition the Chinese have repeatedly encountered each time they tried to purchase a major Western technology company.
Less than one month after Tsinghua paid $3.5 billion for 15 percent of the hard disk drive and storage device manufacturer, Western Digital itself offered to purchase SanDisk Corp. for $19 billion. Once completed sometime next year, the transaction would make Tsinghua a leading shareholder in a U.S.-based company that is also one of the world’s biggest and most influential players in the fast-growing storage market. All this without a peep from American politicians. Many of them may not even be aware of the deal.
It’s a strategy that other Chinese enterprises interested in Western companies will probably copy and successfully use to overcome the kneejerk oppositions that have in the past characterized their forays into the global M&A market. Many previous offers by Chinese companies for Western technology enterprises have been rejected by regulators who oppose these deals because of fears the products of the target firms could have dual or commercial and military applications.
The U.S. government has been fiercely opposed especially to the acquisition of American semiconductor companies by Chinese firms. While there doesn’t appear to be a formal and publicly stated policy of opposition to these acquisitions, the government has used regulatory objections to assure the stillbirth of such moves by Chinese firms. The government also ensures some transactions proceed no farther than in the minds of Chinese enterprise bosses by classifying certain technologies as dual-use, effectively terminating any efforts to transfer such IP or related products.
Tsinghua might have learned a few lessons from its ill-advised push to purchase Micron Technology Inc. earlier this year. The company publicly proclaimed its interest in paying as much as $23 billion for the Boise, Idaho-based memory semiconductor supplier in August but the discussions appear to have stalled because Micron executives believed regulators would not approve such a deal, according to reports.
Nobody should expect China, its investment arms and publicly-traded Chinese companies to back away from efforts to become a bigger player in the semiconductor market; the industry is just too large and too critical to numerous segments of the global economy. The Semiconductor Industry Association forecasts IC sales will increase to $365 billion by 2017, from $343 billion in 2015. With China currently the No. 1 global consumer of semiconductors, it is understandable that China might want a piece of the pie.
Last year, the Chinese government said it will spend $170 billion over the next five years to beef up China’s semiconductor production. The push will be achieved through a mixture of internal growth and foreign acquisitions, according to a McKinsey & Co. report.
The research firm predicted that the industry would see a flood of mergers and acquisition actions by Tsinghua and other Chinese firms in the semiconductor market to achieve the government’s objectives. Tsinghua had previously led the consolidation of China’s wafer foundries with the acquisition of four of them in 2013, including Spreadtrum and RDA Microelectronics, McKinsey said. It warned, however, that China would push for overseas acquisitions because it lacks the IP-base to grow its local semiconductor industry without the technology already available at established Western companies.
“Chinese companies will become more aggressive in pursuing international mergers and acquisitions. Indeed, it would be quite difficult for Chinese players to build a complete and competitive semiconductor value chain without capitalizing on foreign assets; collaborations between Chinese and global players probably will not be enough to meet the country’s objectives,” McKinsey said in the report noted above.
“We should expect China to continue to actively seek opportunities to acquire global intellectual property and expertise, usually with the intent of transferring them back home. What’s still to be determined, however, is how global governments will react to proposed deals in light of the emerging policy and market changes,” added the research firm.
Western governments are understandably wary of China’s push for and interest in acquiring semiconductor companies within their territories. That is unlikely to change in the near future and the Chinese may have finally decided to stop pushing for outright acquisition of certain Western technology enterprises. It is harder, however, for Western governments to stop Chinese firms from buying minority stakes in these companies. The Western Digital-Tsinghua deal confirms this strategy works by flying under the radar of the fiery politicians who like to hammer such transactions.
With time, perhaps, Western governments may even allow Chinese companies to turn their minority stakes in their top chipmakers into majority ownerships that would make the enterprises subsidiaries of China’s investment firms but with conditions foreign regulators can live with.
Who knows what these can lead to even further down the road?