Chinese enterprises, government and public investment firms need a different international M&A strategy because whatever they are doing now is clearly not working in the global semiconductor market. China has built a $150 billion-plus technology war chest to transform its economy into a high-end IT powerhouse but Western governments have repeatedly checkmated those moves in a determined effort to maintain their intellectual property and military advantages.
A crippling U.S. blow dealt this week to a purchase agreement in the semiconductor sector shows China hasn’t quite figured out a way around Western objections to its high-tech acquisition goals. The government ordered Lattice Semiconductor Corp. and Canyon Bridge Capital Partners LLC, its China-backed suitor, to immediately terminate their one year-long courtship, triggering concerns about other deals involving Western and Chinese enterprises.
“The proposed acquisition of Lattice by the Purchasers (the proposed transaction) is prohibited, and any substantially equivalent transaction, whether effected directly or indirectly by the Purchasers, through the Purchasers' shareholders or shareholders' immediate, intermediate, or ultimate foreign person beneficial owners, or through the Purchasers' subsidiaries, is also prohibited,” said the White House in an order signed by president Donald Trump. “The Purchasers and Lattice shall take all steps necessary to fully and permanently abandon the proposed transaction not later than 30 days after the date of this order, unless such date is extended by the Committee on Foreign Investment in the United States (CFIUS) for a period not to exceed 90 days, on such conditions as CFIUS may require.”
Whether the US government was right or wrong about the perceived dangers it faces from the Lattice-Canyon Bridge deal is immaterial. The government took a decision the parties involved could not appeal. Recognizing this, Lattice issued a statement indicating it would immediately comply with the government’s decision.
“The transaction with Canyon Bridge was in the best interests of our shareholders, our customers, our employees and the United States,” said Darin G. Billerbeck, CEO of Lattice Semiconductor, in the statement. “We also believe our CFIUS mitigation proposal was the single most comprehensive mitigation proposal ever proposed for a foreign transaction in the semiconductor industry and would have maximized United States national security protection while still enabling Lattice to accept Canyon Bridge’s investment and double American jobs. We will continue to focus on initiatives that will contribute to Lattice’s long-term success, specifically in areas where our affordable, low power, small form factor devices create advantages. Lattice’s future remains bright.”
Lattice is moving on, as it must. For China and its investment arms, though, the conundrum remains. They want Western technology but at what price and will they ever get it? What China obviously needs is a healthy dose of realism about what is achievable and an energetic economic diplomacy campaign to explain Chinese objectives to foreign governments and address their concerns. Even these will take time to yield fruits and many national governments, including those of the United States and its closest Western allies, will not be convinced.
Because the Western governments hold the aces in this game, though, it is China and its public investment funds and Western companies interested in being acquired by Chinese businesses that must figure out the best strategy for achieving their goals in economic sectors such as automation, aviation, engineering, medical technology and semiconductor. Getting around the “national security” wedge used by Western governments may still be almost impossible as indicated in the US order on the Lattice deal.
If Not Lattice, Which Other Firm?
The $1.3 billion Lattice transaction would have barely registered on the Richter scale of recent high-tech acquisitions. The business involved reported less than $500 million in annual revenue last year and its punch – by market share – in its core communications infrastructure, consumer electronics and industrial equipment sectors – pales beside those of rivals.
Although the government noted that Lattice's products have dual use – civil and military – potentials, the rejection of the Chinese group's offer is based on the more fundamental issue of Western governments’ perception of China as an economic competitor and a potential military adversary. The strengthening of China’s economic and military power in the last two decades have only made Western governments even more wary.
“The national-security risk posed by the transaction relates to, among other things, the potential transfer of intellectual property to the foreign acquirer, the Chinese government’s role in supporting this transaction, the importance of semiconductor supply chain integrity to the United States Government, and the use of Lattice products by the United States Government,” said the US government, in a separate statement.
Lattice and Canyon Bridge first signed an agreement regarding the transaction in November 2016 and the parties had assumed it should receive CFIUS clearance because Lattice is much smaller than many of its competitors and because the deal was packaged as designed to secure local jobs and boost foreign investment in the United States. Trump’s background as a business owner with interests in many countries was also seen as helpful. The deal immediately ran into stiff headwinds, however. The CFIUS declined to support it and recommended the government reject it, principally because of the involvement of China Venture Capital Fund Corp. Ltd., an investment fund allegedly controlled by the Chinese government.
An unusual appeal to Trump by Lattice only brought the hammer down harder and faster. The US president, perhaps bristling under other disagreements and disappointments with China’s leadership, told the parties to disengage, end all discussions, report weekly progress of termination talks to CFIUS and provide a “timeline of projected completion of remaining actions necessary to effectuate the abandonment.”
This, in effect, is a transaction that cannot be resurrected. Furthermore, Canyon Bridge and China Venture Capital Fund have effectively been shut out of the US semiconductor market for engaging in activities which the American government sees as threatening its “national security.” It will take strenuous efforts on the part of the Chinese government to erase the negative impression and eliminate likely kneejerk reactions to all future deals proposed by China Venture Capital Fund and its associates.
Other Chinese firms and investment funds – private and government-owned – will most likely be shut out of the US technology investment market as well or, at least, be compelled to show proposed acquisitions of American technology companies will not threaten US security interests.
There will also be a boomerang effect in other parts of the world. Technology M&A transactions typically require the approval of multiple national government regulators and a single “nay” could result in the termination of talks between agreeable parties.
So, if China cannot buy a relatively small semiconductor company like Lattice, what will the West allow it to purchase and at what financial and other costs? That’s a question all electronics companies in the major regions of the world should be exploring. As it has done in the past with other exploratory M&A moves, China used Lattice to determine what it could be allowed to do and it receive an unambiguous response from the American government.
Checkmate against China, for now. A return match is inevitable.