Chinese Peril

Obama left a departing gift Trump actually might want: a road map for countering China's plans to dominate the semiconductor business.
By William McConnell
A big part of President Donald Trump's economic message during the campaign was his promise to get tough on China, which he singled out for drawing jobs from the U.S. with the lure of cheap workers and generous government subsidies and for erecting trade barriers that favor exports from that country over imports.
If he wants to fend off threats, he might send his White House staff searching for a Jan. 6 report issued by Barack Obama's White House science officers. 

The web link to the report, which recommended steps U.S. officials can take to protect the U.S. semiconductor industry, no longer works, no doubt because of the new president's zeal to scrub all things Obama from the White House's communications outreach. 

A link to copy from The Deal, owned by The Street, is here.
But Trump would likely be receptive to the report's theme: that China's industrial policy designed to quash the U.S. lead in the global semiconductor market and place itself in that role is a threat to U.S. economic and national security and the U.S. should counteract those efforts.
Regulators' wariness of semiconductor sector acquisitions by buyers with Chinese ties already has killed many recent deals. 

But, typically, the challenges are targeted at only deals involving products sold to the military or that are critical to the U.S. telecommunications infrastructure. 

Fujian Grand Chip Investment Fund LP on Dec. 8 dropped its €670 million ($717.5 million) bid for German chipmaking equipment supplier Aixtron SE after Obama said he would block the Chinese investment fund from acquiring the Aixtron's U.S assets. 

Lam Research Corp. and KLA-Tencor Corp. spiked their $10.6 billion merger in October due to an extended investigation by the Committee on Foreign Investment in the U.S. 

In January 2016, Royal Philips NV backed out of its $3.3 billion agreement to sell its Lumileds lighting components business to a Sino-U.S. consortium, citing opposition by Cfius. 

Others deals halted under U.S. government threat include Fairchild Semiconductor International Inc.'s $2.46 billion takeover offer from China Resources Microelectronics and Hua Capital Management, China's Unisplendour Corp. Ltd planned investment in Western Digital Corp., and Tokyo Electron Ltd.'s 2015 effort to acquire Applied Materials Inc. for $9.4 billion.
It's not as if semiconductor deals involving Chinese buyers can't get done. 

In December 2015, GlobalWafers Co., Ltd. was cleared for its $683 million acquisition of SunEdison Semiconductor Limited, and three other semiconductor-related deals involving Chinese and other foreign buyers were approved in 2015: Globalfoundries Inc.'s acquisition of IBM Corp.'s microelectronics business, NXP Semiconductors N.V.'s $1.8 billion sale of its RF Power unit to Jianguang Asset Management Co. Ltd. and Integrated Silicon Solution Inc.'s acquisition by Uphill Investment Co.
According to the report, economic threats should be added to the list of national security concerns that could result in an acquisition of U.S. assets by foreign buyers being blocked by Cfius, particularly if the buyer's home country (China) is violating international trade agreements. 

Under the Obama administration's plan, the U.S. would only expand the definition of national security threat to take much more widespread action blocking deals involving China when the negotiated rules have been violated. 

The report hinted that China's noncooperation on economic and trade issues would provide more proof of a national security threat. 

Trump's only real reservation about the plan might be to quibble with the some of the steps Obama's team recommended as being too plodding and requiring naive faith in China's willingness to negotiate and follow a set of rules governing such issues as each countries' import restrictions and use of government subsidies.
China has stated that it intends to have "advanced world-level" semiconductor capability in all segments of the industry by 2030. 

Its government has committed $150 billion over 10 years to subsidize investment and acquisition and also conditions access to its market on local production and technology transfer.
Coupled with these initiatives, China's gambit is timed to take advantage of the fading phenomenon of Moore's Law, the expectation that the semiconductor industry will double the number of transistors on a chip every 18 to 24 months. 

That pace is much harder to keep up today as industry R&D is spread across more numerous types of products. 

Because semiconductor technology is advancing more slowly, it is now easier for China to narrow the gap in its capabilities, according to the report.
Anne Salladin of Stroock & Stroock & Lavan LLP said the report could launch an important conversation within the Trump administration.
"Cfius is intended to deal with acquisitions on a transaction-by-transaction basis," she said. 

"This is an inexact tool for dealing with repeated purchases by a determined government like those we have seen over the past year," she said. 

While the CFIUS process is designed to prevent deals that could put a specific military or telecom technology in the hands of a hostile government, the statutory criteria it relies on to challenge a transaction were not designed to prevent a string of acquisitions that could supplant U.S. economic leadership bit by bit.
Trump, however, is unlikely to adopt the report without making major revisions, particularly to recommendations urging U.S. and Chinese officials to engage first in dialogue to agree in principle to measures that are reasonable for protecting national security. 

Under the Obama administration report, if China fails to adhere to these agreed-upon norms, one way that the U.S. could respond would be to allow China's policy to affect national security threat assessments of Chinese acquisitions. 

"On its face, it seems as if the report's goals would be aligned with President Trump's, but certain recommendations in the report are not necessarily a blueprint for action. These recommendations rely on norms agreed to by the two countries," Salladin said. 

"That process could take time to put in place and would not immediately apply higher scrutiny to deals."

China's Dirty Money

Nose to the Window for China
By Nisha Gopalan

No matter who becomes the next occupant of the White House, it's already clear that it will be tougher for Chinese companies to make acquisitions in the U.S. and elsewhere in the West.
Chinese companies have ramped up outside purchases amid a slowing economy at home, but they are finding a bigger push-back from politicians in their target markets. 

U.S. lawmakers have expressed strong concern about Chinese acquisitions in Hollywood and urged the Treasury Department to reject the $1.1 billion takeover of Aleris Corp., a Cleveland-based aluminum firm, by China Zhongwang Holdings Ltd. 

That came a week after once-welcoming Germany withdrew its support for the 670 million euro ($743 million) purchase of chipmaker Aixtron SE by a unit of Fujian Grand Chip Investment Fund LP.
Even as Chinese companies hone their sophistication in global dealmaking, it's looking as if there's not much left beyond Switzerland and Mediterranean markets like Italy and Portugal.
Scrapped Chinese overseas acquisitions are hitting levels not seen since 2009, when the world was reeling from the global financial crisis and mainland buying of overseas commodities and related companies was on a tear. 

On the Scrap Heap
The value of rejected Chinese acquisitions overseas is approaching the record level it hit in 2009, when China was on a commodities buying spree

Note: Several big China commodity deals were scrapped in 2009, including the Aluminum Corp. of China's $4.1 billion bid for a majority of Rio Tinto and Sinochem's $3.7 billion bid for Australia's Nufarm. Cnooc's $19 billion Unocal bid was rejected in 2005.

The U.S. has always been a tough market for China, which was made clear when regulators spurned oil giant Cnooc's almost $19 billion bid for Unocal more than a decade ago. 

But that hasn't stopped companies from trying, even as the list of spurned deals this year grows. 

For example, Anbang Insurance Group Co.'s $14 billion offer for Starwood Hotels & Resorts Worldwide Inc. earlier this year, scuttled in large part by opposition in Washington, is the second-biggest terminated Chinese transaction in the U.S.
As that deal indicates, opposition is moving beyond military-related, energy and infrastructure purchases. 

Technology options are also increasingly out, led by Tsinghua Unigroup’s $23 billion rebuffed attempt to acquire Micron, which would have been the largest Chinese overseas takeover at the time. The company also backed out of a $3.78 billion deal to invest in disk-drive maker Western Digital Corp. 

Other abandoned deals include a lighting unit put on the block by Royal Philips NV and Silicon Valley stalwart Fairchild Semiconductor International Inc.
The U.S. push-back has even expanded into so-called soft power like media. 

Tycoon Wang Jianlin, who has set his sights on Carmike Cinemas and finalized his acquisition of Golden Globes producer Dick Clark Productions, faces political accusations of being the vehicle for China's takeover of American cultural trophies.
Opposition isn't limited to the U.S., either. 

Until the approach for Aixtron, Germany, while increasingly sensitive to Chinese purchases, seemed ready for China's business despite rumblings about the sale of robot maker Kuka AG. 

That openness is going to be increasingly rare.
Australia, long a source of cheap commodities and utilities and highly dependent on trade with China, joined the chorus this year, blocking a bid last month from mainland Chinese buyers for Ausgrid, the country's largest electricity network, as public opposition to the sale of everything from farmland to Sydney real estate heats up.
Even Britain, one of the most popular destinations for Chinese investing, is partly cooling to Chinese money after its vote to leave the European Union. 

After a brief delay, Britain approved the controversial 18 billion pound ($22.4 billion) Hinkley Point nuclear power project funded by Chinese money in September but attached new conditions on foreign investing in U.K. infrastructure. 

That leaves just three relatively wide open big markets: Switzerland, home to agricultural giant Syngenta AG, which China National Chemical Corp. is looking to buy for $46 billion in its hunt for seed technology; Italy, where the Chinese chemicals giant acquired tiremaker Pirelli last year; and Portugal, whose largest insurer is now in Chinese hands.
But narrowing the potential Western geographies that are open for business means that access to the kind of technology knowledge or global brands the Chinese covet is becoming much more difficult. While strapped Greece or emerging markets like Pakistan open their smaller ports and utilities to Chinese money, the really big Western targets could be off the table. 

Shopaholic
Of the top 10 bids for overseas assets made by Chinese acquirers on record, five were this year, and all but Spanish firm Repsol's sale of its Brazilian assets were of Western companies

Chinese bidders are going to have to either narrow their focus to targets in other parts of the world or focus on minority stake purchases if they want to keep buying overseas. 

Though unlikely to fizzle, China's M&A boom is definitely beginning to sputter. 

Chinese Peril

Security Concerns Prompted Germany to Reopen Review of Chinese Takeover of Aixtron
By SARAH SLOAT

Robots at a plant of Kuka Robotics in Shanghai, China. The planned purchase of Aixtron is part of a wave of Chinese acquisitions of German technology firms. One of the larger transactions was Midea Group’s $5 billion bid for Kuka AG, which makes robotics systems for the auto and aerospace industries. 

FRANKFURT—The German government reopened its review of a €670 million ($728.89 million) Chinese takeover of chip equipment maker Aixtron SE because of security concerns, the buyer said on Tuesday.
“Information…indicates the know-how of Aixtron also comprises security-related technologies, in particular in the defense sector, which could be revealed through the contemplated acquisition of Aixtron,” said Grand Chip Investment GmbH, the German unit of China’s Fujian Grand Chip Investment Fund LP.
Grand Chip said the withdrawal didn’t mean its offer would be terminated. 

Grand Chip bid €6 per share for Aixtron in May, and the German government issued a clearance in early September. 

On Monday, Germany’s economics ministry confirmed that it withdrew the clearance but declined to elaborate on the reason.
The proposed acquisition of Aixtron is part of a wave of Chinese offers for German technology firms that has raised concern in the government. 

Some of the targeted companies specialize in innovative technologies important to industry, including the auto sector.
The offer period ended Friday, and final results will be announced Oct., Grand Chip said. 

On Monday, it said it had secured roughly 65% of Aixtron, well above the 50.1% threshold it set for the deal to go forward.