February 22, 2016
Another attempt by Chinese investors to grow their foothold in the U.S. semiconductor industry has been scuttled by the prospect of nervous regulators. The latest would-be target, industry pioneer Fairchild Semiconductor (NASDAQ: FCS), has rejected an unsolicited $2.5 billion takeover bid from China Resources Microelectronics and Hua Capital Management, opting instead for an existing $2.4 billion agreement with ON Semiconductor (NASDAQ: ON).
In a vacuum, accepting $20 per share from an American competitor rather than the $22 per share offered by the Chinese consortium may not add up. But recent history indicates that the Committee on Foreign Investment in the United States (CFIUS), the regulatory body that can block transactions for national security reasons, may have done just that if Fairchild had agreed to be acquired by investors linked to the Chinese government.
Best known as the basis for modern computing and the rise of Silicon Valley, semiconductors are also critical components in drones and other military systems, which explains U.S. reticence for the nation’s top chip manufacturers to enter Chinese ownership. Last July, the Chinese government-owned Tsinghua Unigroup put forth a $23 billion bid to acquire Micron (NASDAQ: MU), another U.S. semiconductor business, as part of a stated goal to become the world’s third-largest chipmaker over the next five years. The proposed deal fell through, though, due to skepticism it would receive regulatory approval. Last September, Tsinghua agreed to invest $3.8 billion in hard-drive maker Western Digital (NASDAQ: WDC), a deal the CFIUS may still choose to investigate more closely.
Similar concerns extend to other sectors, too. After an investor group led by Chongqing Casin Enterprise Group announced plans earlier this month to acquire the Chicago Stock Exchange, a group of 46 U.S. lawmakers wrote a letter to the CFIUS outlining their concerns over company with ties to Beijing gaining direct access to the U.S. equities marketplace. In January, Chinese construction company Zoomlion (SHE: 000157) entered an unsolicited $3.3 billion offer to buy Terex (NYSE: TEX), a manufacturer of heavy industrial equipment with U.S. government contracts. And just a few days earlier, the CFIUS blocked a proposed $3.3 billion sale by Philips (AMS: PHIA) of its Lumileds lighting unit to Chinese investor GO Scale Capital.
Ultimately, the rapid deceleration of GDP growth, rumors of further yuan devaluation and the blessing from Beijing to funnel huge quantities of capital into foreign strategic assets means hefty buyout offers from Chinese investors are likely to continue; late Wednesday, Tianjian Tianhai (SSE: 600751) agreed to acquire Ingram Micro (NYSE: IM), a U.S.-based distributor of computers and software, for an equity value of $6 billion. Whether U.S. regulators warm to the idea, however, remains to be seen.
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