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Cofense deal highlights strategy shift from US foreign investment watchdog

Pamplona Capital Management’s investment in Cofense is the latest deal to be investigated by CFIUS, as concerns over foreign investment in the US continue to grow.

Pamplona Capital Management is reportedly looking to sell its share in cybersecurity company Cofense (fka PhishMe) due to pressure from The Committee on Foreign Investment in the United States (CFIUS).

Pamplona and BlackRock purchased a stake in Cofense, a provider of phishing defense software, for $400 million in February 2018. However, some of the funds Pamplona used for the deal reportedly came from business magnate Mikhail Fridman, who was included on a US Treasury Department list of Russian oligarchs released last year in the wake of an investigation into possible Russian interference in US elections around the same time the Cofense transaction was conducted. CFIUS contacted Cofense about the deal around a month after it occurred, and the cybersecurity company and Pamplona agreed in October to conduct a sale by this July, per Reuters.

CFIUS is an interagency committee first established in 1975 by an executive order from the Ford administration. It was formally signed into law under the Bush administration in 2007 and has had its powers significantly expanded under Donald Trump as trade tensions between the US and China have increased. Not only can CFIUS block foreign takeovers, but it reportedly also has the power to undo deals that have already occurred, including minority investments and joint ventures.

The news of Pamplona’s agreement to divest its stake in Cofense comes amid elevated national security concerns regarding foreign investment in the US. And it’s not the first such deal to fall under the scrutiny of CFIUS. The Committee also blocked Broadcom‘s $117 billion hostile takeover of fellow chipmaker Qualcomm last year, reportedly stipulating that Broadcom would not be competitive enough to stave off Chinese telecom giant Huawei.

CFIUS shifts focus to data companies

While CFIUS has previously focused on large infrastructure deals involving foreign investors, the committee has begun to shift its focus toward deals involving consumer-data-driven businesses.

Popular gay dating app Grindr was acquired by Chinese gaming company Beijing Kunlun Tech in 2016, with the company acquiring the remaining shares in Grindr it didn’t own last year. In a move that likely drew attention to itself, Kunlun failed to submit the investment to CFIUS, per Reuters. After reviewing the deal, the Committee asked the company to divest from the app, reportedly citing concerns that Kunlun could potentially have access to the data of Grindr’s members, including those in the US military or other intelligence-related positions. Kunlun had originally planned on taking the company public, but has reportedly transitioned to looking for an outright buyer for Grindr.

In 2017, Chinese biotech company iCarbonX made an investment of more than $100 million in PatientsLikeMe, the provider of a network that allows users to connect with other patients who have similar symptoms. The business had raised an estimated $26 million in previous equity financing. Late last year, the companies began receiving notifications from CFIUS, and now the Committee is forcing iCarbonX to divest itself from the company due to unease over access to consumer health data, per CNBC.

Even Uber wasn’t able to escape the watchful eye of CFIUS. When SoftBank completed its roughly $8 billion investment in the ridehailing company in early 2018, the Japanese telecom giant gained rights to two board seats. Although SoftBank still technically has the right to those seats, they will likely lose them when the company goes public, according to Bloomberg. In its recent S-1 filing, Uber indicated that the two SoftBank seats were vacant and waiting for approval from CFIUS, but Uber CEO Dara Khroswshahi has reportedly said that he intends to add “more independent directors who aren’t executives or major shareholders,” again per Bloomberg.

The overall crackdown on foreign investments is likely the main reason why China’s foreign investment in the US dropped by 90% between 2016 and 2018, according to CNBC. And that trend of regulation may be spreading to the European Union. This week the European Commission announced a new framework for screening foreign investments, though perhaps not to the extent of CFIUS. The new regulation process will allow member states and the Commission to review foreign investments and give their opinion on the transaction, ultimately leaving the decision up to the member state where the transaction is taking place. Currently, 14 of the 28 states have the power to screen such transactions.

Featured image via Llgorko/iStock/Getty Images Plus

  • graham-linley.jpg
    Written by Graham Linley
    Graham Linley used to write about M&A, private equity, and a sprinkling of VC.

    As a homegrown Californian and UCLA alumni, Graham loves the sun, which he misses very dearly. He also enjoys video games, fiction books and binge-watching only the best of TV shows. He also loves to have a good laugh with good friends.
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