CFIUS: The powerful and unseen US gatekeeper on multi-billion-dollar deals

US Treasury Secretary Steven Mnuchin is leading the Committee on Foreign Investment in the United States, or CFIUS.
US Treasury Secretary Steven Mnuchin is leading the Committee on Foreign Investment in the United States, or CFIUS.PHOTO: AFP

NEW YORK (NYTIMES) Qualcomm, one of the world's largest chipmakers, has spent the past four months fending off a hostile takeover from Broadcom, a Singaporean rival. On Monday (March 12), the fate of what would have been technology's biggest takeover was decided by a little-known committee of top White House administration officials who meet in secret, wielding power to kill the biggest multi-billion-dollar global deals.

The Committee on Foreign Investment in the United States, or CFIUS (pronounced Sif-e-us), investigates mergers that could result in control of a US business by a foreign individual or company, judging whether the deal could jeopardise the national security of the United States.

The committee is made up of members of the State, Defense, Justice, Commerce, Energy and Homeland Security departments, and is led by the treasury secretary. These days, that means Steven Mnuchin.

When CFIUS reviews a possible deal, the committee does not publicly disclose any information provided to it - nor does it even acknowledge that a party to a merger has submitted a deal to review. It also has the authority to intervene and review pending or completed transactions, without being asked by any of the companies involved, if members of the committee think a deal that could raise national security concerns.

The committee's findings, which are not publicly announced, are sent to the president, who may suspend or prohibit the deal.

But cases do not often get that far: The rejection of a deal by the committee is usually enough to kill a deal.

CFIUS GREW OUT OF FEARS OF JAPANESE INVESTMENT

US President Gerald R Ford signed an executive order creating Cfius in 1975, mainly as a vehicle to study foreign investment. But its responsibilities expanded after a crisis in the 1980s involving - like Qualcomm - an American chip maker: Fairchild Semiconductor, one of the pioneers of Silicon Valley, wanted to sell itself to Fujitsu, a Japanese company.

In the 1980s, Japanese companies were at the forefront of the electronics industry, and Reagan administration officials mustered intense pressure to force Fairchild to cencel the deal (it later struck a deal with National Semiconductor).

 

But the threat of more Japanese investment led Congress to pass the Exon-Florio Amendment in 1988, granting the president the ability to stop a foreign acquisition if there is "credible evidence" that a "foreign interest exercising control might take action that threatens to impair the national security." CFIUS was charged with reviewing mergers for potential threats.

CHINA IS A FREQUENT ELEMENT IN THE DEALS CFIUS REVIEWS

Cfius reviews deals across a variety of industries and companies from dozens of different countries. But it has often set its sites on deals involving Chinese companies, as the country's economic might has grown in recent yearsas the country's economic might has grown in recent years. From 2013 to 2015, the latest years for which the committee has made data public, about 20 per cent of the deals that CFIUS reviewed involved investors from China.

Among the notable recent reviews were:

  •  Money-Gram - Ant Financial: A Chinese electronic payments company, wanted to purchase MoneyGram, a money transfer company based in Dallas, for US$1.2 billion. But the deal collapsed in January after both sides said CFIUS refused to approve it. The collapse came despite a charm offensive by Jack Ma, the Chinese tycoon who controls Ant Financial, who had visited President-elect Donald Trump at Trump Tower and pledged to create 1 million American jobs. But it could not overcome the Trump administration's concerns about Chinese acquisition of American know-how.
  • Canyon Bridge Capital - Lattice: Canyon Bridge Capital, a private equity firm, wanted to acquire Lattice, a chipmaker based in Portland, Oregon. Canyon Bridge received investment from a group that included China Venture Capital Fund Corporation, which is owned by government-backed organizations. Lattice said CFIUS objected to the deal, and the company tried to appeal to the president, offering to resolve national security concerns. But Trump formally blocked the deal in September 2017, prompting China's commerce ministry to issue a statement saying countries should not push protectionism through security reviews.
  • GO Scale - Philips: In 2015, the Dutch electronics giant Philips had an agreement to sell a controlling stake in its automotive and LED business for as much as US$2.9 billion to GO Scale, an investment fund sponsored by GSR Ventures of China and Oak Investment Partners. Philips canceled the deal after it could not resolve CFIUS' concerns, and in December 2016 announced it would sell the unit to Apollo Global Management for US$1.5 billion, almost half the amount of the earlier deal.

The Broadcom-Qualcomm deal does not involve China-based companies. But there has been speculation that the acquisition could undermine the ability of the United States to compete with China in the race for telecommunications supremacy.

"Qualcomm's work is too important to our national security to let it fall into the hands of a foreign company - and in a hostile takeover no less," said Sen. Tom Cotton, R-Ark. "I would like to see CFIUS more active especially regarding China and regarding critical industries."

SOME US LAWMAKERS WANT TO EXPAND CFIUS' JURISDICTION

A bipartisan group in Congress has proposed legislation that would greatly expand the number of deals reviewed by CFIUS. In November, Senator John Cornyn, R-Texas, and Senator Dianne Feinstein, D-Calif, introduced a bill that could add thousands of companies with foreign ties to the list of those reviewed each year by CFIUS and provide more funding to deal with that increase. A similar House bill was also introduced by Republican Representative Robert Pittenger. The measure would expand CFIUS' jurisdiction to include joint ventures, sales of minority stakes and real estate deals for property near military bases and other sensitive facilities.

"By exploiting gaps in the existing CFIUS review process," Cornyn said, "potential adversaries, such as China, have been effectively degrading our country's military technological edge by acquiring, and otherwise investing in US companies."

The proposal has drawn objections from some businesses. IBM said the changes would limit "the ability of American firms to do business abroad while empowering foreign competitors to capture global markets."