Mergers, Investments

1
Mergers, Investments CFIUS

• International Trade Relations
• ITRN 603.003
• Professor Malawer
• Fall 2011
• Byron Pitts
• Frantz Price, Jr.
• Scott Russell

2
Contents

• FDI, Mergers, Acquisitions
• CFIUS Explained
• Key Provisions of CFIUS
• Legislative Issue Huawei Case
• Major Problems with CFIUS
• Policy Proposal

3
Foreign Direct Investment

• Foreign Direct Investment (net inflows current
  US) World Bank Statistics
• FDI 2010 236.2 Billion
• FDI 2009 158.6 Billion
• FDI 2008 310.1 Billion

4
Mergers Acquisitions

• Merger
• The combining of two or more companies to become
  one single company
• Acquisition
• Can be either friendly or hostile
• One company takes over another company
• acquiring company often offers a premium on the
  market price of the target company's shares in
  order to entice shareholders to sell

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What is CFIUS?

• Multi-agency body
• Authorized by statute to review national security
  concerns in transactions in which a foreign
  person will gain control of a U.S. business
• CFIUS is voluntary, but CFIUS has authority to
  initiate reviews independently

6
History of CFIUS

• Established by President Fords Executive Order
  in 1975
• Exon Florio Amendment passed in 1988 to give
  president more authority
• Byrd Amendment passed in1992
• Amended by Foreign Investment and National
  Security Act of 2007

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Exon Florio Provision

• Provision allows the President of the United
  States to suspend of block the foreign
  acquisition of a U.S. based company for reasons
  of national security
• President must have credible evidence and must
  believe that U.S. laws are inadequate or
  inappropriate to protect national security

8
Composition of CFIUS

• Secretary of the Treasury (Chair)
• Attorney General
• Secretary of Commerce
• Secretary of Defense
• Secretary of Homeland Security
• Secretary of Energy
• Secretary of State
• United States Trade Representative
• Director of OMB
• Chair of Council of Economic Advisors
• Director of Office of Science Tech Policy
• Assistant to President for National Security
• Assistant to President for Economic Policy
• Head of the Homeland Security Council

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Critical Sectors

• Agriculture/Food
• Critical Manufacturing
• Dams
• Government Facilities
• National Monuments Icons
• Nuclear Reactors
• Commercial Facilities
• Water
• Public Health

• Emergency Services
• Defense Industrial Bases
• Telecommunications
• Energy
• Transportation
• Banking Finance
• Chemicals
• Postal Services/Shipping
• Information Technologies

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CFIUS Notifications/Investigations
Year Notifications Investigations Notices Withdrawn Presidential Decision
2000 72 1 0 1
2001 55 1 1 0
2002 43 0 0 0
2003 41 2 1 1
2004 53 2 2 0
2005 65 3 2 0
2006 111 7 19 2
2007 138 6 15 0
2008 155 23 23 0
2009 65 25 7 0
2010 93 35 12 0
Total 2,155 121 89 14
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Impact of CFIUS

• Dubai World Ports (UAE)
• China National Offshore Oil Corporation

12
CFIUS Since 2007

• Passage of the Foreign Investment and National
  Security Act
• Established Committee by statutory authority
• Removed seven White House appointees
• Requires President to conduct national security
  investigations of certain investment transactions
• Provides Congressional oversight
• President is only officer who can suspend or
  prohibit mergers or acquisitions

13
CNN News Coverage
14
Huawei Case Study

• Huawei, founded in 1987, is a Chinese
  multinational networking, telecommunications
  equipment, and services company based in China
• It is the largest telecom in China and the second
  largest supplier of mobile telecommunications
  infrastructure equipment in the world
• Member of Forbes Global 500
• Huawei has pushed for overseas expansions since
  1997

15
Huawei 3Com

• In 2003 Huawei 3Com formed a joint venture
  (H3C) to focus on research and development and
  production sales
• In 2008 Huawei, as a junior partner in a
  coalition lead by Bain Capital, attempted to buy
  an 83.5 stake 3Com for 2.2 billion
• The deal was met by significant opposition in
  Congress due to the founders ties to the People
  Liberation Army
• Under mounting pressure the coalition withdrew
  their application from CFIUS acquisition talks
  stopped shortly thereafter
• The Chinese government saw this as protectionist
  and anti-China

16
Huawei Sprint-Nextel

• In 2010 Huawei made a bid to supply Sprint-Nextel
  with parts to modernize its existing cellular
  network
• Huawei partnered with Amerilink Telecom to allay
  security concerns
• In August 2010 eight senators expressed concern
  with the Huawei contract bid
• In October 2010 four lawmakers sent a letter to
  the FEC expressing additional concerns
• In November 2010 Sprint, after speaking with an
  administration official, excluded Huawei from
  bidding on the contract

17
Huawei 3Leaf

• In May 2010 Huawei bought 2 million in assets
  from 3Leaf, a firm that specializes in server
  technology
• Huawei did not file the purchase with CFIUS
  because the purchase price was so low
• CFIUS initiated an independent review of the
  purchase and suggested that Huawei should divest
  the assets
• Huawei declined the suggestion, opting for a
  presidential review
• Under mounting political pressure Huawei divested
  assets

18
Open Letter to the U.S.

• Huawei, after the failure to acquire 3Leaf, wrote
  an open letter to the United States
• The letter addressed the security concerns that
  have derailed numerous business opportunities for
  Huawei in the U.S.
• Military connections
• Government connections
• Invited U.S. to investigate concerns over
  security and intellectual property disputes
• Addressed current Huawei investments in the
  United States
• Praised American values

19
CFIUS Virginia

• CGI Group acquirers Stanley, Inc.
• Congressman Wolf and Forbes call for
  investigation into GE joint venture with Chinese
  owned AVIC
• Virginia Partnership for Economic Development

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Concerns With CFIUS

• Perceived as a significant burden to friendly
  mergers
• Possible takeover defense against unsolicited
  tender offers
• Could be used by third parties to block
  acquisitions that they oppose
• Appointment of Secretary of Homeland Security has
  increased the difficulties
• Recovery for troubled U.S. industries may be
  impaired by review process

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Concerns with Implementation

• Biggest overall issue in the implementation of
  CFIUS is the balance between protecting national
  security interests while ensuring that CFIUSs
  enforcement does not create a chilling effect on
  foreign investment
• Economic growth for states and individual
  businesses versus potential security issues

22
Is China Being Targeted?

• If the Presidents goal is to increase FDI
  inflows into the US, is it wise to promote an
  investment review policy that appears to target
  China?
• China only provided 0.6 of total FDI inflows
  into the US in 2010 are current policies pushing
  their investments to competing markets?
• Considering the defense and telecom/IT heavy
  Virginia economy, is CFIUS review leading to lost
  opportunities for investment within the
  Commonwealth?

23
Defense Industrial Bases

• China National Aero-Technology Import and Export
  Corp. (CATIC) Mamco (1990)
• CFIUS denied approval based on Chinese state
  control of CATIC and potential for theft of
  defense related technologies
• Seems logical to limit foreign investment in
  Critical Infrastructure sectors like defense
• But European companies (EADS and BAE Systems)
  have have been winning defense contracts for
  years
• Consider that Virginia brings in the highest
  defense spending of any state per capita
  (approximately 900,000 jobs)

24
IT/Telecom

• These sectors appear to be the crossroads for
  CFIUS controversies going forward
• Virginia has the highest percentage of technology
  workers in the country and ranked 5th in total
  high technology employment as of 2009,
  technology industries accounted for almost
  275,000 jobs in Virginia
• Mobile technology, telecom and IT industries have
  vast potential for beneficial foreign investment
  and joint ventures, but may also be susceptible
  to cyber-security issues

25
China Telecom

• China Telecom to sell wireless service in the US
  in 2012 expected to face government opposition
• Consider that Japanese company, DoCoMo, has
  operated similar services in the US since April
  2011
• Russia based Digital Sky Technologies received
  CFIUS approval for purchase of AOL instant
  messaging technology in 2010

26
Policy Proposal

• If China, or any other country for that matter,
  believe that they are being singled out for CFIUS
  review to the detriment of their potential and
  future investment, what can be done to make the
  process more transparent, predictable and
  friendly to economic concerns, while maintaining
  crucial national security standards?

27
Policy Proposal

• Increase the clarity and transparency of the
  actual CFIUS review process

• Pros
• Greater public and Congressional disclosure of
  the review process would remove uncertainty from
  the minds of both investors and the US public at
  large
• Clarifying for foreign investors which
  transactions raise security concerns might help
  relevant agencies determine under what
  circumstances foreign ownership creates a
  security risk
• Clarifies precedent for future investment
  investors would have opportunity to ensure that
  future investments are in compliance with CFIUS
  standards
• Cons
• Wide majority of CFIUS actions end during
  negotiations/review and before final decree such
  negotiations require confidentiality
• Increase in number of public reports provided may
  slow the review process

28
Policy Proposal

• Mandatory CFIUS review triggered by reaching
  various thresholds (i.e., amount, sector,
  non-friendly states), as done in other
  countries

• Pros
• Would provide predictability to investors and
  domestic industry
• By having clear uniform standards for triggering
  review, eliminates the idea, perceived or real,
  of overt discrimination against investment from a
  particular country
• Removes pressure of voluntary filing for review
• Cons
• Transactions must be reviewed on a case-by-case
  basis difficult for CFIUS agencies to provide
  bright-line criteria that, if met in a
  particular transaction, would or would not
  trigger review
• Could be unnecessary for investments that have
  traditionally been considered acceptable
• Potential chilling effect on investment from all
  countries, considering time and money spent to
  pass review where such a requirement had not
  previously existed

29
Comparable Foreign Procedures
Gordon, Kathryn and Nohen, Alexys.
Identification of Foreign Investors A Fact
Finding Survey of Investment Review Procedures.
Organisation for Economic Co-operation and
Development. May 2010. http//www.oecd.org/dataoe
cd/4/3/45425060.pdf Holden, Michael. The
Foreign Direct Investment Review Process in
Canada and Other Countries. Parliament of
Canada, September 19, 2007. http//www.parl.gc.ca/
Content/LOP/researchpublications/prb0713-e.htm.
30
Policy Proposal

• Include the states (allow FDI recipient states
  the option to be involved in the review process)

• Pros
• Adds important economic perspective to the
  process
• Micro-level view point that may be missing from
  current review structure
• As in VA example, state often involved in
  attracting and negotiating terms of the
  investment intimate familiarity with business
  side of the transaction beneficial to overall
  review
• State could also speak against investment where
  they see fit
• Cons
• Potential loss of focus on macro-level national
  security issues
• Could slow down the process

31
Sources

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