The Committee on Foreign Investment in the United States, known affectionately as CFIUS, is in the news again. The Wall Street Journal reported last week that CFIUS has been hiring a “SWAT” team of crack experts to more closely review foreign investment in US technology companies. Crucially, the team seems to have a mandate to review deals that have already been approved. Pick your pun, but be sure to use one that implies pain and suffering because this could get very messy.
CFIUS is an inter-agency US government committee that has approval on all foreign acquisitions of US assets ranging from real estate to semiconductors. In the 1980’s it ramped up scrutiny of a rising Asian proto-superpower who seemed to be buying all the prime US assets – Japan. Once that panic subsided, CFIUS then went somnolent and was fairly toothless for a long time, one more regulatory item on the M&A closing checklist. Then late in the Obama administration it started to become more active, and then was sent into overdrive over the last four years as China replaced Japan as the bogeyman threatening to pillage US companies.
The most frequent question we have fielded over the past month is what is going to happen with the US-China trade relationship. And we freely admit that we are as much in the dark about this as everyone else. If the Journal article is accurate, we would definitely read that as a path for continued tension.
To be fair, there are good reasons for heightened CFIUS scrutiny, both commercial and security reasons. China’s government has a very active policy of building up its technology capabilities. On the commercial side this has led to forced IP transfers, something which absolutely falls under CFIUS review. There are also plenty of legitimate national security concerns (as well as plenty of less legitimate ones).
Having worked on several CFIUS projects, the big problem is that the process is opaque. The statutory language behind the committee’s powers is vague on some key areas, and it is easy to see that vagueness as deliberate, giving the committee wide leeway.
If CFIUS is now going to go back and review already-approved deals, the uncertainty around the process is going to cause a lot of anxiety. Who is next? CFIUS has in the past forced the unwinding of approved deals (e.g. Grindr), but that was fairly rare. The Journal makes is sound as if this is going to become much more common.
This is a problem for companies dealing with Chinese buyers, but also for non-Chinese buyers. For companies seeking investment from Chinese companies the chill in CFIUS has been in full effect for some time. Most start-ups we speak to today automatically rule out talking to Chinese investors, because they fear a negative CFIUS ruling. But the question is will this apply only to outright acquisitions or will it also cover non-controlling investments. The Journal points out that CFIUS has hired bankers and venture capitalists, so it seems likely that even investments will be reviewed.
We know many Chinese companies who are interested in investing in US start-ups, often with no national security element involved. After a period of just avoiding the US, they are now open to investing again, it remains to see if any of these deals can happen.
And as we noted above, the problem does not just apply to Chinese companies. It extends to almost all foreign companies. We have spoken to many European companies who have expressed a reluctance to invest in US start-ups for fear of CFIUS taking a look at their Chinese holdings. And what about Taiwanese companies? Most of those whom we have spoken with are equally worried about US investments. When pushed on why they would be concerned, their answer basically boils down to “the process is so opaque that we are not sure CFIUS can tell the difference between the PRC and Taiwan.”
This is of course a big problem for US electronics companies. As we have bemoaned before, US investors do not like investing in semis or hardware. By contrast, Chinese investors have large piles of cash dedicated for just these sorts of investments. Will starving those start-ups really help US national security? Will companies who have already taken Chinese investors be forced to return their capital? At this point no one knows, and that is the real problem.