Committee on Foreign Investment in the United States (CFIUS) interventions in the form of blocked deals or mitigation measures were mainly in semiconductor and financial services deals in the past five years, an analysis by this news service shows.

Semiconductor deals accounted for 20% of reported interventions between 2017 and September 2022, while financial services sector acquisitions accounted for 16%, according to the analysis.

CFIUS interventions were reported for 25 transactions in the period under review, with 17 failed deals and eight subject to mitigation.

True prohibitions are rare, but companies frequently decide to abandon mergers if it seems likely CFIUS will not grant approval. These are also included in the analysis. Financial services saw the most abandonments (three).

While CFIUS publishes annual reports including figures on notifications, target sectors, buyer jurisdiction and government interventions, it does not publicise individual transactions it has reviewed unless there is a presidential order to block an acquisition. There were four such prohibitions between 2017 and September 2022: Lattice Semiconductor/China Venture Capital Fund (2017) Qualcomm/Broadcom (2018) StayNTouch/Beijing Shiji Information Technology (2020) and Musical.ly/ByteDance (2020).

This news service compiled data on deals involving listed companies, both on the target and bidder side, that were announced since January 2017 and subject to a CFIUS review. The analysis thus provides a snapshot of CFIUS practice based on 147 deals that were filed with the committee between 2017 and September 2022. According to CFIUS annual reports, the panel received 1,156 notices in the period 2017-2021.

 It should come as no surprise that takeovers by Chinese entities feature most prominently when it comes to CFIUS interventions: 17 of the 25 cases in the dataset involved a Chinese buyer. Other interventions had purchasers from Germany (two), Bermuda, France (one), Hong Kong (one), Japan (one), Singapore (one), and Switzerland (one).

The Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law in August 2018 and expanded the scope of sectors covered by CFIUS, introduced mandatory filing requirements for certain deals, and changed the review and investigation timelines.

Since then, the data shows a sharp drop in interventions, which might be due to a decrease in reporting by parties – or fewer transactions subject to CFIUS review involving listed firms – rather than a drop in interventions. As previously reported, the share of transactions subject to mitigation has decreased from 16.2% in 2018 to 9.6% in 2022, whereas the rate of deals abandoned because of unresolved concerns was lowest in 2021.

Most recently, Switzerland-based Viston United abandoned its bid for US-based, Canada-incorporated Petroteq Energy [TSX.V:PQE] after CFIUS rejected its notice for approval. In December 2021, Chinese Wise Road Capital’s attempt to acquire South Korea’s Magnachip Semiconductor [NYSE:MX] failed as CFIUS did not clear the deal following an unexpected and protracted investigation. These were the only CFIUS-linked publicised abandonments in the past two years.

In 2018, by contrast, no fewer than 10 deals were publicly abandoned amid national security concerns, while measures were revealed for five cases.

Measures rarely reported by companies

The number of mitigation measures reported by companies is low compared to how many measures are agreed or imposed according to annual reports. Only for eight mergers in the dataset have such measures been specified, while CFIUS reported 137 notices with mitigation over the same period.

In some cases, companies did indicate the measures they have agreed with CFIUS directly in relation to the transaction.

For instance, Softbank [TYO:9984] reached a national security agreement (NSA) for its takeover of Fortress Investment in 2017, but this only became public in an FT article. Infineon [ETR:IFX] also reportedly had to offer measures to gain clearance of the acquisition of semiconductor supplier Cypress in 2020. Marvell Technology [NASDAQ:MRVL] completed the takeover of Cavium in July 2018 after a CFIUS greenlight in May of that year, but only informed shareholders that it was subject to regulatory conditions in its annual report for the year.

Nevertheless, the reported measures provide an insight into how US national security risks may be mitigated.

Although CFIUS itself mentions examples of behavioral measures in its annual reports, divestitures can also be part of the remedy. Chinese shipping firm COSCO had to sell a container terminal in Long Beach, CA for CFIUS to clear its 2018 acquisition of OOIL. Germany-headquartered blood plasma supplier Biotest sold its US operations as part of its 2018 takeover by China’s Creat Group.

Cavium/Marvell meanwhile agreed to “implement certain cyber security, physical security and training measures to protect national security”, while Gemalto/Thales (2018) agreed to a fire-walled separation of a business that supplies the US military.

Semiconductor, financial services deals also get cleared

Despite the focus on interventions, the large majority of deals in the dataset that filed with CFIUS (83%) was cleared.

Indeed, 17 semiconductor mergers cleared national security review, as did 11 financial services sector deals.

Twenty-nine deals in the dataset with a Chinese buyer, as well as at least three with a Chinese-owned American buyer were also approved by CFIUS. Other frequent purchaser locations were the UK, France and Canada.

Nevertheless, CFIUS can create some hurdles for transactions that may not have been deemed as problematic at first.

Shell’s [LON:SHEL] sale of its Deer Park refinery to Mexican peer Pemex was reportedly delayed by CFIUS before closing in December 2021. Ericsson [NASDAQ:ERIC] earlier this year had to extend its close date for the takeover of cloud-based communication provider Vonage [NASDAQ:VG] due to national security concerns. The deal was cleared on 15 July.

Clearances also do necessarily not sit well with everyone; the August approval of Alphawave IP Group’s [LON:AWE] acquisition of semiconductor PI developer OpenFive received backlash from Florida Senator Marco Rubio, who “slammed” the sale to the business, backed by Beijing-based private equity firm Wise Road Capital.

Timelines: Deals close three weeks after CFIUS clearance

Some companies communicate when they filed their transaction with CFIUS, which allows for an assessment of timing of the reviews.

According to information provided for 50 deals, companies filed with the panel seven weeks (49 calendar days) after signing their merger agreement. It then took a median of 97 calendar days to obtain the CFIUS decision.

Although CFIUS has a 45-day deadline for its review, which can be extended with a 45-day investigation, the clock only starts to run once the panel accepts the filed notice.

The process as described by Vistus for the failed Petroteq acquisition gives an insight into how reviews can be protracted. In that case it took half a year (183 days) between the first engagement with CFIUS and the review decision. The deal was filed as a short-form declaration – a possibility introduced as part of FIRRMA in 2020 – on 6 January, after which CFIUS informed the parties on 24 February that it was unable to clear the merger. The companies then “pre-filed” a notice on 6 April, and filed the formal notice on 16 May. CFIUS accepted the filing on 24 May, giving a 7 July deadline for the review.

According to data parsed from Mergermarket, parties to mergers received a CFIUS decision a median of 160 calendar days – about five months – after announcing their deal.

Transactions were closed a median of 21 calendar days after national security clearance, according to the available data. In 30% of cases, the deal was closed within two weeks after CFIUS provide its green light.

Post-closing investigations mainly target Chinese acquisitions

Besides reviewing deals for which notices are filed, CFIUS also has the power to call in a non-notified transaction if it has national security concerns.

For deals closed between 2017 and 2022, this news service identified nine cases in which this happened. In seven of these, there was a Chinese buyer.

The other two involved a 2021 order for Ukraine-headquartered Noosphere to divest itself of Firefly Aerospace, in which it had obtained a stake in 2017, and measures imposed on special purpose acquisition vehicle Stable Road for its 2021 merger with in-space transportation company Momentus. The latter was called in over concerns related to the target’s Russian founder, according to an SEC lawsuit against Momentus and Stable Road.

Deals that were subject to a post-closing review were almost always subject to an adverse outcome. Only in one case – the 2018 acquisition of land in Texas to build wind farms by Chinese-owned GH America Energy – CFIUS reportedly investigated and then cleared the transaction in 2020.

In six cases, CFIUS ordered a divestment of the acquired business, while measures were imposed in two.

The decisions came a median of over two years (816 days) after the deals closed.

CFIUS scrutiny could become even more intense following an Executive Order signed by President Biden last week that aims to “ensure robust reviews of evolving national security risks” by CFIUS.

The order directs the panel to specifically consider critical supply chains that may have national security implications; technological leadership including microelectronics, AI, biotechnology and quantum computing; industry investment trends such as one foreign company acquiring multiple firms within one sector; cybersecurity risks; and risks to US persons’ sensitive data.