07/23/17
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How National Security Affects Event-Driven Investing

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Though the two topics seem unrelated, it turns out national security has a role in event-driven investing.

The topics intersect in the form of regulatory approval for deals – a process overseen by the Committee on Foreign Investment in the United States, also known as CFIUS. In fact, CFIUS review was part of the regulatory approval process for Dresser Rand-Siemens, OmniVision-Hua, Quality Distribution-Apax, and Multi-Fineline Electronix-Suzhou Dongshan Precision Manufacturing, all deals that we have discussed on this blog in the past.

CFIUS originated in 1988 with the Exon-Florio amendment to the Defense Production Act, though its mandate was substantially revised in 2007 by the Foreign Investment and National Security Act. The Committee’s mission is to review “transactions that could result in control of a U.S. business by a foreign entity,” with an eye toward preventing transactions that are adverse to the national security of the United States.

A Growing Issue

Law firm Covington and Burling reports that through June 23rd, “CFIUS has accepted notices of over 120 transactions in 2017, on pace to set an all-time record; by comparison, the Committee received notices of just 97 transactions in all of 2013” (emphasis added). In addition to an increased quantity of applications, we have seen a greater number of reviews extended to Phase II and a greater proportion of applications pulled and subsequently refiled.

CFIUS, President Trump and a Live Deal

The results of a CFIUS review can determine whether or not a pending merger will be completed. In 2016, CFIUS was responsible for blocking three transactions (Philips-Lumileds, Aixtron-Fujian Grand Chip Investment Fund, and Global Communications Semiconductor-San’an Opto). One transaction that’s currently before CFIUS is the acquisition of MoneyGram International (MGI) by Ant Financial for $18 cash per share. In a novel and expansive definition of national security, MoneyGram competitor Euronet Worldwide is arguing that CFIUS should block the deal because MoneyGram’s offices are near military bases.

MoneyGram just recently refiled its application with CFIUS, and the proposed acquirer, Ant Financial, says that it is “continuing to work with the various regulatory agencies and remain[s] focused on closing the transaction by the end of the year.” Another element of this transaction is the relationship between Ant Financial’s owner Jack Ma (via his control of Alibaba) and President Trump. A recent Washington Post opinion piece suggests that Ma “has been able to gain access at the highest levels, including the president.” This relationship has the potential to politicize CFIUS’ national security analysis and, possibly, bring business interests into conflict with national defense.

More to Come, and It Matters for Deals

But wait, there’s more! As if CFIUS didn’t already have enough on its plate, four key government officials, including Treasury Secretary Steve Mnuchin, are set to meet this week to discuss expanding CFIUS’ role. Potential new responsibilities for CFIUS could include reviewing:

  • technology transfer transactions, even if the buyer is not gaining control of the seller’s business,
  • overseas joint ventures, and
  • real estate transactions

This is a particularly sensitive issue considering China’s recent buying spree. All this even as the U.S. – China Comprehensive Economic Dialogue gets underway, adding to speculation that there could be increased scrutiny of foreign investments. One has to wonder, though…if CFIUS is struggling with its current caseload, how will the committee cope with an expanded mandate? In the corporate-event investing business, the efficiency and politics of this process have direct implications for how we forecast deal outcomes.