Chinese Deals Draw Scrutiny In Washington

   (FROM THE WALL STREET JOURNAL 2/19/16) 
   By Shayndi Raice and William Mauldin 

Chinese companies are winning in the M&A market. Now they have to prove they can win in Washington.

Overseas takeover bids by Chinese companies are on pace for a record year. Technology distributor Ingram Micro Inc. said Wednesday it has agreed to a $6 billion offer from a unit of Chinese conglomerate HNA Group, a deal that comes after China National Chemical Corp.'s $43 billion agreement to buy Swiss agriculture firm Syngenta AG and Haier Group's $5.4 billion bid for General Electric Co.'s appliance unit.

The agreements have pushed the value of outbound Chinese takeover announcements this year to $81.5 billion, according to Dealogic -- far and away the fastest start ever for such deals. But the U.S. government has been especially active, too, questioning Chinese attempts to buy Western assets in sensitive sectors like technology, as well as less obvious areas like light bulbs.

As a result, bureaucrats and politicians are playing an outsize role as deal makers try to keep up with last year's record run for mergers and acquisitions.

"China notably is the only one of our top trading partners that is not a political ally, and the only one that is perceived as a military competitor," said Mark Plotkin, a Washington-based partner with the law firm Covington & Burling LLP. "Given the amount of state ownership of Chinese companies, together with the history of espionage between our countries and U.S. concerns about the potential appropriation and proliferation of sensitive technologies, Chinese investments present uniquely challenging issues."

Full coffers, slowing growth at home and better prices abroad thanks to the global equities selloff have made Chinese companies strong candidates to make acquisitions.

"As China's growth starts to moderate, the U.S. and other developed markets look attractive," said Michael Carr, the co-head of global M&A at Goldman Sachs Group Inc.

But those considerations aren't always paramount. This week, House Republicans asked the Obama administration to take a close look at a Chinese firm's deal to buy the Chicago Stock Exchange. The roughly 134-year-old exchange, which handles a tiny fraction of U.S. equity trading, said this month it would be acquired by Chongqing Casin Enterprise Group.

In a letter organized by Rep. Robert Pittenger (R., N.C.), 46 House Republicans asked the Committee on Foreign Investment in the United States, or CFIUS -- the government body that screens foreign takeovers for security concerns -- to conduct a "full and rigorous investigation into this proposed acquisition."

The deal also made its way into the presidential race, with Donald Trump raising questions about it in the latest Republican debate.

CFIUS doesn't comment on which cases it is reviewing or their outcome unless the president forbids a deal. The interagency body, which is composed of representatives from a number of U.S. departments including Homeland Security and Defense and led by Treasury, is tasked with ensuring foreign acquirers don't pose a risk to national security. If CFIUS determines that a transaction poses such a threat, the president then has the ability to kill the deal.

Another flashpoint for concerns about Beijing is a pending bid by state-owned Zoomlion Heavy Industries Science & Technology Co. to disrupt an agreed-upon merger between U.S. crane maker Terex Corp. and Finland's Konecranes Oyj.

Rep. Duncan Hunter (R., Calif.) sent a letter Wednesday to Treasury Secretary Jacob Lew asking him to investigate the Chinese approach through CFIUS. Mr. Hunter said Terex provides critical infrastructure to the departments of Defense and Homeland Security. He said the fact that Zoomlion is a supplier of the People's Liberation Army "demands that the agreement undergo thorough scrutiny."

The biggest Chinese deal ever -- the proposed acquisition of Syngenta -- also is expected to undergo intense scrutiny. Syngenta's ownership of several U.S. chemical facilities that are deemed potential terror targets could be a cause for CFIUS to review the deal, lawyers say.

The resistance in Washington has some lawyers and bankers saying that Chinese bidders are being saddled with an unofficial "CFIUS premium" to make up for security concerns that could kill a deal. Chinese buyers also typically agree to specific fees they will pay should a deal get denied for security concerns. HNA, for instance, would owe Ingram Micro $400 million if CFIUS scuttles the transaction, a hefty 6.7% of the purchase price.

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Liz Hoffman contributed to this article.

(END) Dow Jones Newswires

February 19, 2016 02:48 ET (07:48 GMT)

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