MADISON, Wis. — A buyer with ties to the Chinese central government and a U.S. company whose technology has potential for dual-purpose applications is an alarming combination that could invite suspicion among regulators concerned about national security. In theory, it could trip up any proposed acquisition involving U.S. tech firms.
This scenario might become the case with a deal announced earlier this month in which Canyon Bridge Capital Partners agreed to buy U.S.-based chip maker Lattice Semiconductor Corp for $1.3 billion.
Reuters reported Monday (Nov. 28) that Canyon Bridge Capital Partners “is funded partly by cash originating from China's central government and also has indirect links to its space program, Chinese corporate filings show.” Reuters, in a review of about a dozen filings from China's state-run corporate register, has concluded that “the financial investment in Canyon Bridge originates from China’s State Council, the top decision-making body of the government.”
If true, the acquisition of Lattice Semiconductor could hit a snag. At stake is the possibility of rejection by the Committee on Foreign Investment in the US (CFIUS). Even if approved, there might be a delay in closing the transaction – scheduled for early 2017 as promised by Lattice at the time of the deal’s announcement.
CFIUS, an inter-agency committee, has authority to initiate review of almost any foreign investment in a U.S. company or asset that may have an impact on national security.
Fresh in the memory of many electronics company executives is what happened with Western Digital Corp. earlier this year. Unisplendour, a unit of China's Tsinghua Unigroup, scrapped a $3.78 billion minority investment in the U.S. hard-disk maker after CFIUS said it would review the transaction.
Canyon Bridge: US fund?
In the case of Canyon Bridge and Lattice, questions that matter to CFIUS are two-fold. First, is the Palo Alto, Calif.-based buyout fund Canyon Bridge considered as a Chinese company? Second, does Lattice make and sell technology for dual purpose applications?
According to the Form Schedule 14A Lattice filed with the Securities and Exchange Commission (SEC) on Monday, Nov. 21st , Canyon Bridge is a recently established U.S.-based private equity buyout fund, currently with only one limited partner. The partner is “a wholly owned subsidiary of China Venture Capital Fund Corporation Limited, a large Chinese investment fund.”
What Reuters has uncovered goes further: China Venture Capital Fund is a unit of China Reform Holdings Corp.
Based on Chinese corporate filings dated June 16 this year, Reuters reported:
China’s State Council is the only shareholder in Beijing-based China Reform Holdings…
…China Reform Holdings, on its website, states the government holds the investment through the State-owned Assets Supervision and Administration Commission (SASAC), a special unit under the State Council responsible for supervising and managing the country's non-financial government-owned enterprises.
We don’t know at this point if Canyon Bridge’s links to the Chinese state, laid out by Reuters above, will prove to be enough to invite the scrutiny of CFIUS.
However, the Lattice deal is one of the largest attempted by a Chinese-backed firm in the U.S. semiconductor sector.
What’s different from China’s previous attempts to buy U.S. tech firms is that the buyer in the Lattice case is described as the U.S. buyout fund.
In its SEC filing, Lattice called Canyon Bridge a “recently established U.S.-based private-equity buyout fund,” whose co-founders include well-known names in the U.S. chip industry. Canyon Bridge’s cofounders include “Ben Chow and Ray Bingham, collectively have more than 50 years of experience in the technology, private equity and M&A markets,” the filing said.
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