CHIPS: Politics Kill China’s Bid for Fairchild Semiconductor

Bottom line: Fairchild’s decision to halt talks to be acquired by a Chinese group reflect mounting US national security concerns over cross-border M&A from China, which are likely to remain high until after this year’s presidential election.

Fairchild calls off talks with Chinese buyer

The Year of the Monkey is shaping up as a busy time for Washington officials reviewing China-US deals for national security concerns, with word that such concerns have killed a bid for Fairchild Semiconductor (NYSE: FCS) by a Chinese buyer. In this instance, it was Fairchild itself that decided to terminate the discussions with a group led by a unit of Chinese conglomerate China Resources, citing worries that such a deal would get vetoed by Washington.

Fairchild’s decision marks the latest case in a recent rise of US-China deals thrown into doubt over national security concerns, which has its roots in several factors. Several of the killed deals have come in the high-tech semiconductor chip sector, which is now in the process of global consolidation. Adding to the pressure are an increasingly aggressive group of cash-rich Chinese global buyers looking to expand beyond their traditional realms of natural resources and other low-end products.

A final element in the equation is politics, since this is a US election year and China makes a convenient scapegoat for bashing by both Republicans and Democrats as they seek to curry favor among voters. That kind of politicking was a primary factor that killed a potential deal last year that had Tsinghua Unigroup pursuing a $23 billion purchase of leading US memory chip maker Micron (Nasdaq: MU).

Since the start of this year, the Committee on Foreign Investment in the United States (CFIUS), which conducts reviews for national security risks, has vetoed a Chinese purchase of the lighting business of Dutch electronics giant Philips (Amsterdam: PHG). It has also said it wants to review a deal that would see Unigroup sister company Unisplendour buy 15 percent of Western Digital (Nasdaq: WDC), even though the US hard disk drive maker says it doesn’t believe that deal should be subject to such a review. (previous post)

That flurry of activity may have spooked Fairchild, which has now formally walked away from talks to be acquired by China Resources Microelectronics and Hua Capital Management. (English article; Chinese article) Fairchild announced its decision in a regulatory filing, saying there was an “unacceptable level of risk” that the deal would get killed by Washington.

Attractive Target

Fairchild is a mid-sized chip maker that was exactly the kind of company that larger rivals were acquiring, as the global sector undergoes a much-needed consolidation. It had agreed to sell itself to US rival ON Semiconductor (Nasdaq: ON) last year for $2.4 billion, when the Chinese bidders launched their surprise counter offer worth $2.46 billion. (previous post) Fairchild had originally rebuffed the Chinese group, then changed its mind last month, only to now decide once again it doesn’t want to pursue the deal.

This kind of flip-flopping looks very similar to what we saw last year when the cash-rich and globally acquisitive Unigroup launched its bid for Micron. In both cases the deals were killed by the US company before any final deal could be reached, so that CFIUS never actually had to rule on whether national security would be compromised. But in the Micron case, 2 powerful US senators did express personal misgivings about the deal and were probably instrumental in Micron’s decision to halt negotiations.

One of my sources tells me another deal announced just last week that would see a Chinese company purchase the small Chicago Stock Exchange could get subject to a similar CFIUS review, taking the issue beyond the high-tech space. (previous post) All these developments show the debate over national security concerns is getting increasingly heated in Washington, and Chinese acquirers might want to think twice before launching more sensitive take-over bids until after US elections later this year.

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