Bottom line: A Chinese bid for the Chicago Stock Exchange could get vetoed on concerns about exposure to the US financial system, while a similar bid for chip maker Lattice could get approved due to its relatively small size.
Two cross-border deals involving China M&A in the US appear to be stalling, even before the protectionist-minded Donald Trump becomes the next US president. That certainly doesn’t bode well for either deal, one in the high-tech chip space and the other in the financial sector, since both could easily have Chinese government backing. One of those has a Sichuan-based investor group trying to buy the tiny Chicago Stock Exchange, while the other has a different group trying to buy mid-sized chip design house Lattice Semiconductor (Nasdaq: LSCC).
The fact of the matter is that it would be rare for the buyer in any deal of this size to have no government connection. That’s because every business of any meaningful size in China was government owned until the mid to late 1990s, when the nation’s private sector began to take off. That means that even the oldest private sector firms have just 20 years of history, meaning most can hardly afford to make purchases in the hundreds of millions or even $1 billion range.
What’s more, many of today’s so-called private companies are really just former state-owned enterprises that were taken over by their managers and are now run independently. But due to their history, many of those companies still count local governments and other state-run enterprises as some of their main shareholders, even though most try to operate independently of political forces.
All that said, let’s look at the latest developments in the Chicago Stock Exchange and Lattice deals, which were first disclosed in February and April, respectively. The CSE is tiny in terms of influence in US stock trading, accounting for just 0.5 percent of US activity. But the deal has attracted political scrutiny because it would offer the Chinese buyer, Chongqing Casin Enterprise Group, a window onto a US financial system that is critical to both the domestic and global economies.
Now the latest reports are saying that Casin has just made a 280-page regulatory filing trying to ease concerns about its state ties. (English article) The bottom line appears to be Casin’s insistence that it has no government connections, and that the deal’s structure would protect the Chicago Exchange from political forces if Beijing ever tried to buy one of the investors.
The deal is currently being reviewed by the Committee on Foreign Investment in the United States (CFIUS), which conducts national security reviews. But honestly speaking, I can’t see the purchase getting clearance from Washington, regardless of Trump. The reason is less to do Casin’s government connections, and more to do with its potential to make mischief using the Chicago Stock Exchange, as Chinese companies are sometimes apt to do.
Government Ties to Lattice Buyer
Next there’s the Lattice deal, which dates back to April when the acquisitive Tsinghua Unigroup indicated it might try to buy the company in a modest purchase that probably would have been worth around $500 million. (previous post) But those talks apparently collapsed, perhaps because of Unigroup’s own government ties, and in November a little-known group called Canyon Bridge stepped in and said it would buy Lattice for $1.3 billion.
That would mark a hefty 50 percent premium over Lattice’s current value, which is already quite inflated from levels before the original Unigroup talks emerged. Now the latest reports are saying that Canyon Bridge is partly funded by the Chinese government, and has indirect links to the nation’s space program, based on Chinese corporate filings. (English article)
In this case I should commend the reporters behind this news article for doing their own corporate sleuthing, which determined some of Canyon Bridge’s funding originates from China’s State Council, the top government decision-making body. But at the same time, this revelation shouldn’t really surprise anyone, since most of China’s chip acquisition attempts over the last 2 years have similar government financial backing due to their large size and Beijing’s desire to build up the industry.
At the end of the day, I would give the Lattice deal a slightly better chance of getting approval from Washington, mostly because the company isn’t very large and is also losing money. The company doesn’t do any business with the US military, which should also work to its advantage. But the Trump factor could play a bigger role in this deal, since it was just announced in November and is unlikely to get CFIUS clearance before the new president takes office in January.