MULTINATIONALS: Politicians Wary on China Bids for Terex, Chicago Exchange

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Bottom line: National security concerns are likely to torpedo pending sales of crane maker Terex and the Chicago Stock Exchange to Chinese buyers, while a similar sale of Ingram Micro shouldn’t draw as much scrutiny.

Terex, Chicago Stock Exchange sales draw national security concerns

Just a day after chip maker Fairchild (NYSE: FCS) called off talks to be purchased by a Chinese buyer over concerns that Washington would veto the deal, 2 other similar planned acquisitions of US firms are coming under the microscope. In the more ominous of the new developments, a group of 46 US congressmen have expressed reservations about a deal announced last week that would see a little-known Chinese company buy the Chicago Stock Exchange.

The other development has a single US congressman expressing similar reservations about a deal that would see Chinese construction equipment maker Zoomlion (HKEx: 1157) buy US crane maker Terex (NYSE: TEX). At the same time, yet another major deal that could draw similar national security scrutiny is in the headlines, with word that a company connected to private equity investor HNA Group has offered to pay $6 billion for computer and component distributor Ingram Micro (NYSE: IM).

The Fairchild, Terex and Chicago Stock Exchange deals have all been in the headlines before, but the sudden chorus of noise from Washington politicians is new this week. No such noises had come over the proposed Fairchild deal, which would have seen the company sold to a Chinese group led by China Resources Microelectronics for $2.46 billion. But Fairchild was worried the risk of a national security veto by Washington was unacceptably high, and this week decided to scrap the talks. (previous post)

Much of the recent chatter in Washington is political, since this is a big election year in the US and China-bashing is an easy move for politicians look to curry favor with voters. But each of these deals does legitimately touch on some sensitive issues, raising the possibility of a veto on national security grounds.

Let’s begin with the Chicago Stock Exchange deal, which surprised many when it was announced last week. (previous post) The deal would mark the first purchase of a US stock exchange by a Chinese buyer, even though Chicago is a tiny player compared with the much larger New York and Nasdaq exchanges. The buyer was an obscure company called Casin Group, which hopes to reposition the exchange as a place for Chinese companies to list in the US.

Now the group of 46 congressmen have sent a letter to the Committee on Foreign Investment in the US (CFIUS) saying the deal should be thoroughly investigated and vetoed if it poses any threat to national security. (English article) The group’s biggest concern was potential ties between Casin and Beijing, and the potential for the Chinese buyer to cause havoc in US financial markets with the purchase.

Concerned Congressman

Next there’s the Terex deal, which has seen US congressman Duncan Hunter send a letter to the US Treasury Department, which is home to CFIUS, raising concerns about Zoomlion’s close ties to the Chinese military. (English article) Again, Hunter isn’t calling for an outright veto of the deal, which values Terex at about $3.2 billion, but instead is calling for close scrutiny.

Finally there’s the Ingram Micro deal, which is seeing a company called Tianjin Tianhai offer $38.90 per share, or about $6 billion, for the US component supplier. (English article) The offer represents a 39 percent premium to Ingram Micro’s 30-day average price, reflecting the big premiums that Chinese companies are willing to pay to get their hands on western know-how. If the deal closes, Ingram Micro would become part of Tianhai’s controlling stakeholder, HNA Group.

So, why are we seeing this flurry of controversial deals right now, and what’s the likelihood that some or all may follow a similar fate to Fairchild? In terms of timing, the flurry of deals right now seems mostly coincidental and is part of a broader trend that is seeing Chinese outbound M&A expand beyond natural resources and low-tech products.

The Chicago Stock Exchange deal looks doomed to me, since the buyer is relatively obscure and doesn’t have much experience, meaning it’s likely to draw suspicion from not only Washington but also Beijing. Terex also looks headed for trouble due to Zoomlion’s military ties. Ingram Micro looks the least controversial and most likely to pass, since the company is really just a distributor and doesn’t own much proprietary technology. 

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