The acquisition of the German chip manufacturer Aixtron by the Chinese investment fund was blocked on Friday after the U.S. foreign investment agency had appealed directly to the President Obama asking to stop the acquisition.
This is the third time in the last 25 years and the second time during Obama's presidency that the U.S. President directly blocks a foreign acquisition of a firm with U.S. assets due to potential threats to national security. Late Friday, Obama's administration has issued an official statement saying that the President blocks the Chinese Fujian Grand Chip Investment Fund from acquiring the American subsidy of the German semiconductor equipment producer Aixtron (NASDAQ: AIXG). Considering that the California-based Aixtron's subsidy accounts for roughly one fifth of the total company's profits and employs more than 100 people, Obama's veto puts the entire deal in question.
"The national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron, a producer and innovator of semiconductor manufacturing equipment and technology," was said in the statement.
Reuters reported that Obama decided to forbid the deal after he had received the results of the assessment of the U.S. Committee on Foreign Investment that pointed that Aixtron produces equipment based on gallium nitride, a compound used in LEDs, radars, antennas and lasers, previously supplied to the U.S. military equipment manufacturer Northrop Grumman (NYSE: Northrop Grumman Corporation [NOC]). Gallium nitride technology developed by Aixtron is capable of significantly improving the sensitivity of weapons and radars while cutting electricity costs, say the experts.
The Wall Street Journal explains that CFIUS has a right to approve acquisitions of domestic companies by foreign investors, to assess national security concerns or advise companies to drop a bid if these concerns cannot be mitigated. However, in extreme situations like this one, the committee can appeal directly the President with a suggestion to block a deal. The President of the United States, in turn, has the authority to block foreign acquisitions of any U.S. business, even if it is just a subsidy controlled from abroad, which is exactly the case of the German-based Aixtron.
In addition to that, Grand Chip Investment is partially owned by the Chinese government, which is yet another factor mentioned among the "national security concerns" of this acquisition. In the statement, the Treasury Department explained that some investors that own Grand Chip are closely related to the government whereas Sino IC Leasing, a leasing company funding the Aixtron acquisition, also belongs to the Chinese government.
German government postpones the approval
The €670 million Aixtron's acquisition has sparked heated political discussions both in Europe and the U.S in the last months. The German government initially gave a full approval for the deal back in September, before taking it back one month later. Back then, the government explained their decision to halt the acquisition process by the need of an additional round of investigation. However, the industry experts said that the deal was delayed because of the security concerns around the buyout of "strategically important" German tech companies by foreign investors. By "foreign" investors the experts mostly mean the Chinese, whose interest in German technology firms has intensified in the last years.
The Local adds that the German government decided to reopen the investigations of the deal in October, after the United States had warned them that China might use Aixtron's technology for developing their nuclear program. Now that the American government issued an official statement coming from the President, the chances of the Aixtron deal getting an approval from the German government are getting even smaller.
"The German government clearly has a motive here. It wants to keep all that technology in Germany with good reason. They've already given too much away. It's German companies, it's German technology, it's German jobs, it's German capital," Barclays analyst David Vos told Reuters.
M&As are getting political
China's foreign ministry spokesman said on Friday that Aixtron's acquisition becomes excessively politically-loaded, referring to the reaction of the German and the American governments to a "normal commercial acquisition":
"This acquisition you mentioned is a normal business activity. Since it's a normal commercial acquisition, it should follow the normal principles and the rules of the market. We hope that there will not be an excessive political interpretation on this acquisition or political interference in it."
Bloomberg experts also add that Obama's ban of the deal comes at a sensitive moment when the president-elect Donald Trump, who has repeatedly accused China of unfair trade practices hurting U.S. economy, is about to take over Obama's role and appoint new members in CFIUS. The WSJ said that just a few weeks ago, the U.S.-China Economic and Security Review Commission that monitors the economic relationships between the two countries issued a recommendation for the Congress that all Chinese state-owned firms should be banned from acquiring American companies. This, combined with Trump's anti-China statements, could further complicate the situation.
“There is an inherently high risk that whenever [a state-owned enterprise] acquires or gains effective control of a U.S. company, it will use the technology, intelligence and market power it gains in the service of the Chinese state to the detriment of U.S. national security. Chinese firms, which often receive state funding, have been particularly active in bidding for U.S. technology assets,” said the Commission in the statement to the Congress, as reported by the Wall Street Journal.