Chinese firms must prepare for US security barriers
Yang Wang and Song Yuhan
Back in January 2017, Ant Financial announced a deal to acquire MoneyGram for $880 million as part of its global growth strategy. In March, US electronics payments firm Euronet Worldwide made an offer to buy MoneyGram for more than $1 billion, prompting the Chinese firm to raise its bid to about $1.2 billion.
During the CFIUS review which normally lasts up to 75 days, the companies, according to a recent Reuters report, "had gone through the process three times in order to address concerns." Still, the deal collapsed, with the two companies announcing in a joint statement that the takeover had been scrapped in favor of a new strategic cooperation plan in the area of remittances and digital payments.
The case should serve as a warning for Chinese businesses hoping to crack open the US market and a few aspects need to be considered.
First, the CFIUS was created for the sake of protecting US assets. The US government has generally held an open attitude toward international investment, which directs fiscal revenues into the country and enables job creation and technological innovation. But there are concerns that foreign direct investment can result in US assets being controlled by foreign businesses. In light of this, the committee, an executive body, was established in 1975 by then US president Gerald Ford, to monitor and vet foreign mergers, acquisitions and other transactions that might have an impact on US national security.
The committee is responsible for looking at any potential problems with foreign-controlled US assets. A standard CFIUS review includes a 30-day investigation of a proposed deal, after which either a written notice is sent to all companies involved that the review has concluded or it will be followed by an additional 45-day review, after which the committee can decide to give no recommendation or recommend that the US president block the transaction. The president makes the final decision about whether or not the transaction will be approved.
As such, the CFIUS aims to find a balance between creating a fair and open investment environment and safeguarding national security.
If that is the case, why do Chinese investments in the US often hit roadblocks?
China's reform and opening-up has two important aspects: "going out" and "introducing into the country." Since China proposed the Belt and Road initiative, the country has become even more active in pursuing outbound investment and economic cooperation.
But Chinese businesses have suffered various setbacks in their investment plans in the US.
In October 2012, Chinese machinery firm Sany had its Oregon wind farm project blocked on the grounds of US national security. And since Donald Trump was sworn in as president in late 2016, his campaign promise to put "America First" appears to have made it harder for Chinese firms to complete deals in the US.
This suggests that Chinese firms should consider new ways to deal with US security barriers. In the case of Ant Financial's planned acquisition of MoneyGram, the Chinese firm stated that it would protect jobs at the target company. But the deal apparently prompted concerns over the security of US consumer data, especially considering that many merchants near US military bases also use MoneyGram. And in the Sany case, according to documents disclosed by the US, the company didn't voluntarily file a notice to the CFIUS about the deal, which was one reason why it failed. Also, Chinese telecom giant Huawei Technologies' planned acquisition of US rival 3Com in 2008 and its bid to buy US computer services firm 3Leaf Systems in 2010 both collapsed owing to objections on grounds of national security.
It's normal that investment abroad can run into risks, particularly given that Chinese businesses are still in the early stages of going out. It's advisable therefore for them to respect and understand the policies and legal frameworks in the overseas markets. Firms intending to invest abroad must fully acquaint themselves with the local markets, put in place an improved mechanism for operational risk prevention and move to actively safeguard their legitimate rights and interests. Meanwhile, the Chinese government and the corporate sector should keep a close eye on policy changes in the target market and carry out investigations. This could lead to more benign development of China's investment in the US.
Also, Chinese businesses should fully understand the CFIUS review regime and formulate reasonable acquisition strategies accordingly, which means they should choose appropriate targets for mergers and acquisitions and avoid sensitive areas as much as possible. They should also make sure they notify the CFIUS of any planned deals. And if they still hit a snag, they should hire a professional legal team to file complaints so as to safeguard their lawful rights and interests.
Yang Wang is research director of the Hande Fintech Research Institute. Song Yuhan is an associate research fellow with the Hande Fintech Research Institute. email@example.com