BDO Technology Insight - April 2017

May 2017


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The Role Of CFIUS In Cross-Border Technology M&A

by John Lash and Aftab Jamil

Since the end of World War II, the United States has maintained and enjoyed an open posture toward foreign investment. In 2016, it remained the largest recipient of foreign direct investment (FDI) globally, with an estimated inflow of $385 billion—a marked 11 percent increase from the year prior, according to a United Nations report. Much of this amount stemmed from several multibillion-dollar cross-border merger and acquisition (M&A) deals, whose total value had increased 17 percent from the 2015 levels.

While foreign buyers remain plentiful and varied, China—whose sights are still set on getting a strategic foothold in the U.S.—is likely to continue to be one of the U.S.’ largest investors, a development that has prompted much national anxiety to-date. With national security an ever-present priority for the U.S. government, as cross-border dealmaking increases, so too will the regulatory scrutiny of such transactions by foreign buyers.

The CFIUS Review Process

A critical element of FDI is the involvement of the Committee on Foreign Investment in the United States (CFIUS). Chaired by the U.S. Department of the Treasury, this interagency task force is responsible for the review of FDI that could result in the control of a U.S. business or U.S. critical infrastructure—defined as “a system or asset, whether physical or virtual…vital to the United States.” CFIUS is also responsible for reviewing the impact these transactions could have on national security.

While CFIUS review is not mandatory, many companies involved in cross-border deals will voluntarily notify CFIUS and initiate a review to gain the benefits of a safe harbor provision. This provision prevents future government challenges to the transaction, including unwinding it or requiring mitigating actions, should the review be cleared successfully. The review process consists of up to three stages. The first stage begins with a 30-day initial assessment period, at which point a determination can be made. If unresolved concerns remain, the committee may initiate the second stage, a 45-day investigation period. Should that yield unsatisfactory results, a 15-day presidential review period begins, with the President rendering a final decision. Actual presidential decisions are rare, with only two transactions blocked during the Obama administration. Rather, most transactions are either approved, adapted to mitigate CFIUS’ concerns or withdrawn by the parties if they suspect the transaction will be blocked.

Cross-Border Technology M&A

CFIUS filings have steadily increased over the last eight years, with companies in the aerospace and defense, manufacturing, critical technologies and natural resources industries filing the most notices. This mirrors a similar increase in M&A activity seen by the tech industry overall—with the sector ranking number one in M&A activity in terms of deal dollar volume last year, according to J.P. Morgan. Foreign interest in tech targets for this year is also looking strong: According to S&P Global Market Intelligence, the information technology sector is currently leading the charge in cross-border dealmaking, with the highest number of cross-border M&A deals (271) as of Feb. 24. This is followed by the industrials (258 deals) and real estate (254 deals) sectors.

The U.S. tech industry attracts buyers from around the world, but China remains its biggest foreign investor—spending a record $18.2 billion across 679 U.S. tech deals since 2011. This investment more than quadrupled between 2012 and 2015, and the first nine months of 2016 saw $3.5 billion in total funding across 160 U.S. tech deals.

Unsurprisingly, China’s prolific spending has prompted significant concern from U.S. lawmakers, including the U.S.-China Economic and Security Review Commission (USCC) and the President’s Council of Advisors on Science and Technology (PCAST). In November 2016, the USCC issued a report recommending Congress to “amend the statute authorizing CFIUS to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies.” Expressing a similar sentiment, PCAST issued a report in January 2017 that advocated using CFIUS and export control laws to ensure that the U.S. semiconductor industry stays competitive. The report supported mitigating dangers posed by “a new and aggressive set of Chinese industrial policies designed to shift the competitive dynamics in the global industry in favor of Chinese production and companies.”

The U.S., the report notes, is currently a leader in the semiconductor industry with a major share of the global market for integrated circuits design and fabrication. However, this position has been recently threatened by China’s 2014 “IC Promotion Guidelines,” a plan for the nation to become “advanced world-level in all-major segments of the industry by 2030.” The plan involves allocating $150 billion in funds over a 10-year period aimed at subsidizing investment and acquisitions and purchasing technology. This is more than six times the annual average of the $23 billion spent on semiconductor M&A by all U.S. companies over the past five years.

In response to growing concerns, the U.S. has begun tightening regulations. On Dec. 2, 2016, President Obama issued an executive order to block China-based Fujian Grand Chip Investment Fund from purchasing Aixtron U.S., the California subsidiary of a German semiconductor producer, on national security grounds. It was only the third time in the history of CFIUS when a president had formally blocked a transaction. According to Dealogic, China had announced only $25 billion in outbound deals by late March of this year—70 percent less than the same period last year—perhaps a result of heavier CFIUS scrutiny.

Nonetheless, China has continued its strategic investment unabated. In fact, the nation is instead aiming for a new target: U.S. startups developing technologies with potential military applications, like artificial intelligence and robotics. According to a 2016 Department of Defense report to Congress, China “often pursues these foreign technologies for the purpose of reverse engineering or to supplement indigenous military modernization efforts.” Many of these high-tech components and major end items, the report notes, are difficult for China to develop domestically—thus, leaving the country to seek to obtain them from abroad.

U.S. startups, on the other hand, have a compelling reason to enter deals with Chinese buyers: to raise the capital they need quickly. According to Max Versace, the chief executive of the artificial intelligence company, Neurala, in The New York Times, Chinese investors are often willing to make riskier deals more quickly—providing the launching pad smaller companies need to get off the ground. Cozying up to Chinese investors also means gaining a competitive entry point into the Chinese market and having the opportunity to develop local partnerships that may be otherwise difficult to establish.

The Future of CFIUS

With the current administration’s heightened focus on national security, it will not be surprising to see CFIUS play a larger role in cross-border M&A activity in the years ahead, with potentially more stringent reviews and/or an increased use of mitigation measures. The practical guidance for identifying factors which constitute a national security risk may also be broadened to include economic security, a net U.S.-benefit test.

As indicated by the evolving rhetoric towards Chinese investment in U.S. critical infrastructure, there may also be heavier scrutiny of deals proposed by geopolitical rivals versus those from “friendlier” nations. These shifting relationships may also affect if and how the U.S. chooses to participate in parallel national security reviews with other countries. Reciprocal market access—meaning, whether a U.S. company would be eligible to undertake a comparable investment in the same sector in the origin country—may also become a greater consideration factor in CFIUS review.

Regardless of what lies ahead, technology companies must be cognizant of how an M&A transaction may impact the reliability, availability and integrity of their resources, transmissions and underlying protected information, as well as the potential applications of their technologies by their acquirer.

The complexity of navigating the regulatory process will continue to increase in tandem with international interest in making investments in U.S. critical technologies. As a result, tech companies should proceed with caution when dealmaking, putting in place the proper processes to safeguard intellectual property, source codes and other technological information that could be used for purposes other than those originally intended.

John Lash is a senior manager with BDO’s National Security Compliance practice, and can be reached at

Aftab Jamil is an assurance partner and national leader of BDO’s Technology practice, and can be reached at