The Rise of Nationalism Could Put Takeovers on Ice
(Bloomberg Businessweek) -- On the last day of July, a group of hedge fund managers met at Sakagura, a subterranean sushi restaurant in Manhattan. The bunker vibe was fitting, given that those assembled had just lost more than $1 billion combined. Worse, they’d done so on a sure thing.
Traders specializing in merger arbitrage had stacked up vast bets on NXP Semiconductors NV, a Dutch maker of chips that accepted a $44 billion buyout offer from U.S. rival Qualcomm Inc. The arb playbook is to buy shares in companies that have agreed to sell themselves but have yet to complete the transaction, taking advantage of a discount, or “spread,” that reflects the risk of the deal failing. The Qualcomm-NXP bet was, in hedgie-speak, a “layup.”
The companies had set a deadline of July 27 to wrap up their deal and were just waiting on regulatory approval from China, the world’s largest market for semiconductors. But Beijing never signed off, forcing Qualcomm to cancel the takeover. By the time the money managers arrived for the invite-only “Sake and Sympathy” dinner, NXP was worth $95 a share, down 20 percent from its high a few weeks earlier.
From Beijing to Brussels, governments are treating corporate mergers as weapons of industrial policy. Deals that may have passed muster on competition grounds are being weighed—and, increasingly, thwarted—for the risks they may pose to a country’s security or strategic industries. Beyond inflicting pain on speculators, the incipient change in stance could upend globe-trotting capitalism as we’ve come to know it. “There have been nationalist tendencies before, but this is the first time M&A is really being impacted by it,” says James Del Favero, a co-founder of investment bank Ardea Partners LLC and former head of cross-border mergers and acquisitions at Goldman Sachs.
On Aug. 1, the U.S. Congress approved legislation granting sweeping powers to the Committee on Foreign Investment in the U.S. (CFIUS), key among which are two jurisdictional upgrades. First, CFIUS can now review not just deals that involve a change of control of an American company but also those in which a foreign entity is acquiring any influence. The law also expands the definition of a U.S. business to include any company or individual “engaged in interstate commerce,” effectively giving the regulator oversight of any enterprise that operates, however marginally, in the U.S.
A lazy interpretation of CFIUS’s retooling would miscast it as an inevitability of the Trump administration’s protectionist bent. In reality it reflects a new consensus in the U.S. and Europe that takeover controls designed to enshrine competition are outdated in a world in which sovereign ambition relies on business as much as it does on battalions.
In May, the European Union voted to introduce a screening framework for foreign investment that gives the 28-nation bloc a single voice to overrule, if necessary, a member state’s interests. “Without succumbing to protectionism, it is time to show that Europe is not naive in these times of globalization,” says Franck Proust, a member of the European Parliament. “If it wants to preserve a favorable climate for investments—sources of growth, jobs, and innovation—it has to protect European assets.”
Some of the EU’s individual members also are breaking with decades of open-door economic policy to ensure their national champions remain just that. In August, German lawmakers blocked a takeover of machine tool manufacturer Leifeld Metal Spinning AG by a Chinese investor, the first time the country has vetoed a deal on national security grounds. In the U.K., which since the 1980s has styled itself as the take-all-comers bazaar of global commerce, politicians are debating the nation’s first-ever foreign investment controls for mergers.
Why the rush of rule-making? One reason is China. In the eyes of many American and European lawmakers, Chinese corporations are extensions of Beijing’s increasingly muscular industrial policy. “The spread of national security reviews for takeovers reflects an increasing awareness by Western countries that their brand of traditional or, if you like, American capitalism cannot compete with China’s state-backed capitalism,” says Paul Halpern, a former CFIUS director.
Beijing’s silence on the Qualcomm deal may have been payback for CFIUS blocking a previous merger between Broadcom Inc. and Qualcomm, where, despite neither company being Chinese, the agency cited the threat of China getting an advantage in semiconductors as the reason for its decision. But CFIUS operates in relative obscurity, so it’s difficult to know how many China acquisitions the committee has nixed. By way of a proxy, let’s consider the value of a U.S. M&A involving a Chinese buyer. This fell a staggering 73 percent in the 12 months to July 2018, compared with a 17 percent drop for all inbound M&As over the same period. The decline also reflects curbs Beijing instituted in 2016 to tame investments deemed too risky.
The second concern is more complex: Barring a seismic change of course, humanity is headed for a future of near-total digitalization. In a world where your fridge talks to your car to find out what kind of day you had before deciding whether to dispense soda or Scotch on your arrival, there are legitimate questions about the extent to which almost any deal would give a foreign acquirer access to the personal data of another country’s citizens.
The increasingly stringent M&A regulation is unlikely to halt cross-border activity. Rather, the harm to deal flow is likely to be a slow creep, informed as much by legitimate national security concerns as by the sort of tit-for-tat that blossoms amid protectionism. That prospect has already added a layer of uncertainty to the delicate art of dealmaking.
©2018 Bloomberg L.P.