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September, 2017

Trump sinks China-backed bid for Lattice Semiconductor

Original article: Bloomberg

U.S. President Donald Trump has prevented a Chinese-backed investor from acquiring Lattice Semiconductor, dealing a blow to Beijing's IC ambitions. Trump chose to block the bid on national-security grounds after consulting with a multi-agency panel. 


It was just the fourth time in the past 25 years that a U.S. president has prevented a foreign takeover of a domestic firm for reasons of national security. The buyer who was rejected is Canyon Bridge Capital Partners LLC, a private-equity firm backed by a Chinese state-owned asset manager.


In a statement, Treasury Secretary Stephen Mnuchin said: "Consistent with the administration’s commitment to take all actions necessary to ensure the protection of U.S. national security, the president issued an order prohibiting the acquisition." 


At a press briefing, China's Ministry of Commerce said that Gao Feng said that “Conducting security checks on a sensitive investment is a nation’s legitimate right, but it shouldn’t be used as a protectionist tool."

Analysis:

On the campaign trail, President Trump promised to address China's unfair trade practices. He talked often about imposing tariffs on Chinese goods. Most observers didn't think that would be a wise course of action, especially considering that U.S. firms continue to manufacture heavily in the PRC. 


Fortunately, Trump has recalibrated his focus to a serious problem that businesses and policymakers both want to be resolved: China's playing fast and loose with U.S. intellectual property. Outright theft aside, Beijing has other ways to pry away valuable IP from U.S. companies. Often, firms need to hand over IP in exchange for access to the China market. They end up in joint-venture partnerships that provide overwhelming control to their Chinese partners.


Another way to acquire U.S. IP is to buy it. While it's natural for Chinese companies to want to strengthen their capabilities with M&A, bids like the Lattice one involving sensitive technology - semiconductors have many military applications and therefore require scrutiny.


It's also instructive to apply the principle of reciprocity. Chinese firms should expect to face more barriers to investment in the U.S. given how U.S. firms are treated in the PRC. China completely bans foreign investment in 28 sectors and limits it in many others. Limitations don't stop at ownership, either. In banking, for instance, foreign firms are mostly barred from conducting local-currency retail business. In contrast, Chinese banks face no such constraints in the U.S. 


In a statement, Lattice chief executive officer Darin G. Billerbeck said: “The transaction with Canyon Bridge was in the best interests of our shareholders, our customers, our employees and the United States." Billerbeck did not mention that the main benefactors of the deal would be company executives and deal advisors; they stood to make a windfall.  


As for the United States, it's not clear how the nation would benefit from handing over sensitive semiconductor IP to Canyon Bridge. The White House cited three national-security concerns in a statement: the U.S. government's use of Lattice products, Chinese government support for the deal, and the importance of maintaining the integrity of the semiconductor supply chain. 


The tenacity of Canyon Bridge's bid - and the fact that it has a mandate to acquire U.S. semiconductor firms - may have set off warning bells in the U.S. security establishment. Not only did the Chinese company and Lattice try three times to secure approval for the deal, but after those efforts failed, they appealed directly to President Trump himself - a highly atypical move. 

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