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M&A deals in US getting harder to close, not just for Alibaba

Bipartisan bill would step up scrutiny of foreign purchases

In a rare move, the U.S. Justice Department last September balked at a deal after the traditional 30-day antitrust waiting period had passed.   © Reuters

TOKYO -- The U.S. is taking an increasingly close look at the economic and security ramifications when foreign companies attempt to acquire American corporations, a move that is supposedly aimed at China but could trip up businesses from other parts of Asia as well.

On the one hand, Asian businesses are eager to invest in America, enticed by corporate tax cuts and other efforts to attract capital under President Donald Trump. Charoen Pokphand Group is considering several merger and acquisition deals, the Thai conglomerate's U.S. business chairman said recently. Leading Vietnamese dairy company Nutifood has signed a contract to sell infant formula there, a foray into a potentially lucrative market.

On the other hand, acquisitions of U.S. companies can be complex and sometimes fall through.

In early January, a potential deal by China's Ant Financial, a unit of Alibaba Group Holding, to buy U.S. money-transfer company MoneyGram collapsed due to an objection from the Committee on Foreign Investment in the United States, or CFIUS. A number of deals involving Chinese companies have been blocked in a similar fashion in recent years.

CFIUS, whose members include the heads of such departments as treasury, justice, commerce and defense, reviews M&A proposals involving foreign concerns from a national security standpoint. The number of deals filed in 2012 totaled 114. The figure dipped to 97 in 2013 but stayed high at 147 and 143 the following two years.

China has been the most prolific filer for the past several years, requesting pre-approval for 29 deals in 2015, the latest year for which figures are available. Japan accounted for between nine and 18 filings annually from 2012 to 2015.

These two countries dwarf filings from the rest of Asia: Among members of the Association of Southeast Asian Nations, only Singapore and Indonesia sought pre-approval during those four years, accounting for just 14 cases and three cases, respectively.

U.S. lawmakers from both parties are now pushing to broaden CFIUS' reach.

Introduced in November with bipartisan support, the Foreign Investment Risk Review Modernization Act would expand the scope of CFIUS scrutiny to include real estate located near military installations or other government property that, if purchased, would constitute a security risk. Important intellectual property is on the list as well.

The bill would also strengthen scrutiny of deals involving a "country of special concern" that poses a significant security threat to the U.S., a reference thought to include China and Russia.

By making intellectual property purchases subject to review, the bill could let CFIUS crack down on deals that take place even outside the U.S. "Transactions under which an American company transfers important technologies to a joint venture established outside the U.S. could be scrutinized," according to Masaki Sekimoto, a Japanese attorney and expert in American law.

As things stand, it is common practice for companies to file with CFIUS on a voluntary basis before a transaction is made, rather than risk falling afoul of the committee after a deal gets underway.

Japanese companies made 12 filings in 2015. They "would have to consider more carefully whether a particular deal will come under CFIUS scrutiny," said Yasuhide Watanabe, a Japanese attorney well-versed in M&A matters in the U.S.

The U.S. is also getting stricter about potential antitrust violations. The Department of Justice in September mounted a legal challenge to the acquisition of Clarcor, a Tennessee-based manufacturer of filtration technology, by motion and control technologies maker Parker-Hannifin, demanding that Parker sell off a portion of the merged operations making filtration systems for aviation fuel. The Cleveland-based company eventually agreed to a sale as part of a settlement with the government.

How the case unfolded raises red flags for future M&A deals in the U.S. The Justice Department had said nothing about the deal during the traditional 30-day antitrust waiting period after Parker filed notice of the acquisition, leaving the parties to assume they were in the clear. Nor is the business in question particularly large -- Parker and Clarcor's annual sales of aviation fuel filtration systems stood at less than $20 million combined. It was only after a customer filed a complaint that the department took action.

According to Sekimoto, it is "extremely rare" for the government to take action after the waiting period has passed. Companies "now need to consider the possibility" of such delayed action when putting together acquisition plans, he said. "Not even niche markets are exempt."

In other respects, barriers to companies looking to buy American businesses have grown less formidable in recent years. Until 2014, U.S. companies' shareholders challenged over 90% of acquisition plans in court, charging that the buyer was underpaying or not disclosing enough information on the deal. But many such cases were viewed as frivolous, "the result of the plaintiffs' attorneys seeking legal fees," according to Watanabe. After a court in the state of Delaware ruled in 2016 that settlements in such cases had to be in the interest of shareholders, those suits decreased in number. Now, 70-80% of acquisition bids are challenged in court.

"We've been sued by shareholders a few times in the U.S.," said Hiromichi Jitsuno, general manager of the legal department at Japanese trading house Sumitomo Corp. "It certainly delays a deal's closing, if only by two or three months, and so I'm pleased to see it's growing less frequent."

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