SEMICONDUCTORS
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Chinese Offshore Investment

Setbacks don’t derail China’s semiconductor ambitions

Analysts note spike in formal and informal Chinese takeover offers

PUBLISHED : Sunday, 28 February, 2016, 4:20pm
UPDATED : Sunday, 28 February, 2016, 5:41pm

A series of semiconductor-related deals abandoned due to security issues has raised concerns over Beijing’s ambitious chip industry development plans and greater scrutiny of mainland Chinese investments in the United States, according to recent media reports.

Some analysts, however, see that as a “serious misreading” of the situation.

In a report, Nomura analyst Huang Leping largely attributed the derailed Chinese acquisitions – including the termination of Unisplendour’s US$3.8 billion investment in Western Digital last week – to the inexperience of the mainland firms in communicating with the Committee on Foreign Investments in the United States (CFIUS).

An inter-agency body, CFIUS assesses the national security implications of mergers, acquisitions and takeovers that could result in foreign control of any US business.

China is the country with the most deals placed under CFIUS review. Mainland Chinese companies accounted for 24 of the 147 cases filed with CFIUS in 2014, according to the committee’s latest annual report published on February 19. They accounted for 21 in 2013 and 23 in 2012.

A greater number of Chinese deals now target US technology assets, and the potential transfer of critical US technology is one of the key questions that CFIUS assesses
Thilo Hanemann and Daniel Rosen, Rhodium Group

Research firm Rhodium Group said in a report that China’s rise to the top of the CFIUS rankings primarily resulted from the rising number of mainland acquisitions in the US.

It estimated the number of Chinese mergers and acquisitions in the US rose to 103 last year and 100 in 2014, from an average of 43 between 2010 and 2013 period and 13 between 2006 and 2009.

“Compared to this exponential increase in the annual number of deals, the increase in CFIUS investigations is disproportionally small,” Rhodium analysts Thilo Hanemann and Daniel Rosen said in the report. “Most importantly, a greater number of Chinese deals now target US technology assets, and the potential transfer of critical US technology is one of the key questions that CFIUS assesses.”

They highlighted an “unprecedented jump in Chinese overtures in the semiconductors industry”, saying the US and other countries had seen a “spike in formal and informal Chinese takeover offers” because of Beijing’s industrial development policy.

In June 2014, the central government introduced a national policy to inject vast amounts of capital to build an advanced semiconductor manufacturing supply chain. The domestic chip industry’s aggressive target is to record a 20 per cent compound annual growth rate by 2020.

Chinese companies successfully acquired two US semiconductor firms last year, while formally or informally approaching other US firms with the intent to buy or forge strategic partnerships.

OmniVision Technologies, a US maker of advanced digital imaging sensors, was acquired for US$1.9 billion by mainland private equity firms Hua Capital Management, Citic Capital and Goldstone Investment.

Integrated Silicon Solution, a designer and supplier of memory chips used in the automotive, communications and industrial markets, was sold for about US$640 million to another Chinese-backed consortium, Uphill Investment, led by Summitview Capital.

That run has recently screeched to a halt. In January, Chinese equity fund Go Scale Capital cited US national security concerns for walking away from its US$2.8 billion bid for Dutch electronics giant Philips’ Lumileds light-emitting diode components business.

Earlier this month, Fairchild Semiconductors turned down a proposed takeover by China Resources Microelectronics and Hua Capital Management over likely CFIUS rejection. A CFIUS probe led Unisplendor to withdraw its bid to acquire a 15 per cent stake in storage systems firm Western Digital.

Nomura’s Huang said those setbacks “should create a decline in valuation premiums in overseas semiconductor assets” and open up “opportunities for more prudent companies like [Hong Kong-listed] Semiconductor Manufacturing International Corp”.

“We believe there is no change to China’s goal of building a complete ... local [semiconductor] eco-system,” Huang said.