Philips Sale Draws U.S. Review as Chinese Expand Into Chips

  • Lumileds deal stalled over national-security concerns
  • Committee on Foreign Investment scrutinizes the sale

China may be the world’s source of cheap electronics. It buys a lot of semiconductors for them. Buying semiconductor technology is a trickier affair.

Royal Philips NV said Monday that it hit resistance from U.S national security officials over the planned sale of its Lumileds lighting business to Chinese-led investors. The $2.8 billion deal is stalled over the transfer of semiconductor technology involved in making LEDS, a device that emits light, according to one person familiar with the situation. LEDs have various uses from brake lights in cars, to digital cameras and fiber-optic telecommunications systems.

The Committee on Foreign Investment in the U.S. is scrutinizing the sale to a group led by GO Scale Capital Ltd. as China steps up investment in the chip industry. GO Scale and Philips are working on a solution to address concerns from CFIUS, which reviews investments by foreign entities to ensure they doesn’t pose a risk to national security. The investors expect to gain approval, GO Scale Chairman Sonny Wu said by phone on Monday.

"Many say while one individual deal may not be a problem, there is an aggregate issue," said Harry Clark, a lawyer at Orrick, Herrington & Sutcliffe LLP in Washington. "Isn’t there a tipping point? There’s no easy answer to that question."

Chinese Commitment

Philips didn’t say why the Lumileds sale triggered concerns, but semiconductor transactions often involve advanced technology used in U.S. government or critical infrastructure systems. The Dutch company’s shares declined when the delay was announced on Monday, and traded 1.7 percent higher at 24.26 euros as of 10:39 a.m. in Amsterdam on Wednesday.

In the last two years, Chinese state-backed investors have committed about $39 billion to buying U.S. tech companies, according to data compiled by Bloomberg. A big part of that spending has been aimed at kickstarting a stalled foray into the $300 billion chip industry, where it’s struggled to create challengers to the likes of Intel Corp. and Qualcomm Inc. China buys more than half the semiconductors sold each year, yet doesn’t have one domestic manufacturer among the 10 biggest chipmakers.

"It seems that when you put semiconductors and China in the same sentence, you’re bound to get CFIUS’s attention," said Farhad Jalinous, a lawyer at White & Case LLP who advises companies going through committee reviews.

Deal Cleared

Not all purchases of semiconductor businesses by Chinese buyers are held up. OmniVision Technologies Inc., a camera sensor-maker, agreed in April to a $1.9 billion sale to a group of Chinese investors, a deal that was reviewed and cleared by CFIUS, according to the company. 

NXP Semiconductors NV, which is selling its RF Power business to Beijing Jianguang Asset Management Co., said this month that CFIUS intended to conduct a 45-day investigation of the deal, indicating a more in-depth review. Integrated Silicon Solution Inc. said in August it restarted a CFIUS review of its deal to sell itself to a China-backed investment group. CFIUS later extended the inquiry for an additional 45 days. Companies pull and refile merger reviews with CFIUS in the hope more time will help resolve the committee’s concerns.

Philips is trying to sell Lumileds so the company can turn its focus to the $125 billion health-care industry. Amsterdam-based Philips said Monday the sale of an 80 percent stake of Lumileds sale to investors led by GO Scale Capital is now "uncertain" after CFIUS expressed some "unforeseen concerns." 

Companies under CFIUS review often negotiate agreements with the government to resolve security concerns, such as requiring certain products or services be handled by U.S. citizens or the sale of some businesses.

CFIUS’s authority is limited to acquisitions of U.S. businesses by foreign entities. Lumileds’ U.S. unit, which is based in San Jose, California, has research and development activities in addition to production facilities. The combined Lumileds and Automotive business reported third-quarter earnings before interest, taxes and amortization of 10 million euros ($11 million), Philips said on Monday. Whether splitting out certain business lines would satisfy the government isn’t known.

U.S. Criticism

Chinese investment in the industry has drawn criticism from U.S. lawmakers. Senator Chuck Schumer, a New York Democrat, wrote in August to the Treasury Department, which leads CFIUS, about a bid for Micron Technology Inc. by Tsinghua Unigroup Ltd., saying he was "deeply concerned" about allowing China to gain control over components used in U.S. defense systems.

Representative Dana Rohrabacher, a California Republican, said in June that China may be hoping that CFIUS doesn’t focus on its piecemeal acquisitions in the industry.

"This accelerating trend negatively impacts U.S. long-term competitiveness and security through gradually shifting development of core technologies outside the U.S., and in these cases to a global power with which the United States has sensitive economic and national security relations," Rohrabacher said.

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