With Fairchild Semiconductor rejecting a Chinese-backed takeover on worries U.S. regulators may block the deal, China's hunger for overseas assets has reached a turning point. Acquirers won't need to pay up just in premium terms, they'll also have to budget for the increasing likelihood authorities will challenge their bids.
When state-owned China Resources Microelectronics and Hua Capital Management made a $21.70-a-share offer in early December for Fairchild, one of America's oldest chipmakers, there was a feeling the Chinese could buy U.S. technology, so long as it wasn't too sensitive. Sure, China Resources was breaking up a deal, considering Fairchild was already in advanced talks with U.S. competitor ON Semiconductor, but it had several reasons to feel comfortable about reaching out.
Fairchild isn't exactly Micron Technology, one of the world's largest memory chipmakers, and China has sailed through smaller purchases in the U.S. tech sector before. Another reassuring point: Fairchild's power-regulating chip, the sort used to conserve battery life in cell phones, among other things, is hardly the kind of sensitive technology the U.S. wants to keep out of foreign hands.
Fairchild's board, though, had ideas of its own. As Washington's concerns about Royal Philips's planned $2.8 billion sale of its lighting-components unit to a consortium led by GO Scale Capital of China grew louder (and the mooted transaction was ultimately canceled), Fairchild asked for, and obtained, an increased $22-a-share bid.
That meant China Resources wasn't just paying a 10 percent premium to ON Semiconductor's offer, but a price almost 56 percent higher than Fairchild's closing share price of $14.14 on Oct. 13, when reports began to circulate the California-based technology firm might be in play.
What China Resources didn't raise, however, was the amount it would pay Fairchild should the Committee on Foreign Investment in the U.S., or CFIUS, reject the bid. It kept its breakup fee at $108 million, even though Fairchild, according to people familiar with the matter, was pushing for a number closer to $300 million. By Wednesday, Fairchild had announced its $20-a-share talks with ON Semiconductor were back on.
A look at Fairchild's SEC filing shows China Resources' refusal to raise the breakup fee was a sticking point: ``Specifically, the board believed that the consortium’s proposed $108 million reverse termination fee would not adequately justify risking the company stockholder premium present in the ON Semiconductor transaction in order to seek the incremental $2.00 per share proposed to be paid in a potential $22.00 per share transaction with the consortium.''
Of course, it isn't only the Chinese that have been at the receiving end of U.S. rejections. General Electric pulled out of selling its consumer appliance business to Electrolux after the U.S. Justice Department ruled a merger would make the Swedish firm overly dominant.
But buyers from China have a steeper hill to climb than others. They're attempting to enter the U.S. in a once-in-a-four-year period when competition regulators are especially cautious -- an election year.
It means Chinese companies and their bankers are going to have to rethink the rule book when it comes to offshore acquisitions. Paying more in breakup fees will become a reality, especially in cases where an approach is in competition to an existing offer from another firm -- think Zoomlion Heavy's play for U.S. crane maker Terex that in turn is threatening to derail Terex's proposed all-stock merger with Finland's Konecranes. National security concerns have already been raised and although Zoomlion hasn't disclosed the size of its breakup fee, shares of Terex are trading at $21.29, signaling a distinct lack of confidence in the Chinese company's $30-a-share offer.
Even the $3 billion breakup fee being offered by ChemChina to Syngenta may not be reassurance enough for the Swiss firm's shareholders. (Syngenta's genetically modified seed technology is particularly attractive to China in its hunt for food security but the company, also subject to a takeover approach by St. Louis-based Monsanto, makes around a quarter of its sales in North America.)
Already, bankers are beginning to wake up to the fact. HNA Group, the largest stockholder of Tianjin Tianhai Investment, is offering a $400 million breakup fee in the event its $6 billion tilt at computer, networking and software distributor Ingram Micro is thwarted. True, the amount pales versus ChemChina's termination offer, but it's significant as a proportion of the deal. China's biggest-ever overseas acquisition, oil giant Cnooc's $15 billion purchase of Canada's Nexen, carried a breakup fee of $400 million.
With Washington on edge, Chinese companies with U.S. assets in their sights are going to have to come to terms with something young lovers have long known. Painful breakups always come at a cost.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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