Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Two words tend to make M&A arbitrage traders run for the hills: China and CFIUS. 

The first, an economic superpower that has considerably stepped up its investment in American businesses this year, particulary those with technology assets. The second, a somewhat obscure government agency whose mission it is to protect U.S. national security interests and thus has the ability to block such deals. High-tech companies and those with government contracts would rank high on the list of things CFIUS (pronounced "sif-ee-us")  would probably want to keep out of the hands of China, a nation suspected by the U.S. of carrying out cyber attacks.

Mergers Without Borders
China is spending more than ever to purchase U.S. businesses, but not all offers have been successful.
Source: Bloomberg

This tension, along with fickleness recently among some Chinese suitors, means that these transactions haven't had a high success rate. Plus, China itself is trying to control capital outflows to avoid putting more depreciation pressure on its currency. That said, if there's one acquisition that can get by, it's probably Ingram Micro. 

Ingram Micro is a Santa Ana, California-based electronics reseller that agreed in February to sell itself for about $6 billion to Tianjin Tianhai Investment Co., a subsidiary of the Chinese airline and logistics conglomerate HNA Group. Shares of Ingram Micro have traded for less than $35 apiece this week, a significant discount to the $38.90-a-share all-cash takeover price, which means investors stand to make a hefty profit should the deal get done.

The China Discount
Ingram Micro trades way below the Chinese suitors takeover bid because of regulatory risks that may be overstated. The 11.5% spread compares with an average of 3% for U.S. deals larger than $1 billion.
Source: Bloomberg

The CFIUS process is unlike other regulatory reviews. Companies can voluntarily file to CFIUS, or risk an involuntary probe. Tianjin Tianhai and Ingram Micro opted not to file, likely because they don't think a review is necessary in this case.

Ingram Micro distributes technology rather than producing it, selling products made by Acer, Cisco, HP, Microsoft, etc. And of the $43 billion of revenue it generated last year, only a tiny fraction seems to have come from doing business with the U.S. government. That's why this deal may have a better chance than something involving sensitive assets.

It's a bet the $3.8 billion Merger Fund is taking. Roy Behren and Mike Shannon, the fund's managers, estimate the deal will close by July 31, which based on the current spread implies a potential 93 percent annualized return. 

"We understand that the approvals aren't as clear as maybe some other transactions, and we wish we knew the buyer better. However, we believe the stock is mispriced enough to be attractive, as the market is basically ascribing only a coin flip to the likelihood of successful completion."

Let's say CFIUS does decide to launch a review. It's possible that doesn't happen until after the deal closes because, yes, it can do that. But even in that scenario, the entire transaction might not need to be unwound as perhaps only the small piece of Ingram Micro doing U.S. government work might need to be divested. 

As for China's foreign-currency regulator, details in the Ingram Micro merger agreement pertaining to its breakup fee seem to suggest they're all set there. If the deal were scuttled by regulators, Tianjin Tianhai would have to pay Ingram Micro $400 million. But instead of having that money set aside in China, it was deposited into an escrow account with Deutsche Bank's Trust Company Americas. 

See, arbs? Those "C" words aren't always so scary.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. CFIUS stands for Committee on Foreign Investment in the U.S.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net