By Diane Bartz and Greg Roumeliotis
WASHINGTON/NEW YORK (Reuters) - A spate of proposed Chinese takeovers of U.S. companies, from the Chicago Stock Exchange to makers of high-end semiconductors, has created a vibrant business for a small circuit of Washington insiders who advise on how to get cross-border deals approved by the U.S. government.
Several former U.S. officials have in recent years joined the ranks of lawyers, consultants and lobbyists that have emerged as key brokers in trying to get Chinese acquisitions or investments in U.S. companies approved by the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes deals for national security concerns.
Because this interagency panel, comprising 16 U.S. government departments or agencies and chaired by the Treasury, does not publish its decisions or its reasoning for them, advisers say inside knowledge and connections are important to navigate what outsiders often see as a "black-box" review process.
There have been 22 M&A transactions announced in the United States so far in 2016 involving Chinese acquirers, worth a combined $23 billion, according to Thomson Reuters data. That is a massive increase from 88 deals worth $13 billion for all of 2015, and 88 deals for $7 billion in 2014.
For a graphic showing Chinese acquisitions of U.S. companies by number and value, see http://tmsnrt.rs/1T4e6hF
It has all boosted corporate demand for former officials who served on CFIUS or have knowledge of the inner workings of the agency, several lawyers, consultants and lobbyists involved in the advisory work told Reuters.
"We're just completely overwhelmed," said one lawyer involved in advising on the CFIUS process, who asked not to be named because he was not authorized to speak with the media.
China's aggressive, often state-backed overseas buying spree has set off alarm bells among some politicians in Washington who are already on edge as China’s armed forces expand their presence in the South China Sea and because of high-profile hacking attacks against U.S. government agencies and corporations, which U.S. officials and security software companies have blamed on China.
Adding to the tensions are attacks on China’s trade policy, and in particular its surplus with the U.S., by Donald Trump, who is leading the race to be the Republican candidate in November’s presidential election.
Among the former officials who use their CFIUS experience in advisory work are Anne Salladin, who reviewed some 500 deals that went to CFIUS during her 20 years at the Treasury. Her role at law firm Stroock & Stroock & Lavan LLP has included advising a Chinese private equity firm on the acquisition of some semiconductor-related assets. Other officials include former U.S. Treasury deputy assistant secretary for investment security and policy Nova Daly, now with the law firm Wiley Rein LLP, and former Department of Homeland Security assistant secretary for policy Stewart Baker, now with law firm Steptoe & Johnson LLP, according to the websites of their employers.
Baker worked on the acquisition of Motorola Mobility by Chinese PC and smartphone maker Lenovo Group <0992.HK> in 2014, while Daly advised U.S. hard-disk maker Western Digital Corp <WDC.O> on a proposed investment by China's Unisplendour Corp Ltd <000938.SZ> that was abandoned this week amid CFIUS concerns.
All three of the former officials declined to comment for this story.
Whitney Smith, a Treasury spokesperson, declined to comment on CFIUS's relationship with company advisors.
Before a deal is announced, the advisors will often seek to gauge its chances for CFIUS approval by holding a preliminary meeting with key officials. If the initial reaction is hostile, then this can avoid the embarrassment and cost of announcing a deal that is later scuppered, said Mark Plotkin, a CFIUS expert with the law firm Covington & Burling LLP.
A good CFIUS advisor will figure out what issues might crop up in a certain deal – such as cutting edge chip technology or Pentagon contracts -- and discuss how to best handle these with the agencies most likely to be concerned, said Plotkin.
"The CFIUS process is going to be a full-body X-ray of the target," he said.
Another lawyer involved in CFIUS work, who spoke privately, said that he gives a 45-minute presentation to Pentagon officials and then carefully examines the questions asked, as well as body language, to judge their level of discomfort with a particular deal.
It is not unlike a preliminary meeting that antitrust lawyers might request with the Justice Department or Federal Trade Commission about an antitrust review of a merger, the lawyers said.
Not all CFIUS advisors are hired to help a deal go through. Some are brought in by corporate competitors to lobby against a deal, while others are tapped by investors making bets on whether a transaction will be cleared by CFIUS. For instance, Mario Mancuso, a partner at law firm Kirkland & Ellis LLP who formerly sat on CFIUS as undersecretary of commerce for industry and security, now typically advises companies. But he also represented some investors in pork producer Smithfield Foods when China's Shuanghui International made a successful bid for the company in 2013.
MORE WILLING TO HIRE
This CFIUS advisory business is also benefiting from Chinese companies’ new willingness to spend on advisors.
Traditionally, Chinese companies had been mistrustful of advisors, or unwilling to pay for them, some investment bankers and lawyers say. But the Chinese government’s encouragement of outbound deal-making has spurred many of the country’s companies to spend on advisors, including CFIUS experts, these people say.
A CFIUS review typically lasts between one and three months and can cost from as little as $50,000 to as much as $1 million for more complicated or controversial transactions, according to a CFIUS expert who has shepherded deals through the process.
China led the pack of countries whose planned U.S. acquisitions and investments in 2014 were probed for U.S. security implications, making it the most scrutinized country by CFIUS, according to the latest CFIUS annual report, which was released last Friday. No official data is available for 2015.
Chinese bids for technology and chip makers get particular scrutiny, CFIUS experts say. Semiconductors form electronic cores for a long list of military systems, including drones, guided missiles and bombs.
To be sure, even with expert advice, companies can get it wrong. In the case of Western Digital, the company had told investors that it believed Unisplendour acquiring a 15 percent non-controlling stake would not be subject to a CFIUS review But CFIUS informed Western Digital it would review the transaction nonetheless, prompting Unisplendour to pull out.
CFIUS concerns also killed other semiconductor deals in the past few weeks. Fairchild Semiconductor International Inc <FCS.O> earlier this month rejected an acquisition offer from China Resources Microelectronics Ltd <CHRMI.UL> and Hua Capital Management Co Ltd, over concerns that CFIUS would stop the deal. Last month, Philips <PHG.AS> scrapped a $3.3 billion deal to sell a division which makes LED lights to Chinese investors also because of CFIUS concerns.
U.S. politicians have also began to agitate over some of these deals. Last week, a group of 46 U.S. lawmakers urged CFIUS to take a hard look at a bid by Chongqing Casin Enterprise Group to buy the Chicago Stock Exchange because of concerns that China would gain access to information about U.S. companies.
COTTAGE INDUSTRY The cottage industry that has developed around CFIUS includes a wide array of actors.
Law firms such as Skadden, Arps, Slate, Meagher & Flom LLP and Covington & Burling offer to provide insight into how CFIUS will view a deal, tapping into their working relationships with CFIUS officials at several government departments. Skadden declined comment for this story.
Lobbying firms, including Podesta Group and BGR Group, both of whom boast CFIUS experts on their websites, seek to persuade lawmakers and U.S. officials that a transaction is not threatening, as any concerns they harbor can trickle down to CFIUS officials, according to industry sources. BGR declined to comment, while Podesta did not respond to requests for comment. Management consulting firms, such as Accenture Plc <ACN.N> and Deloitte Touche Tohmatsu Ltd, offer to help companies address national security risks identified by CFIUS. So-called "mitigation measures" can range from asset sales to ensuring that only U.S. citizens perform certain tasks. Deloitte declined to comment. Sorting out who among the advisors have connections and insight into CFIUS is not always easy.
"Some of the law firms specializing in this stuff are excellent, while others sign companies on for terms that are utterly unimplementable," said Accenture consultant Andrew Walker, who helps companies comply with conditions imposed by CFIUS.
(Additional reporting by Elizabeth Dilts in New York; Editing by Soyoung Kim and Martin Howell)