With the fear of an imminent slowdown in the global economy and the ongoing trade war, uncertainty is currently dominating the upstage, to the detriment of M&A cross-border transactions, which so far could instead count on a positive momentum.
With the looming pressure from Chinese companies pushing for acquisitions of US and EU companies and, on the other hand, western companies trying to consolidate to defend from Asian competition, the cross-border M&A market has been chaotic in recent years. Authorities in this context have become particularly active in stepping in to stopping transactions deemed as dangerous. More in detail, policymakers throughout the world frequently oppose mergers and acquisition plans either for competition issues or for protectionist reasons against the Asian companies’ pressures and, as we will see later, in particular for the Chinese Intellectual-Property-theft threat.
The active approach has been particularly strong in Europe as the European competition Commission frequently intervened in large transactions to prevent loss of competition to the detriment of consumers. It is important to notice that it did so despite the single member states were occasionally in favor of the transactions, suggesting that a supranational approach might be more effective in guaranteeing a good functioning of the market.
Protectionism, on the other hand, mainly concerns the role that Asia plays in the world economy. Evidently, China represents a major stress factor for the West, for several reasons. Firstly, its current economic slowdown has unsurprisingly already had a negative impact on some American companies’ stock performance, cutting their projected earnings, in cases like Caterpillar, Nvidia and Apple. Secondly, the tensions generated by the trade war with the US constitute a significant source of uncertainty in the global markets, discouraging investments. And thirdly, as hinted at above, Chinese companies are somehow involved in a worrisome Intellectual Property theft. As a matter of fact, some of them have been accused by Western authorities of unfairly acquiring control over technology developed by American and European companies, by means of strategic stealthy deal making, or by forcing foreign companies to transfer proprietary technology to their Chinese partners in exchange for access to the Chinese huge market.
The article will present examples of the depicted antitrust and protectionist reasons for authorities’ intervention in cross-boarders M&A transactions as a response to the change in international capital equilibrium.
Interference in M&A transactions: Strategic Reasons
In Europe there have been three major examples connected to risk of infringement of antitrust regulation. Led by Margrethe Vestager, the European Commission for Competition has played a major role in the M&A landscape since 2014 and over the last few years, the Board has both approved and rejected several deals across industries.
The first case concerns the opposition of the European Competition leader to Siemens-Alstom merger. The two companies operate in the market for railway signaling systems and high-speed trains. Already dominating the market in Germany and France (their respective consolidation countries), the merged company would have controlled 40% of the international market (which excludes China, a closed market) which means $18bn out of the estimated $45bn. The merger was warmly welcomed by French Finance Minister Le Maire, according to whom the European Commission should start incentivizing local consolidation, thus keeping up with US and Chinese economic nationalism. French President Macron as well believed in the project, calling for a “Stronger Europe”. As a matter of fact, through this deal, the two firms could better face the Chinese threat, represented by CRRC, which they had somehow indirectly fueled some years ago. Indeed, back in 2004, when the then-Chinese-president Hu Jintao visited Germany, Alstom SA signed a $1.14bn supply contract with the Asian country, involving the production of 60 passenger trains and 180 freight locomotives. Siemens AG entered a similar contract, promising the delivery of 300 kilometers-per-hour trains. As the contract forecasted in its core clauses, most of the production was carried out in China, with Alstom and Siemens handing over some of their most precious intellectual property and technology with the Asian counterparty. Originally, this move by the two European companies was aimed at consolidating a long-term intercontinental partnership. Nevertheless, far from being a partner, the newly created CRRC exploited Alstom and Siemens’ intellectual property and know-how, becoming a true threat to the two European companies.
Unfortunately, according to Mrs. Vestager, the proposed Siemens-Alstom merger, in its original terms, would have easily evolved into a monopoly on the European marketplace. On these grounds, in the first place, she required the two companies to comply with some stringent conditions, involving, for each of the two parties, the sale of a mix of licenses and assets, which, for instance, the CAF (Construcciones y Auxiliar de Ferrocarriles) of Spain would have been ready to buy for €900m. Anyhow, both Siemens and Alstom declined the proposal and the conditions imposed by the Authorities, since those terms would have harmed the revenues, reducing them by 4%, through a reduction in cost savings for €470m.
Furthermore, Mrs. Vestager claimed the Chinese threat was definitely not imminent. On this point, according to Siemens and Alstom’s heads, Brussels failed to properly assess the complex railway market, dominated by confidential contract tenders and infrequent signaling systems sales.
In any case, on February 6th, 2019, the veto on the deal at issue confirmed that Europe will still have two (rather than one) global champions in rail infrastructures for the years to come.
The second example of explicit intervention in the M&A environment from the European Commission was registered on the same day and involved Wieland’s acquisition of Aururubis Rolled Products and of Aururubis’ stake in Schwermetall. All the three mentioned entities are incorporated in Germany, to manufacture and supply semi-finished copper and copper alloys products. Specifically, Wieland-Werke AG is a private company, recording €3.4bn revenues for fiscal year 2017/2018, while Aururubis AG generated €10.4bn revenues in the fiscal year 2017/2018 and presents a €2.13bn market cap; Schwermetall, instead, is a joint venture equally controlled by Wieland and Aururubis, and generated €330m revenues both in 2016/2017 and in the following fiscal period.
After the transaction, Wieland would have controlled more than 50% in value over the European Economic Area. As such, according to Mrs. Vestager, the deal would have harmed competition and increased prices for rolled copper products, to the detriment of major European manufacturers. These latter are indeed somehow forced to rely on local supply, on the grounds of the high import duties they would otherwise face, in case supply came from overseas.
Despite resembling a mere issue of monopoly, the core point outlined by the European Commission was one of unfair information flow. Namely, by taking full control on Schwermetall, Wieland would have had access to confidential information about the joint venture’s own customers, which are in turn Wieland’s rivals. On these grounds, the conditions imposed by Vestager’s team involved Wieland’s divestment in Schwermetall. Clearly, the party declined the proposal, leading to the acquisition cancellation.
The third case of Vestager’s interference with M&A deals in the Eurozone is represented by the veto on the Three-O2 consolidation, back in May 2016. The transaction would have given birth to UK’s largest mobile operator, eventually boasting a 40% market-share. Clearly, European Commission’s response basically further fed UK’s leave sentiment at the time.
According to the Board, the takeover would have left only two mobile network operators in the UK, namely Vodafone and Everything Everywhere, to challenge the merged entity, to the detriment of British customers, also potentially hampering the development of mobile network infrastructures.
In order to overcome the Commission’s concerns, Three’s head Mr. Hutchinson proposed a set of measures aimed at supporting the market entry of new players; he also proposed to divest O2’s stake in the Tesco Mobile joint venture and Virgin Media. But these solutions were disregarded by Mrs. Vestager’s team, which claimed they were still not sufficient to prevent the likely negative impact on prices, quality of service and network innovation in the UK mobile sector, following the takeover.
Interference in M&A transactions: protectionist reasons
The first obstructed M&A transaction we will address is the $117bn Qualcomm-Broadcom deal during 2018. Qualcomm is an American multinational semiconductor and telecommunications equipment company that designs and markets wireless telecommunications products and services. In December 2017, Singapore based semiconductor giant Broadcom made its formal move towards a hostile bid to take over Qualcomm. The US government intervened citing ‘national security threat’. Qualcomm has two divisions of business-chip creation and patent licensing. When Qualcomm creates a new chip, it logs new patents into its portfolio. Those patents can then be licensed to other companies for massive profits, and those profits can go back into the creation of more chips, thus creating a virtuous cycle. As Qualcomm’s patents also involve the way in which modern smartphones connect to mobile towers (CDMA and LTE), almost every smartphone with a CDMA or LTE mobile connection, needs a paid license from Qualcomm. With the impending launch of 5G, Qualcomm’s control over patent licensing will become increasingly central as we look toward a time when mobile phones will provide faster internet connection than the regular wired one, eventually making the latter obsolete. Now, the acquisition in question could have implied a future in which a country besides the US could have manufactured all the chips and also control their patents. This would therefore mean that a key component of mobile technology could potentially come from an Asian country, thus posing a security and strategic threat. The proposed acquisition was hence blocked by the US government.
As mentioned above, one of the reasons the US government cites for imposing tariffs on imports from China, and thus beginning the trade war, is the alleged theft of American intellectual property by China. Among 50 countries in the U.S. Chamber of Commerce’s International IP Index, which measures a country’s commitment to fostering and protecting innovation through legal rights, China ranks 25th, while the US ranks 1st.
Another instance of IP theft is that of the case of Huawei. The Chinese telecom giant is the world’s largest provider of Internet and telecom equipment. Recently, Huawei has been gaining attention worldwide for allegedly stealing western technology by using it without paying the corresponding amount of royalties for patents. In 2003, US internet equipment market leader Cisco Systems filed a lawsuit against Huawei, accusing the company of stealing the software code for Cisco’s Versatile Routing Platform routers. Despite Huawei claiming publicly to not have used Cisco’s source code, Cisco’s revenue, which in 2002 was nine times greater than that of Huawei, was 87% lower than Huawei’s in 2017. Furthermore, in 2007, Huawei stole Motorola’s wireless technology, since then it built the world’s number 1 wireless infrastructure business, with a 28 percent share of a $37 billion global business. Huawei’s “EasyGSM” base station for 2G wireless networks, which was effectively Motorola technology according to federal prosecutors, played a significant role in its growth. Motorola’s wireless business declined, and the company was sold to Nokia in 2010.
Huawei can be termed a leader in this practice of IP theft, and probably the most successful Chinese company in building a huge global business based on replication technology, very low prices enabled by state subsidies, a protected home market, and aggressive sales techniques in overseas markets.
Yet another example of how China has sought out and bought key technologies in its quest to become a world-class producer of computer chips is the acquisition of the Swedish Silex Microsystems in 2015 by private Chinese company Navtech. The acquisition, however, involved a number of Chinese state-owned funds, revealing that the government is at best complacent with these practices and in the worst scenario actively promoting them. Navtech went on to build a $300m plant in Beijing “relying on Silex’s technology” in micro-electromechanical systems (MEMS), the components embedded in chips that are increasingly central to everything from mobile phones and medical devices to self-driving cars. Silex is only one of the Swedish MEMS companies to be bought in recent years by Chinese investors with state funding.
The other case has to do with the German attempt to safeguard its technology-based companies. Germany, in 2016, was seen to become a popular destination of Chinese investments, hosting 68 acquisitions. Chinese investments all over Europe have been making headlines and to an extent stealthy to the point of classifying them as predatory. The takeover of Germany’s famous robotic company Kuka by Chinese Midea in a $5.3b acquisition was a tipping point for policymakers in Berlin to reassess opening its markets to investment without Beijing offering reciprocal access. At the same time, German industries have been worrying about multiple Chinese takeovers of middle-size companies that could become direct competitors under their new Chinese management.
In this context, addressing the safety of sensitive industries, the German cabinet recently approved a draft law that will give the government the right to scrutinize — and, if need be, block — all investments in sensitive industries in which a non-EU company acquires more than 10% of a German business. This law would be a push for reciprocity and a call for a level playing field internationally, increasing national security.
Moves to address Chinese investments in the US have also been gaining momentum lately. In fact, a clear example of the US taking data security actively can be seen from the US Federal Trade Commission, in its previously mentioned antitrust lawsuit against Qualcomm, ruling that Qualcomm must license its wireless chip patents to its competitors. This was a severe blow to Qualcomm as the company has been defending its licensing practices worldwide. Currently the US model of antitrust regulation limits the definition of consumer harm to price increases, which are not easy to prove in barter transactions of services for data. However, there are now discussions following calls from technology giants such as Cisco and Apple to pass laws that would mimic the role of European Legislation on data protection – General Data Protection Regulation (GDPR) in the US in order to tackle the issue of data privacy. Prior to the GDPR, the burden was on the user to take privacy protecting measures within a given product or a service; by changing the default settings, opting out, or turning on access controls, for example on location data. The GDPR privacy by design and by default principle requires that privacy standards are built into the technology and offered to the user by default. The GDPR shifts the burden of implementing privacy protecting measures from the user on to the company or organisation.
Meanwhile, on the technology front, China, in line with its ‘Made in China 2025’ (MIC 2025) vision, has set goals in sectors such as artificial intelligence, robotics, alternative-energy vehicles, medical devices or aviation, to be achieved alone or by taking over foreign innovative companies. China’s plans have previously also been intended to achieve greater investments in hi-tech manufacturing. The difference, however, with MIC 2025 seems to be the plan’s attempt to achieve know-how, vastly supported by the state. Support from the state has grown considerably in the past decade. In fact, the plan of MIC 2025 includes market share targets for some industries such as that of agricultural machinery seeking up to 95% of the domestic market. The target becomes problematic as it breaches the terms of the World Trade Organization, of which China is a member since 2001. Furthermore, with regard to the issue of IP theft, China was responsible for 59% of $48.4m charges the US charged in 2017 for lack of fundamental research.
It is in the context of these multiple aforementioned issues such as IP theft, lack of fundamental research and stealthy deal-making, that cross-border M&A deals pose not only the problem of being powerful enough to make competitors obsolete, but also of being a serious threat to national security. The western response to this threat is to close off its market, more than allowing uncontrolled consolidation within its market and creating new and more effective regulation.