Who is CFIUS?
Much has been written and spoken about foreign companies with ties to communist governmental regimes acquiring US-based companies. This article discusses how the US government protects our country’s national security issues when M&A transactions are suspect.
Many may not know that there is a body within the U.S. government that is devoted to screening planned acquisitions of U.S. companies by foreign entities. The Committee on Foreign Investment in the U.S., or CFIUS, is a fourteen-member committee under the U.S. Department of Treasury that reviews transactions involving foreign investments in the United States in order to determine potential adverse effects on national security and other concerns.
The core members include the Attorney General, the US Trade Representative, the Director of the Office of Science and Technology, and the Secretaries of the Treasury, State, Defense, Homeland Security, Commerce, and Energy. There are also five White House offices that observe and can participate in CFIUS’ activities including the Office of Management & Budget, the Council of Economic Advisors, the National Security Council, the National Economic Council, and the Homeland Security Council.
Inception
CFIUS was founded in 1975 under President Gerald Ford to study foreign investment. Since then, CFIUS’ jurisdiction and powers have grown. In 2020, the Foreign Investment Risk Review Modernization Act (FIRRMA) took effect. This broadened CFIUS’ jurisdiction over certain non-controlling investments and certain real estate transactions located near U.S. military or government facilities. FIRRMA also relaxed rules by accepting Australia, Canada, and the UK as “excepted foreign states” due to their intelligence sharing system.
The Process
Filing for a review can be either voluntary or mandatory. CFIUS holds the right to review after a transaction, so foreign entities that are not required to file a review might want to in order to limit potential risk in the future. The passing of FIRRMA made filing requirements mandatory for transactions in the technology, infrastructure, and personal data spaces.
The process begins with the review of the deal and national security implications. If the transaction has potential to affect national security, it is investigated. Actions resulting from the investigation can include mitigations or an entire block of the deal. Mitigation requirements can include any kind of alteration to the transaction that CFIUS imposes to reduce a national security risk. CFIUS can also recommend the President review and potentially suspend or block transactions. CFIUS has penalties for not following mitigation requirements which may include civil penalties up to the greater of $250,000 or the value of the transaction.
Data
Investigations have increased, due to the growing interconnectedness of the world and increased geopolitical threats by countries such as China. In 2015, the number of mitigated and blocked deals started to rise, as shown in the table below.
Table 1. Volume of Transactions Screened by CFIUS, 2009-19
| Year | Notices Reviewed | Number of Investigation | Mitigated Deals | Blocked Deals | Presidential Blockings |
|---|---|---|---|---|---|
| 2009 | 65 | 25 | 5 | 0 | 0 |
| 2010 | 93 | 35 | 8 | 0 | 0 |
| 2011 | 111 | 40 | 8 | 0 | 0 |
| 2012 | 114 | 45 | 5 | 0 | 1 |
| 2013 | 97 | 48 | 9 | 1 | 0 |
| 2014 | 147 | 51 | 9 | 1 | 0 |
| 2015 | 143 | 66 | 12 | 3 | 0 |
| 2016 | 172 | 79 | 17 | 8 | 1 |
| 2017 | 237 | 172 | 30 | 26 | 1 |
| 2018 | 229 | 158 | 37 | 19 | 1 |
| 2019 | 231 | 113 | 28 | 8 | 1 |
| TOTALS | 1,639 | 832 | 168 | 66 | 5 |
Source: CFIUS Annual Report to Congress for FY 2019.
Note: Data for 2020 is not available because CFIUS tends to release the prior year’s data anywhere between several months or a year and a half after the close of the year. (However, the target or acquirer of blocked or mitigated transactions are free to release the details of CFIUS’ investigation into their deal.)
Transactions
Thanks to the freedom of the acquirer and target company to publish blocked deals involving them, we were able to review some deals that were blocked by CFIUS. As expected, the common themes in these deals are personal data protection, competition in emerging technology, and military security. Below is a handful of illustrative examples.
First, “StayNTouch” of Beijing Shiji Information Technology Co. is an example of technology that led CFIUS to have personal data protection concerns. In 2020, CFIUS forced Beijing Shiji to divest StayNTouch for this reason. Beijing Shiji provides software services to the hospitality, food service, retail, and entertainment industries. StayNTouch offers hotel management software to big names such as MGM Resorts and the Fontainebleau. CFIUS blocked this transaction given that Beijing Shiji would gain access to the personal data that StayNTouch has on the patrons at hotels using this software.
Second, the blocking by CFIUS of Broadcom’s planned $117Bn takeover of Qualcomm in 2018 is an example of protection of emerging technology. Broadcom, a Singapore based company, designs semiconductor infrastructure software solutions while Qualcomm, a U.S. based leader in the 5G space, develops and commercializes technology used in mobile devices and network equipment. 5G competition is intense, and an acquisition of Qualcomm could have caused the U.S. to lose its competitive position in this space.
A third example of protection in the emerging technology realm is the 2020 blocking of Ekso Bionics’ joint venture with Zhejiang Youchuang Venture Capital Investment Co. (ZYVC) and Shaoxing City Keqiao District Paradise Silicon Intelligent Robot Industrial Investment Partnership. The two foreign investors make investments in emerging technology while Ekso is involved in developing exoskeletons for the military and rehabilitation services. Exoskeletons are placed on a user’s body as an outer skeleton that can increase strength, reduce pain, and improve overall performance. Under the failed agreement, Ekso would license its manufacturing technology to the two companies. However, this was blocked due to Ekso’s past work with the US Defense Advanced Research Projects Agency (DARPA) which develops emerging technology for the military.
Fourth, national security concerns resulted in CFIUS’s block of the 2016 acquisition of Aixtron S.A. by Fujian Grand Chip Investment Fund (FGCIF), a Chinese investment firm. Aixtron provides semiconductors used in various end markets, including in U.S. and German missile systems. Although Aixtron is a German company, it has U.S. operations. Germany also decided to block this transaction.
Finally, in 2017, CFIUS blocked Canyon Bridge Capital Partners’ (CBCP) $1.3Bn bid to acquire Lattice Semiconductor Company. CBCP, a private equity firm, is owned by China Reform Fund Management Co. which was linked to China’s space program. Lattice is a developer of semiconductors that are used in communications, computing, industrial, and U.S. military operations. Investigations found that China’s central government was attempting to fund this deal.
Conclusions
CFIUS has an increasingly important role in protecting national interests in an increasingly volatile geopolitical environment.
Southeast Spotlight
We are wrapping up this issue of the M&A Wire by spotlighting closed mergers and acquisitions in the Carolinas, Georgia, Tennessee, and Florida over the last 6 months with transaction values of greater than $25MM.
Table 2. Recent Southeast M&A Transactions October 2020-April 2021
| M&A Closed Date | Acquirer | Geographic Locations [Acquirer] | Target/Issuer | Geographic Locations [Seller] | Business Description [Target] | Total Transaction Value ($USD MM, Historical rate) | Implied Enterprise Value/Revenues | Implied Enterprise Value/EBITDA |
|---|---|---|---|---|---|---|---|---|
| 04/14/2021 | Cresco Labs Inc. (CNSX:CL) | Florida | Bluma Wellness Inc. (CNSX:BWEL.U) | Florida | Bluma Wellness Inc., through its subsidiary, One Plant Florida, operates as a medical cannabis company in the State of Florida. | $253.53 | - | |
| 04/14/2021 | AIP, LLC | Florida | SEACOR Holdings Inc. (NYSE:CKH) | Florida | SEACOR Holdings Inc. engages in transportation and logistics, risk management consultancy, and other businesses in the United States and internationally. | $1,234.55 | 1.54x | 11.25x |
| 04/13/2021 | Orbital Energy Group, Inc. (NasdaqCM:OEG) | Georgia | Gibson Technical Services, Inc. | Georgia | Gibson Technical Services, Inc. provides technology services and equipment for cable system operators and equipment manufacturers. | $48.00 | 1.20x | 8.73x |
| 04/06/2021 | Red White & Bloom Brands Inc. (CNSX:RWB) | Florida | Acreage Florida, Inc. | Florida | Nature's Way Nursery of Miami, Inc. engages in the production of medical cannabis. | $60.00 | - - | - |
| 04/06/2021 | Elbit Systems of America, LLC | Florida | Sparton Corporation | Florida | Sparton Corporation, together with its subsidiaries, provides design, development, and manufacturing services for electromechanical devices; and engineered products in electromechanical value stream worldwide. | $380.00 | - | - |
| 04/01/2021 | IQVIA Holdings Inc. (NYSE:IQV) | North Carolina | Q2 Solutions LLC | North Carolina | Q2 Solutions LLC, a clinical trial laboratory services organization, provides bioanalytical, genomics, vaccines, flow cytometry, anatomic pathology, immunoassay, companion diagnostics, and central laboratory services. | $760.00 | - | - |
| 04/01/2021 | Instem plc (AIM:INS) | North Carolina | d-Wise Technologies, Inc. | North Carolina | d-Wise Technologies, Inc. provides software solutions and IT consulting services to healthcare and life sciences industry. | $30.95 | - | - |
| 04/01/2021 | Sunnova Energy Corporation | Florida | Sunstreet Energy Group, LLC | Florida | Sunstreet Energy Group, LLC provides transmission and distribution of solar energy. | $297.80 | - | - |
| 03/31/2021 | Sangoma Technologies Corporation (TSXV:STC) | Florida | Star2Star Communications, LLC | Florida | Star2Star Communications, LLC provides cloud-based voice and unified communications solutions to small and mid-sized businesses, and large enterprises. | $438.04 | 5.52x | 29.89x |
| 03/29/2021 | Charles River Laboratories International, Inc. (NYSE:CRL) | Tennessee | Cognate BioServices, Inc. | Tennessee | Cognate BioServices, Inc. provides cell and cell-mediated gene therapy products development and manufacturing services to biotechnology companies and institutions in the United States. | $875.00 | - | - |
| 03/18/2021 | Neon Bloom, Inc. (OTCPK:NBCO) | Florida | Bazelet Health Systems, Inc. | Florida | Bazelet Health Systems, Inc., a healthcare organization, focuses on medical treatment and healthcare through genetics, scientific, evidence-based research, education, and products. | $216.00 | - | - |
| 03/15/2021 | Black Rock Petroleum Company (OTCPK:BKRP) | Florida | Torrance Petroleum Company | Florida | Torrance Petroleum Company owns a 520 acre oilfield in the Monterey Shale. | $294.87 | - | - |
| 03/12/2021 | Renaissance Learning Inc. | Florida | Nearpod Inc. | Florida | Nearpod Inc. develops a cloud-based platform to enhance the learning process in classrooms and distance learning. | $650.00 | - | - |
| 03/03/2021 | Ardian | Georgia | PRGX Global, Inc. | Georgia | PRGX Global, Inc., together with its subsidiaries, provides recovery audit services to businesses having payment transactions and procurement environments worldwide. | $235.02 | 1.29x | 8.70x |
| 03/01/2021 | Champion Home Builders, Inc. | Georgia | Scotbilt Homes, Inc. | Georgia | Scotbilt Homes, Inc. manufactures homes. | $53.00 | - | - |
| 02/26/2021 | Ayr Wellness Inc. (CNSX:AYR.A) | Florida | Liberty Health Sciences Inc. | Florida | Liberty Health Sciences Inc. engages in the production and distribution of medical cannabis in the United States. | $308.16 | 5.74x | 10.13x |
| 02/24/2021 | Solar Integrated Roofing Corporation (OTCPK:SIRC) | South Carolina | Cornerstone Construction, LLC | South Carolina | Cornerstone Construction, LLC offers residential and commercial roofing construction services. | $62.40 | 4.16x | - |
| 02/23/2021 | Beam Therapeutics Inc. (NasdaqGS:BEAM) | Georgia | Guide Therapeutics, LLC | Georgia | Guide Therapeutics, Inc., through its proprietary screening platform, discovers and develops nanoparticles to deliver therapeutics for gene therapy. | $440.00 | - | - |
| 02/16/2021 | Flex-Tek Group, Inc. | Georgia | Royal Metal Products LLC | Georgia | Royal Metal Products LLC offers residential and light commercial sheet metal HVAC products. | $107.58 | 1.39x | - |
| 02/01/2021 | Knight-Swift Transportation Holdings Inc. (NYSE:KNX) | South Carolina | Eleos Technologies, LLC | South Carolina | As of February 1, 2021, operates as a subsidiary of Knight-Swift Transportation Holdings Inc. | $41.30 | - | - |
| 02/01/2021 | AdaptHealth Corp. (NasdaqCM:AHCO) | Florida | AeroCare Holdings, Inc. | Florida | AeroCare Holdings, Inc. distributes home medical equipment in the United States. | $2,025.66 | - | - |
| 01/31/2021 | Dream Finders Homes, LLC | Florida | Century Homes Florida, LLC | Florida | Century Homes Florida, LLC provides homebuilding services. | $28.90 | - | - |
| 01/12/2021 | Porch Group Inc. (NasdaqCM:PRCH) | Florida | V12 | Florida | V12 provides Data-as-a-Service solutions to power right-time marketing return on investments. | $28.00 | - | - |
| 01/04/2021 | OneWater Marine Inc. (NasdaqGM:ONEW) | Florida | Roscioli Yachting Center, Inc. | Florida | Roscioli Yachting Center, Inc. operates a shipyard and yacht repair facility. | $30.40 | 2.03x | - |
| 01/04/2021 | Clear Link Technologies, LLC | Florida | Taylor Media Corp. | Florida | Taylor Media Corp., doing business as The Penny Hoarder, publishes personal finance information on its portal. | $102.50 | 2.05x | - |
| 12/31/2020 | Caesarstone USA, Inc. | Florida | Omicron Supplies, LLC | Florida | Omicron Supplies, LLC imports and sells natural stone products. | $27.00 | - | - |
| 12/31/2020 | Malibu Boats, LLC | Florida | Maverick Boat Group, Inc. | Florida | Maverick Boat Group, Inc. designs and manufactures shallow-water flat skiffs, flatboats, and technical poling skiffs. | $150.00 | 1.25x | - |
| 12/31/2020 | Safe Harbor Marinas, LLC | Florida | Rybovich Boat Company, LLC | Florida | Rybovich Boat Company, LLC engages in hauling, yacht refinishing, mechanical work, carpentry work, electrical work, mast and rigging, and metal fabrication for the superyacht industry. | $368.80 | - | - |
| 12/30/2020 | First Reserve Corporation | Florida | The Goldfield Corporation | Florida | The Goldfield Corporation, together with its subsidiaries, provides electrical transmission construction and maintenance services to the energy infrastructure industry throughout the Southeast and mid-Atlantic regions of the United States and Texas. | $233.86 | 1.15x | 8.00x |
| 12/28/2020 | UFP Industries, Inc. (NasdaqGS:UFPI) | Florida | PalletOne, Inc. | Florida | PalletOne, Inc. manufactures and distributes pallet-related products in the United States. | $232.00 | - - | 6.27x |
| 12/23/2020 | Akzo Nobel N.V. (ENXTAM:AKZA) | Florida | New Nautical Coatings, Inc. | Florida | New Nautical Coatings, Inc., doing business as Sea Hawk Paints, develops and manufactures antifouling paints and coatings. | $71.97 | - | - |
| 12/23/2020 | PPG Industries, Inc. (NYSE:PPG) | North Carolina | Ennis-Flint Inc. | North Carolina | Ennis-Flint Inc. manufactures and supplies pavement marking materials. | $1,150.00 | - | - |
| 12/23/2020 | The Home Depot, Inc. (NYSE:HD) | Georgia | HD Supply Holdings, Inc. | Georgia | HD Supply Holdings, Inc. operates as an industrial distributor in North America. | $10,315.42 | 1.34x | 8.77x |
| 12/18/2020 | Central Garden & Pet Company (NasdaqGS:CENT) | Georgia | P & M Solutions, LLC | Georgia | P & M Solutions, LLC, doing business as DoMyOwn, online retails pest control products in the United States. | $83.00 | - | - |
| 12/18/2020 | Blackstone Real Estate Income Trust, Inc. | Florida | Simply Storage Management, LLC | Florida | Simply Storage Management, LLC, doing business as Simply Self Storage LLC, operates a network of self-storage facilities. | $1,200.00 | - | - |
| 12/17/2020 | Assurant, Inc. (NYSE:AIZ) | Tennessee | EPG Insurance, Inc. | Tennessee | EPG Insurance, Inc. offers insurance products and services for heavy equipment and trucking industries. | $43.00 | - | - |
| 12/16/2020 | SPS Commerce, Inc. (NasdaqGS:SPSC) | Florida | Data Masons Software, LLC | Florida | Data Masons Software, LLC develops EDI solutions for consumer goods, industrial and distribution businesses, and resellers. | $100.00 | - | - |
| 12/15/2020 | National Bank of Canada (TSX:NA) | Georgia | Credigy Solutions Inc. | Georgia | Credigy Solutions Inc. offers specialty finance solutions. | $300.00 | 3.69x | - |
| 12/14/2020 | Sun Capital Partners, Inc. | Florida | Miami Beach Medical Group LLC | Florida | Miami Beach Medical Group LLC operates a medical and wellness center in South Florida. | $500.00 | - | - |
| 12/10/2020 | CleanSpark, Inc. (NasdaqCM:CLSK) | Georgia | ATL Data Centers LLC | Georgia | ATL Data Centers LLC operates data centers for e-commerce and bitcoin mining. | $28.08 | - | - |
| 12/09/2020 | Ventures Acquisition LLC | North Carolina | Piedmont Coca-Cola Bottling Partnership | North Carolina | Piedmont Coca-Cola Bottling Partnership distributes and markets nonalcoholic beverages in North Carolina and South Carolina. | $100.00 | - | - |
| 12/02/2020 | FLIR Systems, Inc. (NasdaqGS:FLIR) | Florida | Altavian, Inc. | Florida | Altavian, Inc. manufactures open-architecture unmanned aerial systems (UAS) for collecting data intelligence in the toughest commercial, civil, and defense environments. | $36.60 | - | - |
| 12/01/2020 | Bayer Aktiengesellschaft (XTRA:BAYN) | North Carolina | Asklepios BioPharmaceutical, Inc. | North Carolina | Asklepios BioPharmaceutical, Inc., a biotechnology company, develops and delivers adeno-associated virus gene therapy. | $4,000.00 | - | - |
| 11/25/2020 | Four Twenty Corporation | Georgia | SweetWater Brewing Company, Inc. | Georgia | SweetWater Brewing Company, Inc. operates as a microbrewery. | $370.67 | 5.43x | 16.09x |
| 11/04/2020 | Shift4 Payments, Inc. (NYSE:FOUR) | Florida | Infomart2000 Corp. | Florida | Infomart2000 Corp., doing business as 3dcart, designs and develops eCommerce software to business clients in a range of industries. | $59.10 | - | - |
| 10/29/2020 | SolarWinds Corporation (NYSE:SWI) | North Carolina | SQL Sentry, LLC | North Carolina | SQL Sentry, LLC, a software developer, developed a SQL Server and Microsoft Data Platform. | $142.50 | - | - |
| 10/20/2020 | Splunk Inc. (NasdaqGS:SPLK) | Georgia | Rigor, Inc. | Georgia | Rigor, Inc. develops web-based performance monitoring and optimization software that helps companies to optimize and operate web and mobile applications. | $38.00 | - | - |
| 10/13/2020 | Entravision Communications Corporation (NYSE:EVC) | Florida | Cisneros Interactive | Florida | Cisneros Interactive offers digital advertising services. | $29.90 | - | - |
Source: S&P Captial IQ