Exclusive: Chinese government money backs buyout firm’s deal for US chip maker

01-Dec-2016 Intellasia | Reuters | 6:00 AM Print This Post

Canyon Bridge Capital Partners, a buyout fund that agreed to acquire US-based chip maker Lattice Semiconductor Corp for $1.3 billion earlier this month, is funded partly by cash originating from China’s central government and also has indirect links to its space programme, Chinese corporate filings show.

Reuters, in a review of about a dozen filings from China’s state-run corporate register, has established that the financial investment in Canyon Bridge originates from China’s State Council, the top decision-making body of the government. This link could draw more US regulatory scrutiny over the Lattice deal on concerns that technology gained through the purchase could be used by China’s military, according to analysts who follow the chip industry and monitor foreign investment review decisions by the US government.

“It is a red flag,” James Lewis, a researcher at the centre for Strategic and International Studies, said of Canyon Bridge’s links to the Chinese state. “It’s not a deal killer, but deals like this sometimes run into roadblocks.”

Portland, Oregon-based Lattice makes programmable chips known as “field programmable gate arrays” that allow companies to put their own software on silicon chips for different uses. It does not sell chips to the US military, but its two biggest rivals – Xilinx and Intel Corp’s Altera – make chips that are used in military technology.

Shares in Lattice fell as much as 4.8 percent in early Monday trade, but had recouped losses to close down 2.2 percent.

The Committee on Foreign Investment in the United States (CFIUS), a US government body that conducts security reviews of proposed acquisitions by foreign firms, has yet to sign off on the agreement. How CFIUS judges the potential military applications of Lattice’s programmable chips will help determine if the deal goes ahead or not, industry analysts and CFIUS experts say. CFIUS declined to comment for this story.

The Lattice deal is one of the largest attempted by a Chinese-backed firm in the US semiconductor sector. It is unclear if CFIUS will block the purchase, but a rejection would deal another blow to the Chinese, who have invested a record $200 billion in overseas acquisitions this year. The United States, Germany and Australia have scuttled Chinese takeover bids in recent months due to concerns they may serve China’s national security interests over their own.

Headquartered in Palo Alto, California, Canyon Bridge was formed recently with Lattice being its first announced deal. It describes itself as a “US-based private equity buyout fund focused on providing strategic capital” to technology companies, according to its website. It counts Ray Bingham, an executive chair of Cypress Semiconductor Corp, chair of Flex Ltd and an Oracle Corp board member, as one of its co-founders. Bingham could not be reached for comment.

The only investor in Canyon Bridge is a unit of China Venture Capital Fund Co Ltd, according to a filing made by Lattice to the US Securities and Exchange Commission last Tuesday. The China Venture Capital Fund is a unit of China Reform Holdings Corp, according to the website of China Reform Holdings. For a graphic, click http://tmsnrt.rs/2gegSQc

A Reuters review of Chinese corporate filings dated June 16 this year shows that China’s State Council is the only shareholder in Beijing-based China Reform Holdings. Reuters was unable to determine if China Reform Holdings has another source of financing.

China Reform Holdings, on its website, states the government holds the investment through the State-owned Assets Supervision and Administration Commission (SASAC), a special unit under the State Council responsible for supervising and managing the country’s non-financial government-owned enterprises.

Reuters could not determine if the ownership structure has changed since the filing.

SASAC did not respond to a fax and telephone calls for comment.

Canyon Bridge and Lattice declined to comment for this story. Canyon Bridge’s legal adviser on the Lattice bid, Jones Day, had said publicly that Canyon Bridge had “limited partners with funding coming predominately from the China Reform Fund.” Limited partners are investors in private equity funds. China Reform Fund is a unit of China Reform Holdings.

China Reform Holdings declined to comment and China Venture Capital Fund could not be reached for a comment. Jones Day declined further comment.

According to its 2014 annual report that was published last year, China Reform Holdings is positioned to “invest in strategic emerging industries related to national security and the lifeblood of the national economy.”

Chinese corporate filings also show that China Reform Holdings is a shareholder in China Aerospace Investment Holdings Ltd via a separate unit, Guoxin International Investment Corp Ltd Guoxin International, which was created in 2012 to help Chinese state-owned companies expand within China and abroad, could not be reached for comment.

China Aerospace Investment is the main investment manager of China Aerospace Science and Technology Corp (CASC), which develops and launches all Chinese rockets, satellites, manned spacecraft, and space stations as well as all strategic missiles and other weapons, according to CASC’s website.

China has been working to develop its space programme for military, commercial and scientific purposes. Beijing has said its space programme is for peaceful purposes.

While indirect, those ties between China Reform Holdings, China Aerospace and a US company that makes technology with potential military applications will likely get attention from US regulators, according to CFIUS experts.

“It doesn’t mean they won’t get cleared, but they will get a harder look from CFIUS if the acquiring company is state backed than if it was a private backed company,” said Paul Marquardt, an attorney with Cleary Gottlieb who specialises in CFIUS actions.

China Aerospace’s corporate filings and annual report did not detail the size of Guoxin International’s stake in the firm, except to show that at the end of 2015 Guoxin was one of as many as 19 shareholders, and that it held a 20 percent stake.

A source close to the deal who was not authorised to speak on the record said that Lattice and Canyon Bridge would disclose all sources of Canyon Bridge’s capital in filings with US regulators.

The proxy statement on the proposed Lattice bid, which will have more details of the offer, has yet to be filed. http://finance.yahoo.com/news/exclusive-chinese-government-money-backs-023146775.html;_ylt=AgnNvbwar with China only way to win Beijing’s cooperation over N. Korea: US expert

01/Dec/2016 Intellasia | Korea Herald

The incoming US administration of Donald Trump should impose powerful secondary sanctions on Chinese firms and wage a trade war with China in order to force Beijing to stop its support of North Korea, a US expert said Monday.

Gordon Chang, an East Asia security expert, made the case in an article in Forbes magazine, accusing China of failing to sincerely carry out UN sanctions and stressing that waging a trade war on China “may be the only way to obtain Beijing’s cooperation on North Korea.”

“North Korea looks impossible to solve, and it is if we see China as on our side. It is not. But if we treat China as part of the problem, which it most certainly is, then we can begin to craft solutions, like secondary sanctions,” Chang said in the article.

“Xi Jinping, the Chinese leader, will stop supporting North Korea only when the costs of doing so are too high. So far, his country has suffered almost no penalty,” he said.

To impose costs, the Trump administration could cut “offending Chinese banks off from the global financial system, sanction every Chinese proliferator, and impose his threatened 45 percent across-the-board tariff on China’s goods,” the expert said.

China will try to retaliate, but has few effective options, Chang said, noting that China ran a $334.1 billion trade surplus in goods and services against the United States last year.

“Trade-surplus countries are vulnerable in trade wars, and that is especially true of a China with an already fragile economy that is dependent on the American market,” he said.

China is North Korea’s last-remaining major ally, and a key provider of food and fuel supplies. But it has been reluctant to use its influence over Pyongyang for fears that pushing the regime too hard could result in instability in the North and hurt Chinese national interests.

Analysts say that China often increased pressure on the North in the past, too, especially when Pyongyang defied international appeals, and carried out nuclear tests and other provocative acts, but China never went as far as to cause real pain to the North.

“A more coercive American approach may not work, but the current set of policies, in place for two decades, are guaranteed to fail. They have resulted in an even more irresponsible Beijing and a nuked-up Kim regime,” Chang said.

“So it’s time for fresh approaches, perhaps even to wage that trade war with China, not just to protect the jobs of American workers and the profits of American businesses but the lives of American citizens,” he said.

http://www.koreaherald.com/view.php?ud=20161129001014

 


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