U.S. poised to rule on risk of China cash behind Lattice bid

By Bloomberg   |   11 June 2017   |   4:24 am

Lattice Semiconductor Corp<br />


The U.S. is poised to weigh in on whether the sale of chipmaker Lattice Semiconductor Corp. could pose a risk to national security. The possible rub: While the buyer is a private-equity firm with a Silicon Valley address, the money behind the deal comes from Beijing.

The panel that reviews foreign acquisitions of American businesses is due to issue a decision on the sale of Portland, Oregon-based Lattice as soon as this week, five months after opening its examination of the transaction. CFIUS, as the secretive Committee on Foreign Investment in the U.S. is known, has taken a tough line against China’s campaign to acquire semiconductor technology and develop its domestic chip industry.

The U.S. has portrayed China’s investment push — $150 billion over 10 years — as a risk to U.S. national security, and the panel’s review of the $1.3 billion Lattice deal will put the Trump administration’s stamp on the issue. Lattice is one of the few makers of programmable logic chips, which have a wide variety of uses because their attributes can be changed using software. Such semiconductors are frequently used in components for military communications.

The Lattice deal’s twist is that the potential buyer looks American. The suitor, private-equity firm Canyon Bridge Capital Partners, is described by both sides in the deal as headquartered in Palo Alto, California. According to regulatory filings, though, Canyon Bridge’s main office is in Beijing. Canyon Bridge, according to regulatory filings, is investing on behalf of a Chinese venture capital fund that is sponsored by China Reform Fund Management, a state-owned asset manager.

China Reform made a run at Lattice before, in April 2016. The sides discussed the CFIUS approval process, according to Lattice’s regulatory filings, with the company considering the need for a breakup fee should the panel reject the deal. The sides didn’t reach an agreement. One of the executives representing China Reform in those 2016 talks was Benjamin Chow, who co-founded Canyon Bridge last year, according to the filings.

Passive Investors?
With Canyon Bridge at the head of the deal, the firm could potentially argue to CFIUS that its Chinese financiers are passive investors, according to Peter Thomas, a lawyer at Simpson Thacher & Bartlett in Washington who works on cross-border deals.

“If that’s what they’re trying to achieve, I think it’s highly unlikely that that would improve the odds of success in obtaining CFIUS clearance,” Thomas said, adding that the panel could conclude that the deal amounts to a Chinese acquisition and treat it with caution.

China Reform didn’t respond to a request for comment. Lattice said in a statement that it has had “continued, ongoing and productive discussions with CFIUS.”

Lattice shares fell 1 percent to $6.87 at 1:10 p.m. in New York.

Canyon Bridge co-founder Chow said in a written statement that China Reform and the fund it created, China Venture Capital Fund Corp., “agreed that the most effective way to invest in Lattice was through Canyon Bridge,” whose partners had more experience in the semiconductor industry and investing in the U.S. Canyon Bridge has been transparent with Lattice executives and U.S. government bodies, Chow added.

CFIUS Backlog
The Lattice deal is among several under review by CFIUS, which is led by the Treasury Department and includes officials from the Commerce, State and Defense departments. CFIUS reviews have been slowed because many departments are still awaiting senior-level staff under the new administration. The panel is also grappling with a record number of filings.

The worry over China has frustrated several chip deals. Last year, President Barack Obama upheld a recommendation by CFIUS to block the sale of semiconductor-equipment supplier Aixtron SE to a Chinese buyer because of the military applications of Aixtron’s technology. President Donald Trump’s harsh criticism of China has led some analysts and lawyers to question whether Washington might take a tougher stance on Chinese ownership of American businesses, particularly in technology and critical infrastructure.

Some Democratic and Republican lawmakers have urged the Treasury Department to disallow the Lattice takeover, saying Canyon Bridge appeared to be “a legal construction intended to obfuscate the involvement” of numerous Chinese state-owned enterprises.

Founding Canyon Bridge
Chow, the China Reform managing director behind the approach to Lattice last year, is a China-born U.S. citizen who moved to the U.S. as a teenager, his spokesman said. He received a PhD in aeronautics from the California Institute of Technology and has two decades of private equity and venture capital experience, according to Canyon Bridge’s website.

Among his co-founders at Canyon Bridge is a longtime U.S. semiconductor executive, Raymond Bingham, who is also the executive chairman at San Jose, California-based chip manufacturer Cypress Semiconductor Corp. Bingham received a $1.2 million bonus for signing on at Canyon Bridge, along with a stake of 10 to 25 percent in the private equity firm, regulatory filings show. Through Cypress, he declined to comment.

Canyon Bridge’s mandate is to make investments in companies in the semiconductor industry mainly in the U.S., the firm said in a regulatory filing. Lattice is its first acquisition target.

Confidential Reviews
Representatives from Lattice and Canyon Bridge met with CFIUS officials in October, before the deal was announced, to provide details on the potential takeover, Lattice said in a filing.

The chipmaker said on March 24 that the companies were refiling the deal with CFIUS after an initial 75-day review expired without a decision from the panel. Lattice didn’t give the refiling date, but a review that began that day would end this week. There can be a time lag between the refiling and the acceptance of the filing that starts the clock, and deadlines can be extended.

At the end of a review, CFIUS can clear transactions, impose changes to a deal to protect national security or recommend that the president block them. Companies sometimes abandon transactions when they can’t resolve CFIUS concerns. The panel’s reviews are confidential, and it doesn’t make public comments about specific transactions.

Canyon Bridge might walk away from the Lattice deal if CFIUS imposes conditions that force the U.S. private equity firm to become a passive shareholder or restrict its ability to control the company, according to the merger agreement.

(A previous version of this article was corrected to reflect that Raymond Bingham is the executive chairman at Cypress Semiconductor)




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