Testy ties: Why Lattice deal may hit a snag
Article By : Junko Yoshida
Is Calif.-based buyout fund Canyon Bridge considered a Chinese company? And does Lattice make and sell technology for dual-purpose applications?
What could trip up a proposed acquisition of a U.S. tech company, at least in theory? For one, a buyer with ties to the Chinese central government and a U.S. company whose technology has potential for dual-purpose applications is an alarming combination that may invite suspicion among regulators concerned about national security.
This scenario might become the case with a deal announced earlier this month in which Canyon Bridge Capital Partners agreed to buy U.S.-based chip maker Lattice Semiconductor Corp for ₹8,666.09 crore ($1.3 billion).
Reuters reported that Canyon Bridge Capital Partners “is funded partly by cash originating from China's central government and also has indirect links to its space program, Chinese corporate filings show.” Reuters, in a review of about a dozen filings from China's state-run corporate register, has concluded that “the financial investment in Canyon Bridge originates from China’s State Council, the top decision-making body of the government.”
If true, the acquisition of Lattice Semiconductor could hit a snag. At stake is the possibility of rejection by the Committee on Foreign Investment in the US (CFIUS). Even if approved, there might be a delay in closing the transaction—scheduled for early 2017 as promised by Lattice at the time of the deal’s announcement.
CFIUS, an inter-agency committee, has authority to initiate review of almost any foreign investment in a U.S. company or asset that may have an impact on national security.
Fresh in the memory of many electronics company executives is what happened with Western Digital Corp. earlier this year. Unisplendour, a unit of China's Tsinghua Unigroup, scrapped a ₹25,198.32 crore ($3.78 billion) minority investment in the U.S. hard-disk maker after CFIUS said it would review the transaction.
Canyon Bridge: US fund?
In the case of Canyon Bridge and Lattice, questions that matter to CFIUS are two-fold. First, is the Palo Alto, Calif.-based buyout fund Canyon Bridge considered as a Chinese company? Second, does Lattice make and sell technology for dual purpose applications?
According to the Form Schedule 14A Lattice filed with the Securities and Exchange Commission (SEC) on Nov. 21, Canyon Bridge is a recently established U.S.-based private equity buyout fund, currently with only one limited partner. The partner is “a wholly owned subsidiary of China Venture Capital Fund Corporation Limited, a large Chinese investment fund.”
What Reuters has uncovered goes further: China Venture Capital Fund is a unit of China Reform Holdings Corp.
Based on Chinese corporate filings dated June 16 this year, Reuters reported:
China’s State Council is the only shareholder in Beijing-based China Reform Holdings…
…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.
We don’t know at this point if Canyon Bridge’s links to the Chinese state, laid out by Reuters above, will prove to be enough to invite the scrutiny of CFIUS.
However, the Lattice deal is one of the largest attempted by a Chinese-backed company in the U.S. semiconductor sector.
What’s different from China’s previous attempts to buy U.S. tech companies is that the buyer in the Lattice case is described as the U.S. buyout fund.
In its SEC filing, Lattice called Canyon Bridge a “recently established U.S.-based private-equity buyout fund,” whose co-founders include well-known names in the U.S. chip industry. Canyon Bridge’s cofounders include “Ben Chow and Ray Bingham, collectively have more than 50 years of experience in the technology, private equity and M&A markets,” the filing said.
Who's behind the fund?
Chow, who served early in his career as global product manager at Applied Materials and a research engineer with Boeing Phantom Works, is the founder and managing general partner of Canyon Bridge Capital Partners. Prior to founding Canyon Bridge, he was a managing director with China Reform Fund Management Ltd., a partner with Beijing Leading Capital, and a managing director with SIG China, according to Canyon Bridge’s website. At Warburg Pincus Asia, he was in charge of semiconductor investments in North Asia and was an associate at Rustic Canyon Partners, a TMT focused VC fund in Los Angeles.
Bingham, a co-founder and a general partner of Canyon Bridge, is well known in Silicon Valley. He currently serves as executive chairman of Cypress Semiconductor, chairman of Flextronics International Ltd., chairman of Trinet and the lead Independent board director of Oracle Corporation. Bingham also worked at Cadence Design Systems where he held various executive management roles, including executive chairman, president and CEO and CFO.
Canyon Bridge also lists David Wang as a senior advisor. Before joining Canyon Bridge, Wang was president, CEO and executive director of Semiconductor Manufacturing International Corporation (SMIC), CEO of Huahong Group and chairman of Huahong NEC. He worked at Applied Materials for 25 years in various executive management positions, including president of Applied Materials Asia and global executive vice president.
The names of the key executives at Canyon Bridge read like a who’s who list of leaders in bridging the U.S. semiconductor industry and China over the last few decades. Does this roster make Canyon Bridge enough of a U.S. private equity fund—despite funding coming predominantly from the China Reform Fund?