Forced sales of Grindr, StayNTouch latest casualties as regulators increase merger, foreign investment scrutiny

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The rising number of regulators examining deals means some may not want to act first and instead will look to see what others are doing, potentially slowing deals, Mordaunt said. “They might say, ‘we’re not sure we want to stick our neck out and reach our decision until we can see what others are doing’,” he said.

The US remains one of the most active in terms of blocking deals and implemented new rules last month to scrutinise even minority investments by foreign companies, particularly in deals involving advanced technology or personal data of US residents.

On Friday, US President Donald Trump Beijing Shiji Information Technology, a unit of China’s Shiji Group, to sell its ownership interest in StayNTouch, a US hotel software company, saying the acquisition “threatens to impair the national security of the United States” and raised questions about potential access to customer data.

“Shiji is not a threat to US security in any way,” a Shiji spokeswoman said. “We offered a range of significant proposals to mitigate any concerns the US Government might have, including further restricting access to guest data and appointing an independent monitor to ensure these protections. Unfortunately, those offers were rebuffed.”

Chinese gaming company Beijing Kunlun Technology said in a stock exchange filing on Friday it had agreed to sell gay dating app Grindr for US$608.5 million, nearly a year after the US government had ordered it to divest the company. The US government ordered both the StayNTouch and Grindr sales retroactively after the deals had closed.

Bloomberg News also reported on Friday that Cfius separately recommended Trump block Infineon Technologies’ planned US$8.7 billion acquisition of Cypress Semiconductor on national security grounds. China is the German semiconductor maker’s single largest market, accounting for about 27 per cent of its revenue in fiscal 2019, which ended September 30.

According to its most recent data available, Cfius conducted a review of 237 transactions in 2017, a 38 per cent increase over the 172 transactions reviewed in the prior year. Eight transactions were abandoned in 2016 because the inter-agency committee could not identify mitigation measures, companies were unwilling to comply with those measures or could not satisfy the agency’s process requirements, compared with 26 in 2017.

Those numbers were likely higher in 2018 and in 2019 as Congress has since expanded the review powers of Cfius, which includes representatives from the Justice Department, the State Department and the Treasury Department.

Antitrust scrutiny, along with an 18-month trade war between the US and China and a campaign by Beijing to reduce corporate debt, cut sharply into outbound deal activity from China in recent years. Transactions by Chinese companies have become more politically sensitive in Europe and the US and activity could be

severely limited for as long as a decade

, according to some observers.

Overall, global M&A activity declined by 6.9 per cent to US$3.3 trillion last year against the backdrop of the trade war, according to financial data provider MergerMarket. Outbound transactions fell by 24.5 per cent in 2019 in the Asia-Pacific region, excluding Japan.

As scrutiny has risen, Chinese companies in particular have avoided deals and investments in sensitive industries in Europe and the US, cutting into overall deal activity, and have shifted their focus to other markets, such as southeast Asia.

The number of deals that were withdrawn or pending regulatory approval globally fell by more than half last year after spiking in 2018, according to financial data provider Refinitiv. There were 595 deals withdrawn or pending approval in 2019, compared with 1,219 in 2018, the highest level in the past four years, Refinitiv said.

There only have been 12 deals that have been withdrawn or pending approval to begin this year as activity remains muted.

Law firm Wachtell, Lipton, Rosen & Katz said in a client memo last month that a large percentage of foreign investments remain “well-received” and are “not politicised”, but non-US acquirers should consider potential political fallout and regulatory hurdles, particularly in sensitive industries, such as energy, financial services and telecommunications.

“Regulation in these areas is often complex, and political opponents, reluctant targets and competitors may seize upon perceived weaknesses in an acquirer’s ability to clear regulatory obstacles as a tactic to undermine a proposed transaction,” Wachtell partner Adam O. Emmerich wrote in the February 4 memo.

Outbound deal flow also has been sluggish this year as the coronavirus epidemic has limited the ability of bankers to meet clients face-to-face and forced some issuers to resort to virtual roadshows for initial public offerings or other transactions, particularly in Asia.

The outbreak, which originated in Wuhan in Hubei province, has infected more than 109,000 people worldwide, disrupted the global supply chain and caused economists to cut their outlook for global growth this year as people stay home and travel less.

Through March 5, the number of cross-border mergers and acquisitions slipped by 23 per cent to 1,804 transactions worldwide this year, the slowest start to the begin the year since 2015, according to Refinitiv. That compared with 2,339 deals globally in the same period last year. Inbound activity fell 14.7 per cent this year in the US and 10.3 per cent in China, Refinitiv said.

Regulators also are making companies open their pocketbooks more by levying higher fines for anticompetitive behaviour and improper use of customer data.

Global antitrust fines have nearly doubled in the past four years, rising from €8.49 billion (US$9.7 billion) in 2016 to €15.5 billion last year, according to PaRR’s 2020 Global Trends Monitor. That included a €1.49 billion fine by European regulators against Google for abusive practices in online advertising.

The number of fines related to merger reviews, for activities ranging from providing misleading information to hindering an inquiry, also have skyrocketed from €130 million in 2018 to €207 million last year, according to PaRR

“Congressional lawmakers are expected to keep the heat on enforcers – as they have throughout 2019 – over what some have called ‘lax enforcement’” in the tech space, according to PaRR.

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