Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Cross-Border M&A Gets Torpedoed by CFIUS
Transcript
- Lucas: If you're buying a US company and you're not a US person, there's a gatekeeper you need to know about. It's called CFIUS — the Committee on Foreign Investment in the United States. Luna: CFIUS. I've seen it kill deals, but a lot of operators I talk to don't really understand how it works. They just know it's a risk. Lucas: Right. And the risk is real. In 2018, CFIUS effectively killed what would have been the largest technology acquisition in history: Broadcom's attempted takeover of Qualcomm. The deal was valued at over one hundred and seventeen billion dollars. Luna: That's the one where the US government stepped in and said no, basically. But Broadcom is based in Singapore — it's not exactly a hostile nation. Lucas: Exactly, and that's the nuance. CFIUS isn't just about China or Russia. It reviews any transaction that could result in foreign control of a US business, if that control could threaten national security. The standard is broad, and it's getting broader. In the Broadcom case, the committee was concerned about Qualcomm's leadership in 5G technology and the risk that Broadcom might cut R&D or sell off critical assets. Luna: So it's not just about who owns the company. It's about what the acquirer might do with it after the deal closes. Lucas: Precisely. And CFIUS has the power to impose conditions — mitigation agreements — or, in extreme cases, order divestiture. The committee is made up of nine members, including the Treasury Secretary, the Attorney General, and the heads of Defense, Homeland Security, and Commerce. Treasury chairs it. Luna: That's a heavy table. And I know the rules changed in 2018 with the Foreign Investment Risk Review Modernization Act — FIRRMA. That expanded CFIUS's jurisdiction significantly. Lucas: Yes. Before FIRRMA, CFIUS could only review transactions that resulted in 'control' — meaning majority ownership or effective control. Now it also covers certain non-controlling investments in businesses that deal with critical technology, critical infrastructure, or sensitive personal data. So even a minority stake can trigger a filing. Luna: That's huge for venture capital and private equity. A lot of minority investments that wouldn't have been reviewed before now require mandatory declarations. Lucas: And the penalty for not filing is severe. CFIUS can initiate a review unilaterally, even after the deal closes. And if it finds a problem, it can force divestiture — unwind the whole transaction. That's a nightmare scenario for any buyer. Luna: So what's the practical takeaway for a middle-market operator who's considering buying a US target? When should they think about CFIUS? Lucas: They should think about it before they sign the letter of intent. The first question: is the foreign buyer a national of a country that raises concerns? That's subjective, but China, Russia, and Iran are high on the list. Second: does the US target operate in a sensitive sector? That includes semiconductors, telecommunications, defense, energy, biotech, and any company that handles large amounts of personal data. Luna: And even if the target seems innocuous, if it has contracts with the US government, especially defense or intelligence, that can trigger scrutiny. Lucas: Right. A small software company that provides cybersecurity services to the Department of Defense — that's a classic CFIUS case. The buyer might be from a friendly country like the UK or Japan, but the review still happens. And the process takes time. Luna: How long does a typical review take? Lucas: The initial review period is thirty days. If CFIUS finds issues, it opens a forty-five-day investigation. So best case, you're looking at roughly seventy-five days. But if the parties agree to a mitigation agreement, or if the committee needs more information, it can stretch longer. For complex deals, we've seen nine to twelve months. Luna: That's a long time to keep a deal under wraps. And it creates uncertainty for financing, for employees, for customers. Lucas: Exactly. And that's why you see some acquirers choose to withdraw rather than fight. In the Broadcom case, President Trump issued an executive order prohibiting the transaction. Broadcom withdrew its offer and abandoned the deal. The stock price of both companies fell sharply. Luna: Let's talk about what acquirers can do to improve their odds. Structuring matters, right? Lucas: Absolutely. One common tactic is to propose a mitigation agreement upfront. For example, the buyer might agree to maintain the target's US headquarters, keep certain R&D spending levels, or appoint US citizens to the board. Another is to use a us based acquisition vehicle — a special purpose company incorporated in Delaware, for instance — to reduce the foreign profile. Luna: I've also seen buyers voluntarily file even when not required, just to get a 'safe harbor' letter. That gives them legal certainty that CFIOS won't come back later. Lucas: Right. CFIUS does offer a voluntary filing process, and many sophisticated buyers use it even for deals that fall below the mandatory threshold. The cost of a filing — legal fees, preparation — is small compared to the risk of a forced divestiture. Luna: And the trend is toward more scrutiny, not less. Since FIRRMA, the number of filings has doubled. In 2020, there were over a hundred and fifty notices filed. And the committee is getting more aggressive with mitigation. Lucas: One interesting case from 2020 was the acquisition of a us based video surveillance company by a Chinese buyer. CFIUS ordered the buyer to divest the US assets because of concerns about data security. The company had contracts with local law enforcement. That was a relatively small deal — under fifty million dollars — but it got blocked. Luna: So size doesn't protect you. If you're in a sensitive area, even a small deal can get caught. Lucas: Exactly. And that's the message for our listeners: if you're a foreign buyer or you're advising one, you need a CFIUS strategy from day one. Don't assume you'll be fine because you're from a friendly country or because the target seems small. The committee has a wide net. Luna: And if the deal does get blocked, there's no real appeal. The decision is made by the President, and it's not subject to judicial review on the merits. So it's essentially final. Lucas: Right. That's why prevention is better than cure. You want to design the transaction so that it either avoids CFIUS scrutiny altogether or passes the review cleanly. That might mean selling off certain assets before the deal, or structuring the acquisition as a joint venture with a US partner. Luna: And the US partner can be a powerful ally. A domestic co-investor can help signal that the deal is in the national interest. Lucas: Let's step back for a second. I think conversations like this — where we dig into the real mechanics of how deals get done, or don't get done — are exactly why we started this show. We deliberately don't run ads. No sponsors, no commercials. If you find this useful and want to support that choice, the link is buy me a coffee dot com slash fexingo. Keeps us independent. Luna: Yeah, I love that we can just focus on the stuff that matters. No interruptions. Lucas: Alright. Back to CFIUS. One more thing that's important: the timeline for a filing. If you think you might need to file, start preparing the materials at least sixty days before you intend to close. The filing itself requires a detailed description of the transaction, the parties, the target's business, and any foreign government involvement. It's not something you throw together in a week. Luna: And the information requirements have gotten heavier post firrma. You now have to disclose the buyer's ownership structure, any foreign government ownership, and even the buyer's plans for the target's intellectual property. Lucas: Right. And failure to provide complete and accurate information can lead to a rejection of the filing, which resets the clock. So you want to get it right the first time. Luna: What about deals that involve multiple foreign buyers? Like a club deal where several PE firms from different countries come together? Lucas: That can complicate things. CFIUS looks at each foreign person involved. If any one of them raises concerns, the whole deal could be affected. But there's also a provision for 'nationality-blind' consortiums where no single foreign entity has control. That can sometimes pass more easily. Luna: It's a lot to navigate. I think the key takeaway is that CFIUS is not just a checkbox — it's a strategic consideration that can shape the entire deal structure. Lucas: Absolutely. And we're seeing more deals get abandoned before they even get to the committee, just because the parties realize the risk is too high. That's a smart outcome too — knowing when to walk away. Luna: Let's end with one concrete example that our listeners might remember. In 2019, a Chinese state-owned enterprise tried to acquire a US grain trader called Bunge. The deal fell apart partly due to CFIUS concerns. That was a deal worth over ten billion dollars. Lucas: Right. And that's in agriculture — not a classic national security sector. But food supply is considered critical infrastructure. So again, the net is wide. Luna: So if you're a foreign buyer eyeing a US target, call your M&A lawyer early. And maybe don't assume you can just go through the motions. Lucas: Great advice. That's all for this episode of The Acquisition Talk. We'll be back with another case next time.