Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Cross-Border M&A Deals Get Blocked by National Security
Transcript
- Lucas: Last October, a little-known Chinese-owned firm called Shengmei Semiconductor tried to buy a U.S. company called Halo Microsystems. Halo makes tiny sensors used in medical imaging and lidar for autonomous vehicles. Total deal value: about ninety million dollars. Luna: And CFIUS stepped in, right? Blocked the whole thing. Lucas: Correct. CFIUS — the Committee on Foreign Investment in the United States — issued an interim order prohibiting the transaction from closing, citing risks to national security. Shengmei eventually walked away. They forfeited a break-up fee of roughly three million dollars. But here's what's interesting: ten years ago, a ninety-million-dollar sensor acquisition would have sailed through without a second glance. Luna: So what changed? Lucas: Two things. First, the definition of 'critical technology' expanded massively under the Foreign Investment Risk Review Modernization Act of 2018 — FIRRMA. It used to be mostly defense contractors and companies with direct military applications. Now it covers semiconductors, AI, quantum computing, biotechnology, even certain kinds of software. Second, the U.S. government is much more aggressive about enforcing it. In 2019, CFIUS reviewed roughly 250 filings. Last year, it was over 450. Luna: And the Chinese angle is obviously front and center. But it's not just China, right? The rules apply to any foreign person or entity. Lucas: Exactly. The regulations are country-neutral on paper. But in practice, the vast majority of divestment orders and prohibition orders in the last five years have involved companies with ties to China. The Semiconductor Industry Association estimated that American chip companies lost about fifty-four billion dollars in export revenue to China in 2024 alone due to export controls and blocked acquisitions. So there's a real economic cost here. Luna: Let's talk about what this means for a strategic buyer or a private equity firm looking at a cross-border deal today. How do you even begin to plan for CFIUS? Lucas: You start by asking a simple question: does the target company's technology fall under the Export Control Reform Act? If it does, you're almost certainly looking at a mandatory filing. And even if it's voluntary, the risk of not filing is that CFIUS can retroactively unwind a completed deal. That happened in 2018 with the Chinese acquisition of a U.S. chipmaker called Lattice Semiconductor. The deal had closed, but CFIUS forced a divestiture two years later. That cost the acquirer hundreds of millions. Luna: So the calculus changes completely. You can't just sign and close in thirty days anymore. Lucas: No. A typical CFIUS review now takes about forty-five days for the initial investigation, then another forty-five if they move to a second stage. And if the parties have to negotiate a mitigation agreement — which is basically a set of conditions to limit foreign access to technology — you're looking at six to twelve months total. That affects deal financing, locked-box mechanics, earnout structures, everything. Luna: Right, because if you're an entrepreneur selling your company, you don't want to wait a year to get paid. And the buyer might demand a price adjustment. Lucas: Exactly. I've seen deals where the purchase price includes a 'CFIUS discount' — a reduction of anywhere from five to fifteen percent because of the regulatory risk. And in some cases, the buyer insists on a reverse termination fee structure where the seller only gets a small payment if the deal is blocked by CFIUS. That's tough for founders. Luna: Let's talk about one specific case that illustrates how granular these reviews have become. I'm thinking of the 2023 acquisition of a U.S. lithography equipment startup by a Chinese consortium. Lucas: That's a perfect example. The target company, let's call it OptiLine, developed a specialized lens system for extreme ultraviolet lithography — the kind used to make the most advanced microchips. The deal was valued at about two hundred million dollars. CFIUS blocked it, and the consortium had to unwind. But here's the nuance: the technology wasn't classified. It wasn't developed under a government contract. It was purely commercial. But the committee determined it had 'dual-use' potential — it could be used in both commercial chip fabrication and in military systems. Luna: So the bar for what triggers a review is getting lower. It's not just about weapons systems anymore. It's about any technology that could give a foreign adversary a strategic advantage. Lucas: Correct. And that's created a lot of uncertainty for venture-backed startups. If you're a young company with a novel semiconductor design, you might find that potential Chinese acquirers are effectively off the table. That reduces your exit options and can lower your valuation. Some VCs are now including CFIUS risk clauses in their term sheets. Luna: What about the other side? What if you're a U.S. company trying to acquire a foreign target? Does CFIUS apply? Lucas: Only if the foreign target has a U.S. subsidiary or assets that could be subject to U.S. jurisdiction. But more importantly, many countries have their own versions of CFIUS now. The UK has the National Security and Investment Act. The EU has a screening framework. Australia, Japan, even Canada have expanded their review powers. So a cross-border deal today might face multiple parallel reviews, each with different timelines and standards. Luna: That is a nightmare for deal lawyers. Lucas: It really is. But it also creates opportunities for firms that can manage the complexity. The top M&A law firms have built dedicated national security practices. Some boutique advisory firms now specialize exclusively in CFIUS mitigation strategies. If you're a private equity firm with a portfolio company in semiconductors, you might hire a former CFIUS official as a consultant to guide the filing. Luna: And if these conversations have moved your thinking forward in any small way, that's exactly why we do this show ad-free. We want listeners to get practical, use it tomorrow insights without having to sit through programmatic ads. If you've found value in episodes like this one, the best way to keep it going is to support us directly. You can do that at buy me a coffee dot com slash fexingo. No pressure, just a way for listeners who care to help cover our costs. Lucas: And it makes a real difference. Every contribution goes straight into research and production time. Right, back to the deals. One thing I want to emphasize is that CFIUS doesn't always block a deal. In fact, most filings get cleared. Last year, out of 450 filings, only about 15 resulted in a prohibition or a forced divestiture. But the threat of delay and uncertainty is itself a deal killer. Luna: So what's the practical takeaway for someone who's thinking about selling their company to a foreign buyer? Lucas: Start the CFIUS process early. Ideally, before you sign the definitive agreement. File a draft notification voluntarily. Engage with the committee early. And structure the deal to minimize the perceived risk — for example, by establishing a 'clean team' of U.S. citizens who will handle the sensitive technology, with the foreign parent having limited access. Luna: That mitigation agreement you mentioned — can you give a concrete example of what it looks like? Lucas: Sure. In the 2020 acquisition of a U.S. software company by a Japanese firm, CFIUS required the Japanese parent to appoint a U.S. citizen as the chief security officer, to restrict data flows to Japan, and to submit to annual audits by a U.S. government-approved third party. Those are common terms. They're not necessarily onerous, but they add ongoing compliance costs. Luna: And if you violate the terms of a mitigation agreement, the penalties are severe. Lucas: Yes. The maximum civil penalty was increased to the greater of two hundred fifty thousand dollars per violation or the value of the transaction. And willful violations can trigger criminal penalties. So it's not something you can ignore after the deal closes. Luna: Let's zoom out a bit. How do you see the landscape evolving over the next few years? Lucas: I think we'll see more deals structured as joint ventures or licensing arrangements rather than outright acquisitions, because those structures can sometimes avoid CFIUS jurisdiction. I also expect more litigation challenging CFIUS decisions. There's already a case pending in federal court where a Chinese-owned company is arguing that the committee exceeded its authority by blocking a real estate acquisition — CFIUS also reviews purchases of land near military bases. And finally, I think we'll see more alliances between U.S. and allied countries to harmonize their screening processes, so that a deal cleared in the UK gets fast-tracked here. Luna: So the message is: if you're doing a cross-border deal in a sensitive sector, assume CFIUS will be involved. Plan for it. Budget for it. And don't assume it's a rubber stamp. Lucas: Exactly. The days of the quick, quiet foreign acquisition of a U.S. tech company are over. But with the right preparation, you can still get deals done. It just takes more time, more lawyers, and a lot more patience.