The Strategist

European Commission to tighten control over acquisition of European companies

08/14/2017 - 14:30

Financial Times reports that Jean-Claude Juncker is going to demand expansion of powers of the European Commission in the field of mergers and acquisitions. In particular, the regulator wants to tighten control over foreign investors with regard to purchases of European companies. First of all, such a measure is necessary for the EU authorities to protect its high-tech sector from technology leakage to China.
The European authorities are considering taking an example from the US and introducing strict control over foreign takeovers of strategically important companies. According to the Financial Times, referring to their own sources, Head of the European Commission Jean-Claude Juncker is expected to announce the corresponding measures during his September speech.

The EU authorities are concerned about the growing activity of Chinese investors, who are increasingly trying to buy out European companies engaged in the technological, energy and industrial sectors. At the same time, as European countries fear, not only China can gain access to the latest technologies of European countries, but also earn a competitive advantage. At that, intellectual property of Chinese companies themselves is strictly protected by the Chinese authorities and remains inaccessible to European investors, even in the case of merger deals.

Currently, local authorities of only 13 out of 28 EU countries have enough authority to control investments and acquisitions in local companies, and are able to adequately assess such transactions from the point of view of national security. Such a mechanism is fully functioning in the United States, where the local regulator monitors every deal involving foreign investors. The corresponding regulator, for example, successfully vetoed Huawei's attempts to acquire American technology and industrial companies. And at the end of 2016, then-President Barack Obama blocked purchase of German semiconductor manufacturer Aixtron by Chinese investment fund Fujian Grand Chip. He banned sale of a stake owned by US investors, as this would jeopardize the US national security. A similar case appeared last year in Australia. Leaders of the EU, however, haven’t found a compromise regarding such deals. Nevertheless, the number of those who favor tight monitoring of transactions on the territory of the EU is growing against the backdrop of increasing activity of Chinese investors.

Earlier, Baker McKenzie and Rhodium research company analyzed the situation with foreign direct investment of Chinese companies in 2016. According to their report, Chinese investors failed to commit 30 foreign acquisitions totaling almost $ 75 billion during this period. This is a sharp increase compared to 2015, when foreign transactions of overall worth of $ 10 billion were canceled for various reasons. In 2016, ten deals of Chinese investors in the amount of $ 58.6 billion broke down in the United States; the figures for Europe were20 deals and $ 16.3 billion. The largest canceled transaction was Chinese Anbang Insurance’s attempt to take over American Starwood Hotels & Resorts for $ 14 billion.

For Chinese investors, who do not suffer from a lack of investment appetite, such a decrease in investment opportunities is very tangible. At the same time, pressure on them comes from both sides. In China itself, the authorities have introduced strict restrictions on currency exchange for cross-border transactions in 2016, and foreign regulators, in turn, are cautious when giving permission for such transactions, taking into account the position of the Chinese authorities. In November, China introduced new rules regulating the outflow of capital from the country. This step was explained by the fact that volume of foreign investment has sharply increased on expectations of weakening of the yuan. The authorities spent $ 320 billion from reserves to maintain the national currency. In accordance with the new rules, foreign transactions with payment in yuan and dollars fell under stricter control. The regulators were instructed to restrict "irrational transactions", such as acquisition of assets worth more than $ 1 billion, if these assets are not related to the buyer’s profile activities, and closely monitor cross-border transactions involving acquisition of land, hotels, film production assets and the entertainment industry.