The fate of Lattice Semiconductor Corp.’s acquisition by a Chinese-backed investment firm now rests with President Donald Trump, who could use the important test case to send a message about how the U.S. will approach China’s hunger for chips.
Lattice LSCC, +0.35% said in a regulatory filing Friday that the Committee on Foreign Investment in the U.S., or CFIUS, plans to recommend that President Trump suspend or prohibit the proposed merger between Lattice and an indirect, wholly-owned subsidiary of Canyon Bridge Fund I LP, a private-equity fund with Chinese investors. CFIUS believes that the deal represents a threat to national security, which is in line with an opinion on China’s attempts to buy chip companies put forth late in President Barack Obama’s tenure as president.
The Lattice acquisition bid is an important test case amid a wave of interest from China for chip companies, which come with intellectual property and equipment that could be used for military and security purposes that are against American interests. Lattice develops low-power-consuming field programmable gate arrays, or FPGA, chips, which can be customized to the needs of its users, typically communications companies, mobile device makers and others.
Investors seemed just slightly optimistic on a deal Friday, pushing shares up 0.4% to $5.68, thought that is still far under Canyon Bridge’s proposed price of $8.30 a share.
The proposed deal has had far-reaching effects as it has been held up by the CFIUS, even factoring in a messy public squabble at the top rungs of Cypress Semiconductor Corp. CY, +1.75% It could also be drying up what was a hot market for semiconductor mergers and acquisitions.
Chris Rolland, an analyst with Susquehanna Financial Group, believes that the holdup over the Lattice deal, which was first announced last November, is one of two big reasons that M&A in semiconductors has slowed dramatically this year compared with the large number of chip deals in 2016 and 2015.
“Why has M&A slowed?” Rolland asked in a report last month. “We think CFIUS and deal digestion play a role. We view a significant portion of the M&A pause as related to CFIUS, which has been slow to process deals under the new administration (evidenced by Lattice who has filed for approval three times now).”
Rolland added that he still believes that the Lattice deal “serves as the CFIUS canary in the coal mine, which if approved (although we ascribe a lower probability for approval) could spark a re-emergence of semis deals.”
Lattice Semi, based in Portland, Ore., clearly is hoping that Trump the deal maker will emerge as a contrarian to the CFIUS recommendation, which has precedent. For example, President Obama blocked another deal by a Chinese company that was attempting to buy Aixtron SE AIXA, +0.88% , a German semiconductor equipment maker, after CFIUS suggested the deal should go through.
Lattice is hoping to expand with the much-needed cash infusion from Canyon Bridge, and has promised to add jobs in the U.S. and grow operations in Asia, a spokesman said. However, the company would be owned by investors with ties to the Chinese government, which was not initially disclosed. Reuters reported a few weeks after the deal was first announced that Canyon Bridge had funding in part from the central Chinese government and indirect links to the Chinese space program.
With Trump being one of the most unpredictable presidents the U.S. has ever seen, it’s impossible to know which way he will go on this deal, especially amid a fraught relationship with the Chinese government due to trade policies and North Korea. No matter the decision, which Trump has 15 days to make, it will have far-reaching ripple effects for chip companies as well as U.S. relations with China, and potentially more we can’t even predict.
By Therese Poletti