Risk & Compliance

Buy American (Unless You’re Foreign)

A Congressional hearing Wednesday will ask whether foreign acquisitions of U.S. companies should be vetted more carefully for security risks. One r...
Meghan D. BradyFebruary 7, 2007

Fear that foreign ownership of U.S. companies might undermine national security is hurting investment in this country, a new report says.

The report, released January 25 by the National Foundation for American Policy (NFAP), says that regulatory reviews of foreign investments in U.S. firms have increased and become more onerous. That is particularly true, the report’s author David Marchick says, since the Dubai Port World (DP World) controversy last February.

Last year, DP World—a company based in the United Arab Emirates—acquired P&O, a company that controlled six U.S. ports. The acquisition created a storm of protest, including Congressional debate, as many lawmakers fretted that the acquisition could pose a risk to national security.

Marchick is one of several witnesses set to testify Wednesday before the House Financial Services Committee in a hearing examining whether restrictions on foreign acquisitions of U.S. firms should be tightened or loosened.

Although DP World eventually relinquished its control of the U.S. ports, the NFAP argues that the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee responsible for assessing the national security risk associated with foreign acquisitions, increased its scrutiny of potential investors in 2006. “Reviews are taking longer, costs for companies have increased and CFIUS-imposed conditions are tougher,” the report warns. “The stakes are high,” added Marchick at a press conference in January, where he warned that ignoring the findings in the report could put the future of foreign investment in the U.S. at risk. The value of just one-third of the transactions that were submitted to CFIUS exceeded almost $100 billion last year.

In 2006, there were 113 filings with CFIUS, up from 65 in 2005. Likewise, in seven cases, the CFIUS reviews exceeded the initial 30-day investigation limit. That only happened twice in each of the preceding three years. Five companies also withdrew their transactions from consideration—no more than two did so in each of the preceding three years.

The study’s authors conclude that foreign investors are more likely to file with CFIUS to mitigate uncertainty in the process. Due in part to the sheer number of filings, many transaction reviews in 2006 exceeded the statutory 30-day limit of the initial investigation. The increase in second-stage investigations and withdrawals suggests that transactions are taking longer to close, if they close at all.

Transactions are typically withdrawn to avoid the second-stage investigations, which can take up to an additional 45 days to complete. Add to the second stage a necessary Presidential approval (which in the case of the Lucent Alcatel merger took seven and a half months), says the NFAP, and it becomes clear why companies prefer to avoid protracted reviews. “If the pattern of longer time periods for CFIUS reviews continues,” the NFAP report warns, “foreign investors will either be less interested in the United States or U.S. companies will simply refuse to sell to foreign investors because of the risk of lengthy closing times for deals.”

Another restrictive trend noted by the report is the increase in mitigation agreements; contingencies CFIUS negotiates as a condition for transaction approval. The report suggests that this increase is largely a result of the involvement of The Department of Homeland Security, which was first included in the CFIUS process in February 2003. NFAP reports that since its involvement, the Department of Homeland Security was party to 15 mitigation agreements in 2006, compared to only 13 in the previous three years combined. These compromises are usually required of sectors considered “critical infrastructure” by CFIUS, a definition which encompasses everything from the IT sector to agriculture, finance, telecommunications and several others. The NFAP also expressed concern about CFIUS’s ability to reopen a transaction review after it has been approved and order divestment for non-compliance with an agreement.

“Other countries have already shown a willingness to impose their own investment restrictions against American companies,” the NFAP report warns. “Congress and the executive branch need to find the right balance to meet the twin objectives of protecting national security and promoting investment in the United States.” Marchick argued that few foreign acquisitions actually create serious national security threats. “Chilling foreign investment with little nexus to national security is unlikely to make America more secure,” the report concludes. “After all, U.S. national security depends on the strength of the U.S. economy and on our relations with other countries.”

Not everyone agrees with the NFAP. Representative Barney Frank, Chairman of the House Financial Services Committee, successfully pushed a bill through the House last year to tighten CFIUS, but was unable to get the bill reconciled with a similar Senate measure before Congress expired. He has vowed that he will try again this year.