(Author: Judy Lin, Chief Editor, LEDinside)

Before celebrating the New Year, Chinese-language newspaper UDN in Taiwan has a tradition of conducting an annual poll, requesting readers to pick out a word that best represents the year. For 2016, the Taiwanese people chose the Chinese character Ku (苦), which can be translated as a bitter taste, hardships or even a painful experience. Asked how 2016 went, most in the LED industry would probably agree it was another hard year that left a particularly bitter aftertaste.

Escalating interference from the American and European governments when it comes to Chinese bidders interest to acquire top technology companies, introduced uncertainties in global mergers, especially due to speculated Chinese government financing. The anemic global economy kept LED bulb prices at the low end, making it much more difficult for lighting manufacturers to profit. Top players in the LED industry such as Cree and Nichia initiated a series of patent suits aimed to trim end market demands for unpatented LEDs, and other ongoing developments. Despite the challenges there is still a glimmer of hope for the LED industry.

The once obscure micro-LED technology shone a bright beacon of hope for Taiwan’s LED industry this year, bringing a shimmer of light back into many manufacturers eyes. The budding IR LED and UV LED application markets also spurred new market demands, in the IR LED sector Epistar benefited substantially reporting soaring demands and shipment. Lumileds also released its first compact UV LED product this year. All these are pointing to interesting developments in the industry.

In part one we of these series we discuss increased government interference in mergers between large global companies.

Trend 1: Government meddling in mergers and acquisitions on the rise

Go Scale Capital’s acquisition of Lumileds, a Philips LED component and automotive lighting business, became the first merger in the industry to be blocked by The Committee on Foreign Investment in the United States (CFIUS) over unspecified national security concerns on Jan. 22, 2016. To date it remains unclear what the real reason behind the halted acquisition was, but U.S. government intervention increased as Europe and U.S. became wary of Chinese government involvement in acquisition transactions.

Government interference can be costly for businesses that prefer liberal market functions. CFIUS mighty interference in Lumileds acquisition case considerably lengthened the search for a potential buyer, and cost the company to sell at a discounted price. If Lumileds stuck with the original offer made by Chinese investment consortium headed by Go Scale Capital, it could have sold at a premium price of US $3.3 billion, but as the search for a potential buyer dragged on for nearly a year, investors became more uncertain of its outlook. Lumileds general lighting business also underperformed in 2016, leaving the company to incur massive losses.
 

By the time Philips secured a deal with new buyer Apollo Global Management, the new bidder offered to purchase Lumileds at a discounted price of US $2 billion on Dec. 12, 2016. Deducting before tax and transaction costs, Philip walked away with merely US $1.5 billion, nearly half the amount of the original offer made by Go Scale Capital for the LED business.

• LEDinside Analyses Lumileds Sale to Apollo Global Management to Strengthen Asian OEM Partnerships
• [Breaking News] Apollo Global Management to Acquire Lumileds for US $2B
• Philips is in Talks to Sell Lumileds to American Private Equity Firm
• Go Scale Capital to Bid for Philips Lighting Business

The U.S. government interfered with European companies business transactions through various methods. In the case of Lumileds, even though it is a subsidiary of Dutch lighting giant Philips, the company is based in U.S. which explains CFIUS authority to review acquisition documents. Yet, there is no geographical boundary that can contain the reach of U.S. government interference.

In November 2016, MOCVD equipment manufacturer Aixtron’s sale to Chinese investor Grand Chip Investment was abruptly halted by the German government after U.S. officials presented evidence suggesting the company products could be used for military applications. Specifically, synthesis of GaN wafers using MOCVDs were applicable in military applications, such as drivers, radars, and Patriot missiles.

With 30% of its business revenue generated in the U.S., and one of the biggest defense contractor Northrop Grumman Corp.  being a major client, the deal was called off abruptly. Aixtron tried to appeal and request a pardon from U.S. President Barack Obama to bypass CFIUS suggestion to terminate the sales, but with no avail. Obama’s released statement insisted on blocking the sales of Aixtron’s U.S. arm and patents, which has led the optimistic equipment manufacturer to seek alternative solutions of selling parts of its business instead.

• What Does National Security Have to Do with Chinese Takeovers of Large Int’l Semiconductor Companies?
• Chinese Investment Group GCI Acquires Aixtron for EUR 670Ｍ
• Handelsblatt: U.S. Asked Berlin to Call off China-Aixtron Deal

Shortly after German government halted Aixtron’s sales, Osram, which was looking forward to selling off its general lighting business LEDVANCE to Chinese investment consortium headed by IDG Capital, and containing leading LED package manufacturer MLS (Forest Lighting)’s business transaction also stalled. The two companies had signed an agreement earlier in June 2016. German Economic Ministry requested for resubmission of documents that underwent another lengthy period of reviews.

• German Government Puts Chinese Consortium Acquisition of Osram’s LEDVANCE on Hold
• LEDVANCE Acquisition Documents Reviewed by German Federal Ministry of Economic Affairs and Energy
• OSRAM and MLS to Carve Out Their Positions in LED Lighting Market with LEDVANCE Deal, Says LEDinside
• Who Is the Real Acquisitor of Ledvance?
• MLS to Implement Dual Brand Strategy after Chinese Consortium’s Acquisition of LEDVANCE
• [Breaking News] Chinese Consortium Including MLS Acquires Osram's LEDVANCE Business for EUR 400M

What to expect for M&A in 2017?

Donald Trump will be inaugurated as the new U.S. President on Jan. 20, 2017. His rhetoric about making U.S. great again, keeping jobs in the U.S., and protests of China manipulating the Chinese Yuan caused large trade deficits. The industry should brace itself for more protectionism policies coming along in 2017, if Trump implements his presidential campaign promises, increasing job opportunities in the U.S. will be high on his agenda as the next president. Interference from CFIUS will probably occur more frequently when evaluating foreign company acquisitions of U.S. businesses, especially from Chinese investors that are known to receive Chinese government financial backing.

The burning question for Chinese investors is will EU follow suit? Global political climate of surging populism, and popularity of political leaders such as Marine Le Pen, the leader of French National Front, and Five Star Movement, led by Italian comedian Beppe Grillo. With no miracle drug to save the slowdown of global economic growth, there will be an uptick in protectionism policies.

In fact, one of German’s biggest labor unions IG Metall was very vocal about preventing Chinese investors from acquiring German lighting giant Osram. The union specifically requested Osram to promise it will keep lighting factory jobs in Germany, and even Deputy Economic Minister Matthias Maching proposed the EU should take collective action to prevent Chinese companies from grabbing key German technology companies, and inflicting long term impact on the continent’s job security.

• Germany’s Biggest Labor Union to Block Chinese Investors Takeover of Osram

These trends indicate European and U.S. manufacturers seeking buyers for their businesses need to tread carefully in 2017, and it will probably become increasingly challenging for Chinese investors to acquire foreign technology companies as assets. Previous models where Chinese made frog leaps in technology by merging technology companies might be increasingly difficult under the new global political climate in 2017. Alternative solutions include buying second tier companies, or scaling up funding either from government, abroad or domestically in-house R&D for a change.