Dutch group’s strategy marred by the US regulators
We have become accustomed over the years merger and acquisition deals being blocked by the regulators of various countries on the grounds of risks of market dominance by the proposed merged business. The severity with which these regulators have defined the threshold of what they believe constitutes a threat to healthy competition on the market has greatly fluctuated in the past decades, swinging like a pendulum from relative leniency to being stubbornly restrictive.
In contrast, the decision delivered by the CFIUS (Committee on Foreign Investment in the United States) did not focus on whether a company might have an excessive share of a market, but rather on who is behind that company. In doing so, the CFIUS has barred the way for the world’s leading lighting producer Philips from implementing its strategy of focusing on healthcare, in particular medical devices and health monitoring systems, and moving away from lighting. The CFIUS is headed by the United States’ Treasury Department, but its panel comprises members from several other administration bodies, among which the Department of Defence and Homeland Security.
So how do light bulbs pose a threat to the world’s most powerful nation? Philips’ group company Lumileds, whose lighting devices can be found in one of every third car produced in the world, is the front-runner of the rapidly growing LED lighting industry, boosted by the global move away from incandescent light-bulbs to the far more energy efficient LED technology. Lumileds’ production and development facilities are spread over many countries around the globe; including an important research centre in San Jose, California. At this point, it’s still difficult to understand the nature of the threat to the security of the United States …
Three months of growing uncertainty
Philips’ sale of an 80.1% stake in Lumileds to a Chinese group of investors led by GO Scale Capital was agreed in March 2015, sparking off a complex process of regulatory approval which was initially expected to last six months. This should have allowed the deal to complete by late September, but growing concerns emerged in the USA on the grounds of national security. These hit the headlines in late October as the deal had not closed within the expected time-line. Still,there was hope at that point that some kind of compromise could be worked out, and several analysts were openly confident the deal would go ahead in some way or another
What happened over the past three months is unclear, as the CFIUS has so far not commented on the grounds for its refusal to allow the sale of Lumileds to proceed. The collapse of the deal is a blow to Philips and a huge frustration for its CEO Frans van Houten and Mr Sonny Wu, Chairman of GO Scale Capital who worked intensively on developing solutions that might alleviate the concerns of the US Regulators.
National security, or just national advantage?
Mr van Houten must now be sitting at his desk, with the sad realisation that he has just wasted ten months hoping the USD 2.8 billion deal he had negotiated last March would come to a close. Could the sale of Lumileds really pose a threat to the security of the world’s largest economy and most militarised country? Research on light technology includes areas such as high energy lasers that do indeed have potential military uses, as well as the acceleration of data transmission which is of strategic importance in today’s digital world. However, these technologies are also being researched by the world’s three leading telecom equipment providers Ericsson, Nokia / Alcatel-Lucent and Huawei. But oooops, these are all European or Chinese companies … just like Philips and GO Scale Capital.
Having turned down the offer made by America’s private equity houses KKR and CVC Capital Partners, whose joint bid was beaten by GO Scale Capital, Frans van Houten now faces the difficult and somewhat humiliating task of returning to a market which knows it will not be necessary to offer anything close to USD 2.8 billion to grab that controlling stake in Lumileds now that GO Scale Capital is off limits.
The outcome so far? Serious damage to what should have been a big opportunity for Philips, a dream evaporated for GO Scale Capital and their co-investors, counterbalanced by the USA’s satisfaction at most probably securing Lumileds in “safe” American hands whilst at the same time kicking their western ally Europe in the ankle and pointing a rude finger at China.
No doubt the CFIUS will in the coming days have to publish some form of rationale to their decision, if only to provide a degree of decorum to a decision which, behind the gloss and seriousness of national security, appears instead to have been driven by economic strategy and national advantage, by creating stumbling blocks for European and Chinese companies.
Nothing is definite and final in this world. If KKR and CVC Capital Partners acquire Lumileds, at some point in the coming five to eight years they will want to exit that investment by selling parts or all of that company, and it will be interesting to see then who is in the line-up of potential acquirers.
Save the date in your calendar, sometime in the 2020’s …