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Genworth deal shows possible route for Chinese buyers to win US approval

Obtaining clearance from the Committee on Foreign Investment in the U.S. is not only a major step for China Oceanwide Holdings Group Co. Ltd.'s proposed acquisition of U.S. insurer Genworth Financial Inc., but may also offer hope for other Chinese would-be acquirers of U.S. targets.

China Oceanwide and Genworth have worked for nearly two years to gain CFIUS approval of the deal, having refiled applications with the U.S. foreign investment regulator five times to seek additional time for review. The parties also modified their merger proposal and added risk-mitigation plans to work with a third-party service company to manage the personal data of Genworth's policyholders.

"This is a very important strategy to ease the national security concern from CFIUS," said Zhan Hao, managing partner at Beijing-based Anjie Law Firm. "In the future, when Chinese companies go to the U.S. to acquire securities companies, insurers or banks, they will all face the same question of how to handle personal data of U.S. citizens."

Although CFIUS negotiations are confidential, scrutiny of inbound Chinese investment has sharply intensified in the U.S., and a number of deals have been scuppered in recent months. In January, Ant Financial Services Group scrapped its proposed $1.2 billion acquisition of MoneyGram International Inc. after failing to win CFIUS approval, reportedly because of concerns over the protection of U.S. citizens' data, among other factors. Two months earlier, Chinese aluminum giant Zhongwang International Group Ltd. called off its $2.3 billion deal with Cleveland-based aluminum company Aleris Corp. because of CFIUS scrutiny.

Perhaps most sensationally, President Donald Trump in March ordered Broadcom Ltd., then based in Singapore, to end its planned takeover of U.S.-based fellow chipmaker Qualcomm Inc., citing national security concerns.

Approval of the Genworth-China Oceanwide deal "may suggest that CFIUS might get comfortable with similar structures where the only national security risk relates to the protection of personal data of U.S. citizens," said Ian Ho, a Hong Kong-based partner at law firm Simpson Thacher & Bartlett LLP.

But he noted as well the recent saga of Chinese telecommunications company ZTE Corp., which was sanctioned by the U.S. government in April, only for Trump to announce in May that he was working with Chinese President Xi Jinping to give ZTE "a way to get back into business, fast." A deal was struck in early June, but U.S. senators are moving to block it.

"Given all the noise that you are hearing from the U.S. regarding Chinese investments and particularly the ZTE blow-up ... I am a little surprised to see the clearance" from CFIUS on the China Oceanwide/Genworth deal, Ho said. He added that he would not assume any relaxation of CFIUS' standards, or that it is making less-sensitive reviews of investments by foreign parties.

Sensitive industries such as telecommunications, software and infrastructure are likely to remain off-limits, according to Liu Xuong, managing director of professional service firm Alvarez & Marsal's Asian transaction advisory group in Shanghai.

"If there are other risks involved, for example, in emerging technology, artificial intelligence or semiconductor, I would certainly not … say that those deals in those other sectors would be easier," Ho said.

"The deal reminds [Chinese companies] that it is important to look at the industry first," said Leslie Zhang, vice president and general counsel at United Energy Group Ltd. in Beijing. He said the Genworth approval means it is still possible for Chinese companies to acquire U.S. targets in non-sensitive industries, but whether deals can get done depends on how much acquirers are willing to compromise with the U.S. government.

"Ant Financial and MoneyGram's deal fell through because it would be meaningless for Ant Financial to give up MoneyGram's data," he said in an interview. "But China Oceanwide is willing to outsource policyholders' data to a third-party service company to mitigate the U.S.'s national security concerns."

Although outbound M&A from China to the U.S. has also been dampened by capital controls that have been escalated amid falling foreign-exchange reserves, and although Ho said CFIUS is unlikely to scale back its scrutiny of high-profile transactions across the board, Chinese interest in the U.S. remains strong.

"The interest is still there," Ho added. "We do get a lot of questions, and people are certainly interested in U.S. targets and investments."

A PricewaterhouseCoopers survey showed that, in 2017, Chinese acquirers made 221 deals for targets in the U.S., up slightly from the 217 deals struck in 2016. But total deal value for U.S.-based deals by Chinese companies shrunk to $18.3 billion in 2017 from $65.8 billion in 2016.

Interest in outbound deals among Chinese enterprises remains high, including in the U.S., because of ample liquidity in China, relatively high domestic asset prices and relatively low borrowing interest rates overseas, Zhan said.

"China's foreign exchange controls and U.S. national security scrutiny are generally technical issues," Zhan said. "[Chinese companies'] interest still exists, so why not give it a try?"