Exclusive: Chinese government money backs buyout firm’s deal for U.S. chip maker

Mon Nov 28, 2016 9:31pm EST
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By Liana B. Baker, Koh Gui Qing and Julie Zhu

SAN FRANCISCO/NEW YORK/HONG KONG (Reuters) - Canyon Bridge Capital Partners, a buyout fund that agreed to acquire U.S.-based chip maker Lattice Semiconductor Corp for $1.3 billion earlier this month, is funded partly by cash originating from China's central government and also has indirect links to its space program, Chinese corporate filings show.

Reuters, in a review of about a dozen filings from China's state-run corporate register, has established that the financial investment in Canyon Bridge originates from China’s State Council, the top decision-making body of the government. This link could draw more U.S. regulatory scrutiny over the Lattice deal on concerns that technology gained through the purchase could be used by China's military, according to analysts who follow the chip industry and monitor foreign investment review decisions by the U.S. government.

"It is a red flag," James Lewis, a researcher at the Center for Strategic and International Studies, said of Canyon Bridge's links to the Chinese state. "It's not a deal killer, but deals like this sometimes run into roadblocks."

Portland, Oregon-based Lattice makes programmable chips known as "field programmable gate arrays" that allow companies to put their own software on silicon chips for different uses. It does not sell chips to the U.S. military, but its two biggest rivals - Xilinx and Intel Corp’s Altera - make chips that are used in military technology.

Shares in Lattice fell as much as 4.8 percent in early Monday trade, but had recouped losses to close down 2.2 percent.

The Committee on Foreign Investment in the United States (CFIUS), a U.S. government body that conducts security reviews of proposed acquisitions by foreign firms, has yet to sign off on the agreement. How CFIUS judges the potential military applications of Lattice’s programmable chips will help determine if the deal goes ahead or not, industry analysts and CFIUS experts say. CFIUS declined to comment for this story.

The Lattice deal is one of the largest attempted by a Chinese-backed firm in the U.S. semiconductor sector. It is unclear if CFIUS will block the purchase, but a rejection would deal another blow to the Chinese, who have invested a record $200 billion in overseas acquisitions this year. The United States, Germany and Australia have scuttled Chinese takeover bids in recent months due to concerns they may serve China's national security interests over their own.

Headquartered in Palo Alto, California, Canyon Bridge was formed recently with Lattice being its first announced deal. It describes itself as a "U.S.-based private equity buyout fund focused on providing strategic capital" to technology companies, according to its website. It counts Ray Bingham, an executive chairman of Cypress Semiconductor Corp, chairman of Flex Ltd and an Oracle Corp board member, as one of its co-founders. Bingham could not be reached for comment.   Continued...

China's nation flag flies on Tiananmen Square in front of the portrait of the former chairman Mao Zedong ahead of the closing ceremony of the National People's Congress (NPC) at the Great Hall of the People in Beijing, March 14, 2012. REUTERS/David Gray/File Photo