April 22, 2020

Breakingviews: UK’s inward M&A muddle comes home to roost

by Breakingviews.

The United Kingdom’s nuanced approach to inward investment is coming home to roost. British politicians are up in arms about what they see as an attempt by Beijing-backed private equity firm Canyon Bridge to seize control of the intellectual property of Imagination Technologies, a UK tech firm it acquired for 550 million pounds in 2017. They have limited grounds to intervene.

Three years ago – before the United States and China’s trade war had taken hold and U.S. President Donald Trump had started disparaging Chinese telecoms group Huawei Technologies – approving the sale of the UK chip designer may have seemed an acceptable risk to the British government. Trump had already blocked the same buyer from acquiring U.S. chipmaker Lattice Semiconductor on national security grounds. But Imagination’s value had slumped after it temporarily lost key customer Apple. British authorities were keen to welcome foreign investment, and Canyon itself was incorporated in the United States.

Today Imagination still seems committed to the United Kingdom, judging by comments from Ray Bingham, the chairman who has also taken over the position of chief executive. But the company has shifted its location to the Cayman Islands and former CEO Hossein Yossaie, who left in 2016, says Canyon’s state-owned backer China Reform wants to replace Imagination’s board with its own people. UK lawmaker David Davis has expressed concerns about the departure of the UK’s technology base under the cover of Covid-19 distractions. A recent board meeting was called off under government pressure. Chief Executive Ron Black has departed, along with two other senior executives.

Imagination’s intellectual property, which is used in the graphic chips of Apple’s iPhone, Samsung Electronics’ smartphones and cars, could be classed as a vital strategic asset. Yet British powers to block foreign takeovers are less extensive than those in the United States. Proposals from July 2018 earmark technology as a sector where national security concerns could apply. But Imagination was sold before these provisions were considered, and the deal does not appear to impose any formal constraints on the new owner.

Even if the British government could object, its uncertain trading status after Brexit means its approach to China is less confrontational than Trump’s. Prime Minister Boris Johnson’s decision to use limited equipment from Huawei for the domestic 5G network is evidence of a more nuanced approach to Chinese ownership. That makes it harder to get tough now.

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