China's outbound M&A & National Security

Written by Zennon Kapron & Shannon Beets || February 27 2018

China's recent outbound M&A has been suffering with more and more acquisitions failing due to national security concerns, Ant Financial's missed acquisition of MoneyGram being the latest. Why does national security factor into these decisions and why will it remain a crucial consideration in the future?

The term 'national security' is used to describe the defense and foreign relations of a country and the protection of the country's interests. Elements of national security include military, economic, environmental, political, and cyber security. Some of China's recent M&A attempts are illustrative of the concerns around national security in the United States and the Philippines.

The United States: MoneyGram

On January 2nd, the US$1.2 billion-dollar deal between China’s Ant Financial and the U.S. based money transfer company MoneyGram International Inc. was rejected by the U.S. government over national security concerns. The Committee on Foreign Investment in the United States (CFIUS) nixed the proposal based on the uncertainty around user data and the possibility of it being used to identify U.S. citizens.

MoneyGram is the latest in a collection of Chinese companies that have failed to pass CFIUS's review. In addition to MoneyGram, CFIUS rejected HNA Group's investment in Global Eagle, an entertainment service provider, and SkyBridge Capital, an investment firm. There is still a review pending on China’s Oceanwide Holdings Group's purchase of Genworth Financial Inc. and Chinese equity firm Canyon Bridge's deal for Lattice Semiconductor Corp in Portland, was blocked directly by President Trump himself.

If the CFIUS's standard 30 day review of a transaction indicates that the deal may compromise national security, the committee does a deeper investigation for 45 days. By the end of the 75-day review if no agreements mitigating the potential security concerns are made, the decision is handed to the president who has 15 days to decide to allow or reject the transaction. In the 40 years of the committee’s existence, there have only been three circumstances where transactions have been blocked by the U.S President, all of those were Chinese entities.

The latest round of rejections by CFIUS have led to companies seeking alternative deals, with Canyon Bridge reaching an agreement to buy Imagination Technologies Group in Britain and Euronet and MoneyGram considering a deal.

The scrutiny of the CFIUS has resulted in many broken deals.

Philippines: China Telecom

In November of 2017, the president of the Philippines, Rodrigo Duterte, offered an opportunity for China to break the Philippines telecommunication duopoly of PLDT Inc. and Globe Telecom by opening up the market to Chinese investment. China's government selected China Telecom to invest through a 40% partnership with a local company. Although Duterte's original comments seemed to indicate that the transaction would go through with no issue, it ended up being blocked by the opposition members of the Philippine Congress who believed that China Telecom’s entry could be an opportunity for China to gain access to state secrets, describing this scheme as a ‘Trojan horse’. They believed that allowing China access to the communications infrastructure in the Philippines could be a serious national security threat.

The Philippines is developing ‘A National Cybersecurity Plan’ which will be released in 2022 to protect the nation’s critical information and communication technology infrastructures including all public, private and military networks. The plan focuses on implementing measures to ensure cyber resilience and to enhance responding abilities to threats at all stages of an attack. This will be done in conjunction with law enforcement agencies to manage consequences and ensure society is educated on the importance of cybersecurity.

This plan will be released in the hope of preventing the threats that arise with technology and company expansion, without hindering the Philippines' economic development.

ZTE and Huawei

Concerns from US Lawmakers regarding the Chinese government's involvement in its own companies and security challenges have been long in the making. Two of the most talked about companies are ZTE and Huawei due to the potential national security threat they pose. Both firms have strong connections to the Chinese government, which, it has been suggested, may influence the direction of the companies or potentially affect the functioning of ZTE / Huawei based computer networks, especially concerning as most of ZTE & Huawei's products are network related. 

Partners are also expressing concern about being involved with Huawei and ZTE. AT&T, a U.S mobile carrier giant, decided against selling Huawei’s smartphones after immense political pressure, adding to the list of company deals that have been blocked.

A bill was introduced in the U.S. Congress on the 9th of January 2018, titled the ‘Defending U.S. Government Communications Act’, aimed at banning US government agencies from using or purchasing any sort of telecommunications equipment or services from ZTE and Huawei. Believing it would be ‘inviting’ Chinese surveillance into the private lives of the US's citizens. This bill is part of a larger trend focused on foreign-built software and hardware and the threat it may present to the United States.

National Security and the Financial Industry

Many of China's recent outbound deals have been technology focused, which have much greater risks as compared to say, a natural resources deal. With natural resources, there is of course always a chance the deal goes badly, but technology acquisitions bring the risk of cyber-hacking, data theft, etc. - a much broader set of risks limited only by the network of the destination country.

Huawei and ZTE networking hardware is believed to be hackable by the Chinese government through backdoors that have been hard-coded into the hardware. Huawei networking hardware cannot be sold in the US. Similarly, the Chinese government has concerns on American hardware such as that from Cisco which is similarly believed to be hackable by the NSA. With technology deals continue to grow, so will the scrutiny.

This is compounded by the increasing use and need to protect data which is bringing more attention to financial industry focused deals, especially those originating from China. Ant Financial released a statement explaining that the MoneyGram deal was not to gain access to the U.S. market, but rather to expand in other international markets that MoneyGram had access to. Much like Huawei and ZTE, both mobile giants trying to offer services in an untapped market. Reading into the Ant Financial statement, one could make the argument that if it were really about international markets, the deal could have been structured as such with Ant only purchasing the overseas assets of MoneyGram.

The main threat to national security is whether it jeopardizes or marginalizes the government’s control, which could be a reality as the sophistication of technology platforms increase as does data collection. Technology is a complicated area to regulate and monitor, with countries remaining skeptical as to how foreign organizations intend to use the data. This, in conjunction with a country's checkered past, means that no chances are being taken in regards to new acquisitions. Investigations are incredibly thorough, with extensive measures being taken to check the legitimacy and intentions of foreign organizations looking to enter the market. The government is also relying on industry help and expertise:in June 2017, Kapronasia was invited to testify on issues related to China Fintech.

The foundation for concern over the threats always originates from the technology utilized within organizations or regarding its potential future users. Any malicious actions through the technology would go on to compromise all the users of that product. If that product had a high penetration rate within a country that had allowed its products or services, it could prove to be a disastrous risk, as it would endanger the majority of the country’s population, whether it be through data usage or technology manipulation.


We are only at the start of what will likely be many years of rejected technology deals especially as new solutions incorporating AI and face-recognition come to market. Both of these technologies, and others, bring serious national security concerns which will undoubtedly prompt heavy security and updated regulations that specify the exact entry requirements for companies.

CFIUS only deals with mergers and acquisitions, so any arrangements that do not involve M&A transactions would not be reviewed by the committee. This could see more partnership arrangements between finance companies to extend their services into the new markets. Regardless, it’s going to be tough for China to overcome the obstacles presented by other countries.