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CFIUS Again Objects to a China-Europe Deal

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11/20/2016 | 08:35pm EDT

For the second time in a little more than a year, the secretive U.S. agency that vets global deals on national-security grounds is objecting to a Chinese takeover of a European company.

Late Friday, technology company Aixtron SE of Germany said that it was informed by the Committee on Foreign Investment in the U.S., or CFIUS, about "unresolved U.S. national security concerns regarding the proposed transaction."

Aixtron hasn't said exactly why the U.S. objected. But the committee has become increasingly active in overseas deals, weighing in when it perceives a potential threat to U.S. security, even if neither side in a potential transaction is American.

Friday's disclosure came after Germany's economics ministry late last month withdrew its earlier approval and reopened a review of the ?670 million ($710 million) acquisition of Aixtron by Grand Chip Investment GmbH, the German unit of Fujian Grand Chip Investment Fund LP of China.

People familiar with the matter said the German government's step came after it was notified by U.S. authorities of their concerns over certain technologies.

Both moves were made amid heightened security concerns among Western governments over a high-tech shopping spree by Chinese companies. Still, CFIUS's role in weighing in on the deal is unusual because it doesn't technically have jurisdiction over either of the two companies involved.

CFIUS declined to comment on Sunday.

The planned Aixtron acquisition is the latest deal involving non-U.S. companies to attract the committee's attention.

Dutch electronics company Royal Philips NV early this year canceled a planned $2.8 billion sale of its lighting-component and automotive-lighting unit to a Chinese investor, after Philips disclosed in October 2015 that CFIUS had raised "certain unforeseen" concerns with that deal.

CFIUS also reviewed last year's $16.6 billion merger between Finnish wireless-equipment company Nokia Corp. and French rival Alcatel-Lucent SA. In August, seed and pesticide maker Syngenta SA and China National Chemical Corp. disclosed CFIUS had approved ChemChina's $43 billion takeover of its Swiss rival. That deal is still being scrutinized by antitrust officials.

Aixtron, a chip-equipment manufacturer, said Friday CFIUS recommended the parties "abandon the entire transaction" and that the authority plans to recommend that U.S. President Barack Obama block the deal because there are no possible remedies to mitigate concerns.

People familiar with the work of CFIUS suspect that a new, highly efficient semiconductor technology based on gallium nitride, or GaN, could have been the stumbling block for the Aixtron deal.

CFIUS includes representatives from 16 U.S. departments and agencies, including the Treasury, Homeland Security and Defense departments. Its deliberations are confidential, and some analysts and investors regard the process as opaque.

GaN technology can improve military applications such as radar transmitters by boosting their power while consuming less electricity. Aixtron has been selling products focused on GaN for a number of years to companies including U.S. defense contractor Northrop Grumman Corp. The company, like its rival Raytheon Co., has signed contracts with the U.S. military over products that use GaN technology.

The Pentagon has bet heavily on the use of GaN to improve the performance of some of its most sophisticated weapons. The technology is being pursued to boost performance of efforts such as a U.S. Navy program to jam enemy radar, as well as an antimissile system known as Terminal High-Altitude Area Defense, or Thaad, to be deployed in South Korea against North Korea's long-range rocket threat.

Aixtron said that Mr. Obama "must now render his decision to block or allow the proposed transaction within 15 calendar days."

A spokesman for Fujian Grand Chip Investment declined to comment.

Shares in Aixtron fell about 4% in Germany's after-hours trading late Friday.

The company has been struggling over recent years, especially after Sanan Optoelectronics Co. of China cut back on a large order late last year. The move slashed nearly half of Aixtron's market value and left the company looking for a buyer.

Months later, Grand Chip Investment, another Chinese enterprise from Fujian province, offered to buy Aixtron.

Aachen, Germany-based Aixtron produces machines that cut wafers into products used in chips. It is one of the largest rivals of Applied Materials Inc. and Veeco Instruments Inc. of the U.S.

Aixtron and Veeco each posted third-quarter net losses amid lower revenues, and some analysts have said Aixtron needs a financially strong partner or owner.

The machine makers are heavily reliant on the chip industry and spend more than one-quarter of their revenue on research and development of new products. If a new technology faces delays coming to market, Aixtron and Veeco sit on investments that don't pay off.

In Germany, lighting company Osram Licht AG is seeking approval from the German government for the sale of its lightbulb businesses to MLS Co. of China.

Sanan and MLS have both considered acquiring all of Osram, people familiar with the matter said earlier. Those people added it is unlikely that a move to buy Osram would now be feasible given political backlash amid resistance from labor unions.

CFIUS's stance on Aixtron also might portend close scrutiny for the proposed $5 billion takeover of German robotics company Kuka AG by Midea Group of China. The deal, which was first reported by The Wall Street Journal in May, is still waiting approval from a number of regulators. Sensitivity about the deal has been high because Kuka supplies top German industrial companies and U.S. defense contractors.

Robert Wall contributed to this article.

Write to Eyk Henning at eyk.henning@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
AIXTRON SE -3.55% 7.714 Delayed Quote.-9.55%
AMS AG -2.81% 9.35 Delayed Quote.-63.75%
APPLIED MATERIALS, INC. -8.44% 45.05 Delayed Quote.-26.20%
E.ON SE -0.94% 9.166 Delayed Quote.-3.76%
KONINKLIJKE PHILIPS N.V. -0.97% 35.305 Delayed Quote.-18.88%
KUKA -4.00% 27.6 Delayed Quote.-24.38%
MIDEA GROUP CO., LTD. 3.20% 47.99 End-of-day quote.1.35%
MLS CO., LTD 1.52% 10.66 End-of-day quote.-0.19%
NOKIA OYJ -6.70% 2.681 Delayed Quote.-12.82%
NORTHROP GRUMMAN CORPORATION -2.81% 312.15 Delayed Quote.-6.62%
OSRAM LICHT AG -0.40% 32.67 Delayed Quote.-26.00%
RAYTHEON -8.49% 142.02 Delayed Quote.-35.37%
SAN'AN OPTOELECTRONICS CO., LTD. -3.69% 20.9 End-of-day quote.18.19%
VEECO INSTRUMENTS INC. -12.19% 9.22 Delayed Quote.-37.21%
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