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Should Tom Ridge be in the business of regulating international mergers? President George W. Bush has decided that he should. In a little-noticed move, Bush has installed the secretary of homeland security as a member of the obscure regulatory body that weighs the national security risks posed by major foreign investments in U.S. companies. Now some experts, including former senior government officials who served on the panel, suggest the president’s maneuver could dilute the influence of those who champion cross-border investment. The result could be a more difficult environment for non-U.S. companies that come before the Committee on Foreign Investment in the United States, or CFIUS, looking to execute mergers and acquisitions in this country. “This is part of the broadening of what constitutes a national security concern, and it also reflects a broadening of the industries seen as subject to CFIUS review,” says Ronald Lee, a Washington, D.C., partner at Arnold & Porter who handled CFIUS matters as head of the Executive Office of National Security at the Department of Justice. “It absolutely raises the bar” for approval by CFIUS, says Greg Mastel, a trade policy adviser at Miller & Chevalier in the District. Under a 1998 federal law, CFIUS is required to evaluate any national security risks posed by corporate transactions in which a non-U.S. investor aims to effectively gain control of a U.S. business. The tribunal conducts its business in almost total secrecy. But some cases — such as the current struggle within CFIUS over the proposed sale of a majority stake in Global Crossing Ltd. to two foreign telecommunications companies — garner publicity nonetheless. The committee had been made up of top officials from 11 executive agencies, including the secretaries of treasury, commerce, state and defense, along with the attorney general, the president’s national security adviser and the U.S. trade representative. By executive order on Feb. 28, Bush added Tom Ridge to CFIUS’ roster, bringing its membership to 12. The ultimate authority to approve or reject deals that come before the committee rests with the president. As a practical matter, CFIUS reviews rarely reach the president’s desk. Instead, in cases where it becomes clear the committee won’t unanimously approve a transaction, the companies quietly withdraw their proposal and shelve their transaction. If CFIUS can’t reach a consensus to approve a deal, and the companies don’t withdraw it, then by law the president must decide the matter. According to a 2002 congressional study, only one of 320 deals “notified to the committee” between 1997 and 2001 was ultimately blocked by the president. HAWKS FLY HIGH Bush’s addition of the Department of Homeland Security to CFIUS effectively bolsters the ranks of security hawks on the committee, several observers point out. The move also comes at a time when some of those officials, particularly within the Federal Bureau of Investigation and the Pentagon, are taking a notably tough stance on the Global Crossing deal. Hong Kong-based conglomerate Hutchison Whampoa Ltd. and Singapore Technology Telemedia Pte Ltd. are negotiating for control of Global Crossing. The deal could save the bankrupt Global Crossing from liquidation. And at least one U.S. ally that relies heavily on Global Crossing’s network — Britain — has been urging the United States to approve the sale, sources familiar with the matter confirm. But some members of CFIUS, citing concerns about possible links between Hutchison Whampoa and the Chinese military, have thus far refused to endorse the deal, according to people close to the negotiations between the companies and the government. The companies have sought in vain for at least four months to assuage those concerns. Earlier this year, they offered to seal off Global Crossing’s extensive U.S. fiber optic network, used by some U.S. government agencies and several major corporations, within a “secure subsidiary.” That proposal didn’t win over detractors within CFIUS, however, and the companies were forced to withdraw their application. But in March, the companies and their advisers — who include lawyers and lobbyists from Covington & Burling; Skadden, Arps, Slate, Meagher & Flom; Kissinger McLarty Associates; Latham & Watkins; and Paul, Weiss, Rifkind, Wharton & Garrison — returned to CFIUS with a new proposal. Under this arrangement, sources close to the discussions say, Hutchison would be reduced to a mere passive investor. Control of the post-acquisition Global Crossing would be placed in the hands of prominent U.S. citizens, including former Defense Secretary James Schlesinger and outgoing Merrill Lynch Chairman David Komansky. Still, at press time, it appeared that opponents to the deal within CFIUS remained unwilling to sign off. According to people close to the negotiations, the committee was slated to meet on April 25 in a secure room at the White House to evaluate the transaction yet again. CFIUS and the companies were facing a statutory deadline as this article went to press: If the full committee does not approve the deal by April 28, and the companies don’t withdraw it, then by law it must be subjected to a formal CFIUS investigation — meaning Bush would have to ultimately decide whether or not to permit the transaction. Spokespersons for Global Crossing and its would-be acquirers declined to comment. “We cannot confirm or deny any meetings,” says Allen Abney, a White House spokesman, noting that the White House does not comment on CFIUS proceedings. Former officials who handled CFIUS cases while at Treasury, at the Department of Defense, and at other agencies say they’re not surprised that the committee is pushing back hard against the Global Crossing deal. Since the Sept. 11, 2001, terrorist attacks, they note, the administration has stressed its concern about the potential vulnerability of the U.S. telecommunications infrastructure. And in some corners of the defense and intelligence community, any U.S. acquisition involving China is likely to be viewed with suspicion. These observers and other lawyers who advise clients on CFIUS matters also say they’re unsurprised by Bush’s decision to add the Department of Homeland Security to CFIUS. Indeed, some CFIUS experts contend that the move is mostly symbolic, and is unlikely to have a big impact on the committee’s approach to tough cases. “To people outside of D.C., adding DHS is going to look like [Bush is] making things tougher” at CFIUS, says John Harwood II, a D.C. partner and CFIUS expert at Wilmer, Cutler & Pickering. In reality, he suggests, the administration may be simply “sending a signal” rather than making a substantive change. But others suggest that Ridge’s presence on the committee inevitably places an extra weight on the side of security, as opposed to other concerns, such as diplomatic relations or international economic policy. “It’s another vote on the law enforcement side, at a time when law enforcement is already dominant within this administration,” says one D.C. partner who has advised clients on CFIUS. A Department of Homeland Security spokeswoman declined to answer questions about the new agency’s role on CFIUS, other than to say “we’re honored to be part of it.” Abney, the White House spokesman, declined to comment on the president’s decision to add the DHS to the committee, other than to observe that “there is a correlation” between Ridge’s role and the committee that made it a “natural fit.” Taylor Griffen, a spokesman for Treasury, which chairs CFIUS, denies that the DHS’ presence will reduce the influence of the committee’s economic agencies. “The Treasury welcomes the invaluable input that DHS brings to the CFIUS process,” Griffen says. Several experts also question whether a more defensive approach to foreign investment could undermine U.S. interests in some respects. In the telecommunications sector in particular, several observers note, a worldwide glut of capacity and deeply depressed stock prices will inevitably lead to consolidation on a global scale. If the U.S. government, through CFIUS or other means, resists foreign telecom acquirers, these observers suggest, companies such as Global Crossing could be left with few options, and dim prospects. “Who in the U.S. is going to buy up all these assets?” asks one telecommunications partner at a D.C. law firm. “It’s not going to happen just domestically. We could end up protecting a pretty feeble infrastructure here.” One former senior administration official who worked on CFIUS matters points to another risk. “You need to run a process with a reasonable set of checks and balances,” this former official says, “so that the security and intelligence imperatives are not considered in isolation or used as a pretext for mercantile interests opposed to foreign investment.”

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