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Dealmakers can extract one important lesson from the U.S. government’s prolonged review of the sale of Global Crossing Ltd.: Be prepared. The deal, under which Singapore Technologies Telemedia Pte. Ltd. bought a controlling stake in the bankrupt telecom provider, was held up for months as the Committee on Foreign Investment in the U.S. reviewed the transaction on national security grounds. CFIUS ultimately cleared ST Telemedia’s $250 million offer after deterring Hong Kong-based Hutchison Whampoa Ltd. from joining the bid. “The Global Crossing deal shows us that the government review process has to be considered much earlier when considering and structuring deals,” said Ronald Lee, a Washington-based partner at law firm Arnold & Porter. Indeed, the focus on national security since Sept. 11 puts the onus on non-U.S. companies, particularly those controlled by foreign governments, to prepare possible concessions early in the deal process to allay possible U.S. concerns. CFIUS, a multiagency task force that includes officials from the departments of Defense, Treasury and Commerce, among others, vets foreign acquisitions of companies that operate telecom, Internet, software or anything vital for continued operation of U.S. defense systems. A source familiar with the Global Crossing deal said the merger partners anticipated some regulatory obstacles, including the Singaporean government’s control of ST Telemedia, but they were not prepared for such a long delay. “When dealing with CFIUS in the future, concessions will be made earlier on,” he said. Lee, who participated in government reviews of deals involving U.S. telecom assets while at the Justice Department from 1998 to 2000, said U.S. companies developing such critical infrastructure may consider rejecting offers from a non-U.S. buyer, even if it is the best bid. “The searching and time-consuming nature of the CFIUS review process should lead the seller to think long and hard about whether that deal is better than a lesser deal in the U.S. that might get accomplished quicker,” he said. That specter of a CFIUS review can affect even non-U.S. sellers. In an Oct. 1 letter to U.S. Treasury Secretary John Snow, who heads CFIUS, Sens. Ernest Hollings, D-S.C., and Daniel Inouye, D-Hawaii, called for CFIUS to review a bid for London-based satellite company Inmarsat Ventures plc by British private equity firms Apax Partners Worldwide LLP and Permira Advisers Ltd. Inmarsat, which has contracts with the U.S. Navy and other military services, has agreed to negotiate with Apax and Permira as preferred bidders despite a higher offer from two U.S. companies. Hwan Kim, partner at Chadbourne & Parke in Washington, said the Defense Department is a primary source of concern. In the Global Crossing deal, the Pentagon worried about putting important U.S. assets in foreign hands. “Deals like this will receive heightened scrutiny in order to expose terrorist attacks,” Kim said. One way to pre-empt such scrutiny is for foreign buyers to implement special security agreements and corporate governance provisions. For example, ST Telemedia agreed to ensure that American citizens, including people with ties to U.S. defense companies, would make up more than half of Global Crossing’s board. The parties also agreed to safeguard customer and other records in the U.S. and to ensure Global Crossing’s U.S.-based employees access to the company’s networks. But most observers agree that the growing prominence of CFIUS does not mean fewer deals will be approved. The U.S. government’s need to strengthen military and economic ties with other countries may supersede security concerns, Lee said. In addition, the U.S. government also commonly obtains military components from other countries. “Gone are the days when the DOD could produce everything it needed for its industrial base within the U.S.,” Lee explained. “An international defense supplier base is the reality of this period, and rejection of deals on national security grounds with these countries could hurt that base.” Copyright �2003 TDD, LLC. All rights reserved.

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