The U.S. government is taking a closer look at cross-border mergers and acquisitions, and that has major implications for dealmakers.
Chinese gaming company Beijing Kunlun Tech Co. Ltd. said last week that it has not reached an agreement with the Committee on Foreign Investment in the United States (CFIUS) regarding its stake in gay dating app Grindr, despite previous reports of the mounting pressure on the Beijing-based company.
As Reuters first reported in March, CFIUS, the nine-member federal panel that reviews acquisitions of U.S.-based companies by foreign firms, has pressured Kunlun to sell Grindr, claiming that Kunlun’s ownership of the app constitutes a threat to American national security. Grindr, which has more than 27 million users, collects personal data such as location, photos and even HIV status. The U.S. government is reportedly concerned that foreign governments might use such data as a means of influence or blackmail.
Grindr, which is advised by Silicon Valley’s Fenwick & West, sold a majority of its stake to Kunlun in 2016 for $93 million, and its remaining shares in 2018 for $152 million. Kunlun did not file for CFIUS review until last year, when Congress enacted the Foreign Investment Risk Review Modernization Act of 2018.
The Chinese company had previously planned on conducting an IPO for Grindr, but now appears to be readying to sell the company, media reports say.
The Recorder caught up with Tom Shoesmith, Pillsbury Winthrop Shaw Pittman’s China practice leader, to discuss the broader impacts and takeaways of the Kunlun-Grindr scrutiny. He is not involved in the Grindr deal, but he has been following the news closely.
Shoesmith, a Palo Alto-based partner, specializes in U.S.-China mergers and acquisitions, and multinational corporate finance deals. He joined Pillsbury in 2008 when the firm acquired the China practice of Thelen. His answers were edited lightly for length and style.
Is this the first case in which the U.S. government has asserted foreign control over a Chinese deal because of national security concerns? What are the implications of that involvement?
Shoesmith: It is not the first time that the Committee on Foreign Investment in the United States has asked a foreign company to divest or sell its stake after the deal is closed, although it is somewhat unusual … CFIUS watches Chinese investments, the government watches Chinese investment, whether there has been a filing been made or not. And in this case, there must have been knowledge in that market that Grindr, owned by Kunlun, was considering an IPO. CFIUS took notice, must have decided CFIUS was uncomfortable with the Chinese control of Grindr because of the so-called personal identifying information (PII) issue.
The PII issue is sort of a well-known red flag for CFIUS, there has been a number of cases where PII concerns probably were the reason why deals were not approved by CFIUS. One obvious one was AppLovin, which is a mobile ad-tech company, the parties went ahead, finished the deal using a different structure. Another that probably had PII concern was the attempt to acquire MoneyGram by Ant Financial, which is part of Alibaba.
What is going to happen next?
CFIUS is concerned … about Chinese investment [more] than they care about Canadian investments. At the minimum, the Kunlun group has to divest its interest, it can no longer hold that interest, and [Kunlun is] looking for buyers. Now, if the buyer is not a foreign person, it is going to be pretty easy, if the buyer is a foreign person, you pick another Chinese entity … the buyer will make a CFIUS filing and it will be necessary to clear CFIUS before that can be completed. The most obvious things that are going on here, is the focus on Grindr and PII.
Are we seeing more Chinese deals being blocked under the Trump administration?
We, with people in my group, we have assembled a database of all the China-related deals that we can find, going all the way back to 2014—so the last part of the Obama years—and the first two years of the Trump administration. And here is the conclusion: Chinese deals to have a lower pass rate under Trump than they did under Obama—some, but not a huge amount.
The pass rate under Obama was about 95 percent, which is pretty high. Under Trump, the percentage is 60 percent. So, it is bad, but it is not helpless, if you look at the deals, there are only 44 of them. I would say this Grindr deal is an obviously problematic deal from the beginning. If you don’t try to do a deal that is obviously problematic … if you take those out, you get a pass rate of three out of four. So, it is not terrible, but it is difficult.
What are the key takeaways from the Kunlun-Grindr deal?
A couple of things, it tells us that PII, which five years ago was not a big issue with CFIUS … really is a big issue for CFIUS [now]. If you are thinking about doing a deal, you really need to focus on whether you can, what solution are you going to offer to CFIUS that ensures that PII will not leak back to someone that shouldn’t have it.
The second lesson I think we can take is … that CFIUS already is reviewing existing ownership structures, where a CFIUS filing wasn’t made, and … asking national security questions about existing ownership. The message here is for companies that have a large amount of PII and they have foreign investors, they should think about whether they made a CFIUS filling when the investors invested. And if not, [they should be thinking] what should I do at this point for forestalling something like this in the future?
How is this going to impact Kunlun?
What I would worry about is whether Kunlun is going to be able to do another deal in the U.S. and some other areas.
When CFIUS came and asked for the filing, if that whole process went smoothly and Kunlun was completely transparent, if CFIUS thought it was cooperative… then I think Kunlun is still in a good position for the next deal. … If they didn’t have a good experience with CFIUS, then they are going to be in a position that HNA Hainan airline group is now in with CFIUS.
How about for Grindr?
From Grindr’s point of view, it certainly delays their IPO. [But] if Kunlun is just a buyer, then another buyer is just as good. Frequently, a Chinese buyer is not just a buyer though, because the objective of the company is to expand into China. [If that is the] case, this is going to be a problem for Grindr, it is going to throw a bump in the road for Grindr and for its expansion into China. But, I don’t know if that was the objective for acquisition in the first place.