By Geoffrey Smith
February 11, 2017

Does the United States already consider Germany as much of an adversary as China?

The government is prompting the question after a key committee on foreign investment intervened to block the takeover of Wolfspeed, a North Carolina-based maker of high-performance semiconductors, by Germany’s biggest chipmaker, Infineon Technologies.

The $850 million deal looks dead in the water after the two companies put out a statement Thursday saying that the Committee on Foreign Investment in the United States had informed them that their deal was a risk to national security, and that it was unlikely that the two could “adequately mitigate” the risk with remedial measures.

CFIUS, which is housed in the Treasury but which brings together officials from government departments such as Homeland Security and State, is not allowed by law to disclose information filed with it. As such, a Treasury spokesman said it was impossible to comment on open investigations.

The decision wasn’t entirely out of the blue. U.S. President Barack Obama already blocked two similar deals on national security grounds in the last two years. First there was the sale of LumiLEDs, a division of Dutch electronics giant Philips. Then the administration intervened to stop the sale of Aixtron, a German engineering company that makes chip-making machinery, because some of its facilities and technology were based in its U.S. subsidiary.

The key difference was that in both cases, the buyers were Chinese. The idea that a buyer from Germany, one of the U.S.’s closest and most powerful allies, could be a threat to national security is entirely new.

A spokesman for Infineon dismissed as “pure speculation” the suggestion that the decision could be connected to the chill in U.S.-German relations since the election. President Donald Trump and Germany’s political elite have traded more-or-less thinly-veiled barbs on issues from trade to NATO and human rights since November, with Trump particularly critical of Chancellor Angela Merkel’s policy of allowing mass immigration from Syria and other troubled countries.

Karsten Iltgen, an analyst with Bankhaus Lampe in Düsseldorf, said it’s unlikely that the CFIUS decision was ordered by the new administration because it came so quickly after President Trump assumed power, and the deal has been under review for months. But the expansion of its logic to cover an ally is “striking”, he said.

The news had knocked the share price of Wolfspeed’s parent Cree down by 8% on Thursday, its worst loss in three months. It also shaved 2.4% off Infineon’s. The logic is clear: restricting the circle of potential buyers kills enterprise value. When Phillips ultimately found a U.S.-based buyer for LumiLEDs in the shape of Apollo Global Management, it had to accept 40% less than the cash-rich Chinese consortium had offered it. Aixtron’s share price is down 33% from before Obama’s intervention (and also three weeks ago lost its CEO Martin Goetzeler, who left in a huff after seeing his strategy exploded).

Infineon, which was originally a spin-off from Germany’s biggest conglomerate, Siemens, had originally wanted Wolfspeed for its expertise in silicon carbide (SiC) substrates, diodes and transistors, which it argued would improve its position in the automotive and electrical energy sectors. Those are two fast-growing sectors that account for over half of Infineon’s sales. Some analysts expect that the growth of autonomous technology and electric and hybrid vehicles will mean that the average car contains $550 worth of chips by 2030, compared to around $100 today.

Bankhaus Lampe’s Iltgen argues that CFIUS’ intervention isn’t the end of the world for the German company – it’s a small acquisition, and “they can get there organically, but sadly it will take them longer.” What would make things more interesting, he argues, is if European authorities feel the need to retaliate, to send a message to the U.S. about how much is at stake. Qualcomm (qcom) currently has a much more significant $47 billion bid for Dutch-based NXP outstanding that still needs regulatory approval.

Such retaliation is unlikely, given that the perennial divisions between Europe’s member states and given that the EU has no competence for national security. But tit-for-tat games can easily be played out obliquely, and EU regulators would always be able to put pressure on U.S. companies’ interests in other ways. Antitrust, tax and privacy issues offer ample opportunity, as Apple and others know to their cost.

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