TrendGreater U.S. scrutiny of foreign investment in sensitive industries

Published 26 January 2007

The repercussions of the controversial DPW deal of early 2006 are very much with us, as the Bush administration scrutinizes much more closely many more foreign investment deals, and conditions approval of some of them on national security “mitigation” agreements

Old soldiers may not die but fade away, but some issues not only do not die, but they do not fade away, either. Take last year’s storm over the Dubai-based port management company taking over operations in major U.S. seaports. The Bush administration initially approved the deal, but then renegotiated some of the deal’s terms in response to public outcry about the national security ramifications of the original arrangement (in November Dubai Ports World sold its stake in the controversial deal to AIG at a hefty profit).

Once burnt, twice shy. As a result of the controversy, the Bush administration initiated more national security investigations of foreign deals last year than it did in the previous four years combined, according to research released yesterday by the National Foundation for American Policy. The research was done by David Marchick, a partner at Covington & Burling. The report says that the data underscores the deep impact the Dubai Ports World controversy has had on the U.S. government’s approach to foreign take-overs. The data also supports the contention of business interests that the process of getting deals approved in Washington is now much more arduous and uncertain.

The Committee on Foreign Investment (CFIUS), the twelve-member agency chaired by the Treasury department, is responsible for reviewing deals on national security grounds. The committee saw the number of voluntary filings for review in 2006 rise to 113 filings, an increase of 73 percent from 2005. Of those proposed transactions, seven deals were subjected to extended investigations and five companies withdrew their proposed deals during the investigation.

There are other aspects to the new trend which worry the business community. The number of “mitigation,” that is, national security agreements negotiated between the government and companies as a condition of deal approval, rose markedly. DHS, a powerful member of the security panel, was a party to fifteen mitigation agreements in 2006, compared to thirteen agreements from 2003-5.

Treasury Secretary Hank Paulson last year warned Congress against passing legislation which would create “uncertainty and delay” in the review process, but under his watch as chairman of the panel, CFIUS has forced companies involved in two separate transactions — Lucent’s merger with Alcatel and Nokia’s joint venture with Siemens — to agree to controversial mitigation agreements.

Analysts say that the Bush administration has become too cautious about foreign transactions because of the intense political pressure it came under as a result of the DPW deal. That uproar has weakened the hand of those agencies and departments which are more hospitable to foreign investment in the United States.

-read more in this FT report (sub. req.)