Computer-Chip Testing Firm Urges Blocking Sale of Rival to China Fund -- Update

By Kate O'Keeffe and Eva Dou Features Dow Jones Newswires

The battle between the U.S. and China over computer-chip makers has expanded to a new front: the companies that test the technology.

Continue Reading Below

Citing national-security concerns, a U.S. semiconductor-testing company, Cohu Inc., is mounting a quiet campaign to derail the planned $580 million sale of an American rival, Xcerra Corp., to a Chinese state-backed group, according to documents reviewed by The Wall Street Journal.

The U.S. government has previously shot down attempts by Chinese interests to buy makers of the chip technology used in mobile phones, military equipment and other systems. The deal for Xcerra, which provides equipment to test chips but doesn't actually make them, could test how far the Trump administration is willing to go to shut China out of the sensitive sector at the heart of a trade battle.

The U.S.'s cutting-edge semiconductor technology powers the industries that make the country the world's most formidable superpower, including the military, Silicon Valley and Wall Street. As China continues its rapid development, it, too needs a top-notch chip industry, and it has announced plans to spend $150 billion to get it.

The effort by Cohu is aimed at blocking one deal in which its competitor could gain a financial advantage through an influx of Chinese money. But on a larger scale, it provides a window into the myriad economic and national security considerations the U.S. is juggling as it confronts a powerful new rival in the global chip market.

Chinese officials and executives say the national security concerns their U.S. counterparts raise are a pretext and that the U.S. is simply trying to stave off competition.

Continue Reading Below

Poway, Calif.,-based Cohu recently sent its analysis of the risks associated with the proposed sale of Norwood, Mass.-based Xcerra to the Chinese to the Committee on Foreign Investment in the U.S., a multiagency panel that vets deals for national-security concerns, according to the correspondence reviewed by the Journal. The committee, known as CFIUS and led by the Treasury Department, can approve the acquisition or recommend the president block it.

The deal, announced in April, could give China access to intellectual property that could accelerate its efforts to become a serious player in the industry, Cohu alleges in a six-page white paper it sent to a Treasury official handling CFIUS matters.

"If Xcerra becomes a Chinese state-owned enterprise and obtains top-tier semiconductor companies like Qualcomm, Broadcom and Texas Instruments as customers, it is reasonable to expect transfer of this critical information to Chinese semiconductor companies," the document says.

Xcerra, in a statement, said: "The allegations Cohu make are false, as Xcerra does not possess critical [intellectual property] from any customer." Both parties in the deal intend to cooperate fully with CFIUS "to address any potential national security interests," Xcerra said.

Cohu didn't respond to requests for comment.

A Treasury spokesman said the agency doesn't comment on whether any particular transaction is being reviewed by CFIUS.

The deal's primary financier is a $20 billion Chinese government-controlled fund called the China Integrated Circuit Industry Investment Fund Co., known locally as "the Big Fund." A representative declined to comment.

Cohu's June 2 paper also says a sale of Xcerra could disrupt the semiconductor supply chain and lead to U.S. job losses if the company uses subsidies from its new owner to improperly undercut U.S. rivals.

Some U.S. officials warn that, for example, China could use state subsidies to drive U.S. chip firms out of business and eventually dominate the industry, leaving the U.S. and its military reliant on Chinese chips. Others, though, say it is critical for CFIUS to focus solely on traditional national-security matters, and that taking economic concerns into account would be wrongly protectionist. President Donald Trump has ramped up trade pressure on China, directing aides on Monday to begin a study of whether to launch a formal investigation into whether Beijing is unfairly acquiring patents and licenses from U.S. firms.

U.S. scrutiny of China's chip ambitions and Chinese deals generally has been building. In December, after a CFIUS investigation, then-President Barack Obama blocked a Chinese investment fund's purchase of German semiconductor-equipment supplier Aixtron SE, which has U.S. assets. In January, an Obama administration advisory panel warned of economic and military dangers posed by China's 10-year, $150 billion effort to build a cutting-edge semiconductor sector.

During the Trump administration, CFIUS has thrown a number of high-profile takeover bids by Chinese firms into question, and lawmakers and the Treasury are weighing changes that could make the review process even tougher.

Some say the fight has become overly politicized. Ray Bingham, a partner at Canyon Bridge Capital Partners Inc., a Palo Alto, Calif.-registered private-equity firm funded by the Chinese government, said in a recent interview that politics "more than anything" was behind CFIUS's scrutiny of his firm's $1.3 billion attempt to buy Lattice Semiconductor Corp., a U.S. firm. Canyon Bridge's structure raised red flags with a bipartisan group of 22 House lawmakers led by Rep. Robert Pittenger (R., N.C.), who accused the firm of initially trying to obscure its state backing, which it has denied.

Cohu, in a follow-up letter dated Aug. 8, urged CFIUS to scrutinize the Chinese financing behind Xcerra's deal following Xcerra's Aug. 7 disclosure to the Securities and Exchange Commission that it had changed.

Under the new deal structure, local government funds from China's Fujian and Hubei provinces also will help finance the purchase, Chinese corporate records show.

Xcerra said in its statement that, according to the terms of the deal, its buyer had a right to syndicate its financing. "This change had nothing to do with filing with the Committee on Foreign Investment in the United States," it said.

Write to Eva Dou at eva.dou@wsj.com

(END) Dow Jones Newswires

August 15, 2017 17:24 ET (21:24 GMT)