The Committee on Foreign Investment in the United States (CFIUS), which to M&A bankers has taken on something of the status of a Bond villain, rejected the deal on national security concerns in what must have been the first thing its staff did after returning to work from the Christmas holidays.
What should we read into this? One interpretation is that the rejection had to do with reciprocity, or the lack of it: the fact that American access into Chinese enterprises is limited, and that if this deal was happening in the other direction – US buyer, Chinese financial services and data player – there is just no way it would be approved.
One can tie this point of view in with Trump’s more protectionist domestic policies in the US, with Ant Financial head Jack Ma’s apparent friendship with the US president clearly not enough to get the deal over the line, but the truth is that Obama nixed a number of China inbound deals as well.
The other interpretation has to do with national security, and if that is correct, it means the US did not trust Ant, or China generally, with such a mighty trove of sensitive personal data about American citizens, despite Ant's promise to keep US customer data on US servers. And not just Americans – MoneyGram has 2.4 billion bank and mobile accounts worldwide.
It’s not necessarily a question of suspecting Ant might abuse its power in owning the data; it’s also the question of security and the potential impact of a leak or cyber-attack revealing these records.
Also in the mix are US attitudes towards money laundering and the state’s ability to police it. Cross-border transfers have been considered a potential security threat to the US since 9/11, and the US will not wish to cede any degree of control over those remittance channels.
|Ant Financial is controlled by Alibaba founder|
Jack Ma. Source: www.alibabagroup.com
We can expect this to be a constant issue as China’s e-commerce titans and their financial services arms seek to expand overseas. There is a disconnect between expected domestic practices and international expectations around data privacy.
This reared its head in January when Tencent denied that it stores or analyses messages that are sent through its WeChat platform, saying that “user privacy has always been one of our most important principles” and “the rumour that we look at your WeChat messages every day is pure falsehood”.
But if what Tencent says is true, it actually puts the company in breach of Chinese cyber-security regulation, which explicitly requires group message platforms to keep records for at least six months in case they are needed by the police.
Indeed, a man called Wang Jiangfeng is in prison right now, serving a two-year sentence for referring to president Xi Jinping as “steamed bun Xi” in private messages through Tencent platforms; with the lawyer who defended him disbarred after the trial.
China’s e-commerce and internet leaders have enjoyed unfettered growth, including in basic financial services, partly because of a national acceptance – requirement, even – that your data are not your own but belong, in the end, to the state.
Expanding overseas, though, will bring companies such as Ant/Alibaba and Tencent into increasing contact with jurisdictions where the expectations around use and ownership of big data are very different.
And this is not the only problem Chinese outbound M&A faces. The blocking of HNA Group’s bid for UDC Finance, a New Zealand arm of ANZ, by New Zealand’s Overseas Investment Office (OIO), was also telling. The OIO says it could not verify who controlled HNA, saying that “the information provided about ownership and control interests was not sufficient or adequate”.
But it might also have had to do with the fact it was the first deal to be knocked back since Jacinda Ardern took power in New Zealand, partly on a platform of more tightly policing Chinese investment into the country.
Resonate all year
So the HNA deal shows us two separate issues that will resonate all year: the fact that people want a clearer idea of who exactly is doing the buying; and the fact that all over the world, governments are becoming more protectionist, particularly towards Chinese buyers.
HNA is perhaps a special case. It had already been pinged by the Swiss Takeover Board in November, which accused it of providing inaccurate information and failing to make important disclosures when buying airline caterer Gategroup.
When HNA then pulled out of a bid to acquire Value Partners, Hong Kong’s largest hedge fund, in January, citing “commercial considerations”, the market immediately wondered if this meant an expectation of regulatory challenges.
HNA, incidentally, is also in the CFIUS queue for its intended acquisition of hedge fund-of-funds firm SkyBridge Capital from Anthony Scaramucci; once Trump’s communications director – it’s a tangled world.
In the short term, Ant has just lost a lot of time and money, including a $30 million break fee. Longer term, it has some big questions to ask itself. Will it ever be able to make a MoneyGram-style acquisition given the sensitivity of financial records and the questions regulators ask about China? Or must it instead grow everything organically, or out of minority stakes in smaller businesses?
It still sees huge opportunity in disrupting remittance flows, but it won’t be easy.
“The geopolitical environment has changed considerably since we first announced the proposed transaction with Ant Financial nearly a year ago,” said Alex Holmes, chief executive of MoneyGram, in January.
He’s right. And Chinese M&A will be a casualty.