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P&O becomes prize in the race
to control ports for global trade

By JASON SINGER
Staff Reporter of THE WALL STREET JOURNAL
December 15, 2005; Page A16

LONDON -- This is a potential bidding war with a difference: The governments of two former pieces of the British Empire -- Dubai and Singapore -- are tussling over the fate of one of the U.K.'s last trappings of empire, international ports.

Peninsular & Oriental Steam Navigation Co., operator of some of the world's premier container terminals and one of the oldest companies in England, agreed to sell itself to state-owned Dubai Ports World earlier this month for £3.3 billion ($5.8 billion). A combined company would rank third in terms of global port capacity.

A few days later, the Singapore government's investment company, Temasek Holdings Pte., which controls the world's second-largest port operator, waded into London's stock market and bought P&O shares, much of them at a price higher than Dubai's bid. Temasek, which now holds more than 4%, has remained mum about its reasons for doing so, though many expect it to eventually launch a rival bid.

What is at stake is much bigger than a £3.3 billion company. Port holdings have become crucial assets in global trade.

As the manufacturing of low-cost goods in Asia has boomed and China has emerged as an economic power, the race is on to control the ports that launch the goods made in Asia, and receive them in the U.S., Western Europe and elsewhere. As global industrialization continues, container shipping of nearly every variety of manufactured good is expected to expand strongly.

P&O's 29 ports around the world are among the last available for sale. The rest are state-owned or in the hands of big port operators with no interest in selling. Because there is so much infrastructure involved in container ports, not many new ones are built. And when they are, it takes many years.

"In big-picture terms, P&O ports would be very attractive to add in its entirety," says Neil Davidson, head of the ports practice at Drewry Shipping Consultants in London. He added that P&O's operations in Asia and North America and a new U.K. port are key assets.

"You buy P&O and you get a big chunk of the Indian port market," he said, adding that a buyer would also get the "potential to build in the U.K., which is a pretty rare thing to have."

Dubai Ports ranks seventh in terms of the combined capacity of its ports. It operates container terminals in the Middle East, Africa, India and Eastern Europe.


Singapore's PSA International, which is owned by Temasek, ranks second, behind Hutchison Whampoa Ltd. of Hong Kong, with 18 ports in 11 countries across Asia and Europe. PSA operates the world's largest terminal hub in Singapore, where it processes a truck full of goods every 25 seconds.

Both Dubai Ports and PSA lack container-port interests in North America, where P&O has a 50% stake in Port Newark Container Terminal in New Jersey, among other holdings. P&O has a 6.1% share of the global market, as measured by twenty-foot-equivalent container units, a common measure of capacity in the container-shipping business known as a TEU, according to Drewry Shipping Consultants Ltd.

Investors are confident that both deep-pocketed governments view P&O as too valuable to lose, and they have bid up the company's shares to more than 5% above Dubai's offer. The shares have recently traded 10% higher. As with many other bid battles these days, hedge funds have been piling in and ultimately might have a big say in whoever is the winner.

A spokeswoman from Temasek declined to comment. A spokesman from Dubai Ports couldn't be reached.

The brash gambit each side is using also points to a trend in European mergers and acquisitions: Companies that typically negotiate deals with boards of directors are buying shares in the market first to gain clout for further discussions.

Dubai Ports began trying to buy some P&O stock after the acquisition was announced to help ensure its deal is completed, but Dubai Ports couldn't scoop up much stock before Temasek's buying pushed the price higher than the bid price. According to U.K. takeover rules, Dubai can't buy any stock at a price higher than its bid. If it does, it must raise its bid to the highest price it paid for even a single share.

In an unusual move, Temasek's brokerage firm said it was buying on behalf of Temasek. But the shares quickly surged past Temasek's self-imposed 460-pence threshold, 3.8% higher than Dubai's 443-pence bid.

Adding to the intrigue is P&O's unusual status. Dating back to 1840, P&O is one of the last businesses left that operates under a charter from the British royal family, rather than normal corporate law. That means some of the rules that affect other U.K. mergers and acquisitions don't apply.

The original charter is an antique scroll that hangs on the wall in P&O's corporate office on Pall Mall, a historic London street near Buckingham Palace. In response to a deluge of hedge funds requesting permission to come to P&O's office to read the charter -- looking for loopholes that could affect the bidders' strategy in the takeover battle -- the company last week posted a copy of the royal charter on its Web site.

The most important rule that doesn't apply is the so-called squeeze out, which says that a buyer who accumulates more than 90% of a company's shares can force the remainder to sell, too. Due to its royal status, nobody can be squeezed out as a P&O shareholder.

To get around that, Dubai's agreed bid to take over P&O is being done through the courts, in what is known as a "scheme of arrangement." If 75% of shareholders approve the deal, a court will order that all the shares can be bought for Dubai Ports's cash bid, giving the buyer the ability to complete the deal.

Temasek ultimately might not bid, people close to the matter say. Instead, the company might try to be enough of a nuisance to foil Dubai Ports' deal, or amass enough shares to persuade Dubai Ports to sell it some strategic P&O ports in India and China. To do that, Temasek would need 25%, or close to it, and threaten to turn down the vote.

Dubai has a plan to counter that move, people close to it say. Dubai Ports could switch to a normal tender, making the deal subject to it gaining 50.1% control and leaving Temasek with a minority stake.

--Rod Stone of Dow Jones Newswires contributed to this article.

Write to Jason Singer at jason.singer@wsj.com

http://online.wsj.com/article/SB113980345539772251.html

Companies in Emerging Markets
Show Clout in Global Deal Game

By JASON SINGER and DENNIS K. BERMAN
February 13, 2006; Page A1

Companies from emerging markets, armed with piles of cash from rising commodity prices and abundant financing, are snapping up targets in Europe and the U.S., a trend that could shift the global economic balance of power in some industries.

In the latest example, shareholders of ports operator Peninsular & Oriental Steam Navigation Co. are scheduled to meet today to vote on a $6.8 billion takeover by Dubai Ports World, a company backed by the government in Dubai, one of the seven emirates in the oil-rich United Arab Emirates.

The deal is expected to be approved, ending a three-month bidding war for P&O, one of Britain's oldest companies, between the Dubai company and one from Singapore. If shareholders sign off, the top three global ports operators will be based outside the U.S. and Europe.

Europe especially has been targeted by buyers from emerging markets recently. Last year, companies from the Middle East, Latin America, Asia and other regions spent more than $42 billion on deals there -- more than twice as much as in 2004.

So far this year, companies from emerging markets have announced deals valued at a total of $9.3 billion in Europe, which tops the total for all of 2003, according to research firm Dealogic.

In the U.S., companies from emerging markets spent more than $14 billion on 96 deals in 2005. That passed the previous record of about $10 billion, set in 2000. Among the better-known purchases here was the $1.25 billion acquisition by China's Lenovo Group Ltd. of the personal-computer division of International Business Machines Corp.

Bankers and executives say the latest wave is being driven by a host of new factors. One is an excess of cash, generated in part from the soaring price of oil and other commodities in recent months. Many buyers are backed by national governments that are looking to invest their newfound riches in other industries that will help diversify their economic base or provide new distribution outlets for their exports.

Economic conditions have changed, too. At the same time that once closed countries like China and India have opened up their economies, hedge funds are controlling ever-wider stakes of public companies in Europe and the U.S., and generally are neutral about who buys their holdings.

Moreover, companies from several emerging-markets economies have grown larger and more powerful than many outsiders had realized, said Peter Tague, head of European mergers and acquisitions at New York investment bank Citigroup Inc. "These guys have been consolidating their local markets without anyone paying much attention, and now they're aggressive players on the world stage," he said.

Last year, for instance, Egyptian billionaire Naguib Sawiris bought a controlling stake in Italian mobile and fixed-line phone operator Wind Telecommunicazioni from Italian utility Enel SpA. The deal, which valued Wind at more than $12 billion, was Mr. Sawiris's first foray into Europe after acquisitions across Asia and the Middle East. Mr. Sawiris received massive loans from European banks and sold a bond to finance the deal, while giving Enel a stake in his Egyptian mobile-phone business Orascom Telecom.

Even companies that haven't benefited from high energy prices have been buoyed by an influx of money into their local stock markets from western investors chasing better returns than they can get at home. Higher stock prices enable companies to more easily raise cash from shareholders and to persuade banks to lend to them at low interest rates.

India's benchmark index climbed around 50% in the past 12 months, for instance, so many Indian companies went shopping. During that period, auto-parts maker Bharat Forge Ltd. bought Imatra Kilsta AB of Sweden, petrochemical company Reliance Industries took control of Trevira GmbH in Germany and consumer-electronics concern the Videocon group snapped up the picture-tube business of France's Thomson SA.

In late December, after Indian technology company Wipro Ltd. purchased one company in Europe and one in the U.S., a senior Wipro executive told Dow Jones Newswires that the technology giant is looking to buy more software services businesses in the U.S., Europe and the Asia-Pacific region with its cash reserves of $718 million.

Just last week, Indian generics-drug maker Dr. Reddy's Laboratories Ltd. said it is bidding against local pharmaceutical rival Ranbaxy Laboratories Ltd. to acquire Betapharm Arzneimittel GmbH, a German drug maker.

To be sure, some bidders have run into unexpected obstacles, such as China's Cnooc Ltd., which withdrew its $18.5 billion offer for oil-and-gas producer Unocal Corp. last year in the face of stiff U.S. political opposition.

Moreover, the trend isn't entirely new, as some companies from emerging markets began expanding in the West long ago. Hong Kong conglomerate Hutchison Whampoa Group, for instance, not only is the world's biggest ports operator but also owns an oil company in Canada, a mobile-phone company in Europe and extensive property and retail holdings world-wide. Dickson Poon, a Hong Kong entrepreneur, has controlled famous United Kingdom department store Harvey Nichols since 1991. Malaysia's YTL Power, a unit of YTL Corp., purchased British utility Wessex Water for slightly more than £1.2 billion ($2.09 billion) in 2002.

In some ways, the acquisition trend is reminiscent of Japan's drive into the U.S. in the 1980s. Flush from industrial success exporting consumer appliances, electronics and machinery, Japanese buyers snapped up such well-known properties as Pebble Beach golf resort in California and Rockefeller Center in New York. Many of those deals eventually turned sour. The rich prices became too much of a burden once Japan's domestic economy foundered, sending company share prices and values down.

So far at least, companies from developing nations have tended to make purchases in basic industries that they know, rather than seek trophy properties. Cemex SA of Mexico, for instance, bought into the European cement-making business through its $4.1 billion purchase in 2004 of RMC Group PLC of the U.K.


Also in 2004, a consortium of Hong Kong companies led by Cheung Kong Infrastructure Holdings Ltd. purchased the north England gas-distribution network National Grid Transco PLC for $2.5 billion. Other purchases by Russia and other Asian nations include shopping centers, energy assets and construction companies.

One exception: Last year, state-backed Dubai International Capital LLC paid $1.6 billion for Tussauds Group Ltd. of the U.K., owner of the famous Madame Tussauds wax museum in London, among other attractions.

For now, bankers said, companies from developing nations are tending to focus on deals with a longer-term view to potential profits. Many don't have the same shareholder pressure to show quarterly profit growth as do publicly held companies in the U.S. and Europe.

"They take a much longer-term view of the returns from the assets they buy," said Mark Preston, managing director of investment banking at Deutsche Bank, who advised DP World on its P&O bid. DP World's winning bid for P&O was at a price almost 70% higher than P&O's share price before the bidding war began in November -- a sign of how the newcomers also are providing greater competition and pushing some prices higher.

So far, emerging-markets companies have been more active in Europe than in the U.S., because many European companies, such as P&O, are global businesses but still are considered reasonably affordable. Because the U.S. is itself such a large market, many companies here already are quite large by the time they become multinational companies, limiting the field of potential buyers.

As the deals mount up, some emerging-markets companies are creating business empires designed to rival big Western concerns. Eventually, that could put large parts of key industries in the hands of those companies.

For instance, Indian telecommunications giant Videsh Sanchar Nigam Ltd., which just a decade ago was part of a state-owned monopoly, has ambitions to create an international business to compete directly against the likes of AT&T Corp. and the U.K.'s Cable & Wireless PLC.

First came the acquisition of Tyco International Ltd.'s massive fiber-optic network, a state-of-the-art, 37,200-mile long fiber loop laid along ocean floors and into dozens of cities world-wide. The network cost more than $3 billion to build, but was bought by VSNL for $130 million in 2004. The company just completed the $240 million purchase of Teleglobe Inc., itself the former Canadian international-calling monopoly, which was valued at more than $7 billion in 2000.

VSNL has said it plans to use the two companies to better serve the surge of voice and data traffic coming in and out of call centers in India. But that is just the start, says Vinod Kumar, president of global converged services at VSNL International. "The mindset has changed," he said. "Indian companies can't just operate in the domestic arena. We have to compete in markets outside India, too."

--Eric Bellman in Mumbai contributed to this article.

Write to Jason Singer at jason.singer@wsj.com and Dennis K. Berman at dennis.berman@wsj.com

http://online.wsj.com/article/SB114054059300379152.html

Bush, Congress Head
For Clash Over Ports Deal

President Promises a Veto,
As Republican Leaders Move
To Block Dubai Acquisition
By GREG HITT, DENNIS K. BERMAN and DANIEL MACHALABA
Staff Reporters of THE WALL STREET JOURNAL
February 22, 2006; Page A1

In a politically charged collision of economic and national-security interests, President Bush squared off against Congressional leaders and governors from both parties over the transfer of six U.S. shipping ports to the management of a Middle Eastern company.


The escalating controversy over the $6.8 billion sale of Peninsular & Oriental Steam Navigation Co., of London, to Dubai Ports World underscores political tensions between two Republican commitments: national security and free trade in an increasingly global economy. Though the deal already has been approved by the U.S. government and by shareholders -- and is set to close next month -- an increasing number of critics are questioning the wisdom of entrusting port security to an Arab-owned entity.

Yesterday, Senate Republican Leader Bill Frist joined Democratic Leader Harry Reid in pushing for a delay and further study. Absent action by the White House, Sen. Frist said he would pursue legislation "to ensure that the deal is placed on hold." His call was echoed by House Speaker Dennis Hastert of Illinois.

President Bush vehemently defended the transaction, summoning reporters accompanying him on Air Force One to insist it posed no security threat and to say that if legislation cleared Congress to block the deal, "I'll deal with it, with a veto." Mr. Bush, who hasn't vetoed any legislation during his presidency, said the U.S. would be sending "mixed signals" by acting when a British company faced no such objections, and he challenged lawmakers to "step up and explain why a Middle Eastern company is held to a different standard."

MORE ON PORTS


• Framing the Issue: Safe Harbors?

• Vote: Should the U.S. let the deal go through?

Back at the White House later, he added, "If there was any chance that this transaction would jeopardize the security of the United States, it would not go forward. But I also want to repeat something again, and that is: This is a company that has played by the rules, that has been cooperative with the United States, a country that's an ally in the war on terror, and it would send a terrible signal to friends and allies not to let this transaction go through."

With the president's popularity flagging, the White House faces a real risk that opposition from the House and Senate leadership, fanned by the administration's Democratic adversaries, could lead to Congressional legislation blocking the deal. "[The administration's] credibility on national security is not the ace that they thought it was," said Rep. Rahm Emanuel of Illinois, head of the Democrats' House campaign committee.

More broadly, a successful move to block the deal could send a chilling signal about some foreign investment in the U.S. at time when such investment has been critical in sustaining growth. The uproar follows a similar outcry last year at the unsuccessful effort by a Chinese state-controlled oil firm, Cnooc Ltd., to buy U.S. oil company Unocal Corp.

At the least, the uproar could lead to a change in the way such deals are reviewed. With the administration already having signed off, some in Congress are calling for overhauling and toughening the government's 31-year-old system for reviewing foreign investments with national-security implications -- including creating an expanded role for Congress. Under federal law, there is little the administration can do at this point to derail the sale.

WALL STREET JOURNAL VIDEO



WSJ's John Harwood on the clash between Bush and Congress over the ports deal and whether to expect some type of compromise. Plus, WSJ editorial board member Stephen Moore and Bilzin Sumberg attorney Michael Kreitzer debate the deal.
• New Jersey Governor John Corzine details a planned federal lawsuit to block the handover of the Port of Newark to Dubai Ports World.

The deal followed the normal approval process for foreign transactions with national-security implications. The acquisition was run through the Treasury Department, which typically convenes experts from across the government for what is called the Committee on Foreign Investment in the U.S., or CFIUS. Wrapped in secrecy, the panel makes recommendations to the president, who has final say.

"I think we're at a time where we can get some good CFIUS reform," said attorney Patrick Mulloy, a critic of the current approval process who sits on a government-appointed U.S.-China trade commission. The P&O example reveals that the Treasury Department "doesn't want to use its authority," Mr. Mulloy said. "Foreigners finance our budget deficits and trade deficits, and Treasury doesn't want to do anything that will interfere with the investment flows."

Among its global holdings, P&O controls ports in New York, Philadelphia, Baltimore, Miami, New Orleans and Newark, N.J. Its U.S. affiliate directly employs 430 workers, while another 6,000 or so workers are hired daily on a contract basis through the longshore union.


For its part, Dubai Ports World is backed by the government in Dubai, one of the seven emirates that comprise the oil-rich United Arab Emirates, a small, conservative Muslim state on the Persian Gulf. The company's chief operating officer, Ted Bilkey, said it has worked within U.S. law and "actually approached the U.S. government for approval of our security arrangement weeks prior to the formal review."

In a statement, Mr. Bilkey said: "We will continue to work with the U.S. government on maintaining the highest standards of security at U.S. ports, and will fully cooperate in putting into place whatever is necessary to protect the terminals." People close to the matter said the company isn't considering stripping out the U.S. ports because it sees no such need.

Yesterday, members of the Senate Homeland Security and Governmental Affairs Committee -- including Republican Chairwoman Susan Collins of Maine -- sent a letter to Homeland Security Secretary Michael Chertoff and Treasury Secretary John Snow expressing "serious concerns" about the review of the sale and demanding the committee be briefed on the process.

Also questioning the deal were two Republican governors, George Pataki of New York and Robert Ehrlich of Maryland, and New Jersey's Democratic Gov. Jon Corzine, all of whom have affected ports in their states. Joining Mr. Frist were Republican leaders Jon Kyl of Arizona and Rick Santorum of Pennsylvania, both facing tough Senate re-election races this fall.

Dubai Ports World executives plan to visit Washington this week to brief congressional leaders and staffers and administration officials on the deal. Girding for a battle, the company is tapping well-connected consulting firms for help: Downey-McGrath Group, founded by former congressmen from both parties, and Alston & Bird LLC, whose advisers include former Senate Democratic Leader Thomas Daschle of South Dakota.

In the background is Albright Group, a firm founded by former Secretary of State Madeleine Albright. The Albright Group doesn't lobby but has provided strategic advice to Dubai Ports World, specifically on expanding the company's presence in China.

Some maritime executives said the weakest links in port security aren't likely to be in domestic ports. "If you are worried about a bomb in the box going off in New York, you need to worry about who loads the container overseas rather than the terminal operator who unloads it in the U.S.," said Theodore Prince, senior vice president of Optimization Alternatives Ltd., a Texas provider of terminal-operating software.


Indeed, terminal operators represent just one of many links in a typical international supply chain. Typically, cargo is loaded into a container by a manufacturer or consolidation center overseas. It is then trucked to a foreign port, put on a ship and brought to the U.S.

On the U.S. side of the transaction, a container is taken off a vessel at a terminal and moved by truck or train to a cargo receiver. While terminal operators play a role in security, including the fencing and access by employees, dockworkers and truck drivers, they don't normally touch the cargo inside the box. Security is provided by law enforcement such as the Coast Guard and Customs and Border Protection.

Most U.S. container ports consist of multiple terminals, each of which is leased to a separate operator, such as P&O. Such terminal operators are responsible for developing and operating the terminal and may subcontract to a stevedoring company that supplies the labor to load and unload the ships. Stevedores usually hire unionized dockworkers who are U.S. citizens.

--Jeanne Cummings contributed to this article.

Write to Greg Hitt at greg.hitt@wsj.com, Dennis K. Berman at dennis.berman@wsj.com and Daniel Machalaba at daniel.machalaba@wsj.com

http://online.wsj.com/article/SB114011934491976166.html

Lawmakers Push for New Review
Of Port Deal Amid Security Fears

By GREG HITT
February 17, 2006; Page A4

WASHINGTON -- A confrontation is brewing between Congress and the Bush administration over a deal to transfer control of a large U.S. port operator to a company in the Persian Gulf emirate of Dubai.

Warning of the potential for dangerous security lapses, a widening group of lawmakers, including the bipartisan leadership of the Senate Banking Committee, is pressing for the sale to be re-examined by the federal government. A high-level committee that reviews the national-security implications of foreign purchases of U.S. assets has blessed DP World's $6.8 billion purchase of Peninsular & Oriental Steam Navigation Co. of London.

The U.S. arm of the company runs commercial operations at six ports on the Eastern seaboard and the Gulf of Mexico, including facilities in New Orleans and New York that would come under DP World's control as part of the deal. Spokesmen for the companies couldn't be reached last night.

Government approval of the transaction came after a standard review by the Committee on Foreign Investment in the United States, which found no objections.

"Clearly, no responsibility of the government is more important than national security," said Treasury spokeswoman Brookly McLaughlin. The department chairs the 12-member investment-review committee that includes representatives from the departments of Defense, State and Homeland Security. A White House spokesman said the transaction was "vigorously reviewed."

The administration considers the United Arab Emirates, a federation of emirates that includes Dubai, to be an ally in the U.S.-led war on terror. In a demonstration of trust, the administration authorized the sale of the U.S.'s most advanced F-16 fighter jets to the federation.

But lawmakers are raising alarms about the deal. In a letter to Treasury delivered late yesterday, Senate Banking Chairman Richard Shelby (R., Ala.) and Maryland Sen. Paul Sarbanes, the panel's ranking Democrat, cast doubt on the depth of the administration review. They said the investment-review committee is required by law to give "special attention" to deals involving entities controlled by foreign governments.

"It does not appear any such investigation has occurred, despite Dubai's ownership of" DP World, the senators wrote after Banking Committee staffers received a briefing from the administration. The committee is planning to hold a hearing late this month on the transaction, and larger concerns with the investment-review process.

The concern voiced by Sens. Shelby and Sarbanes dovetails with larger worries outlined by several members of the House and Senate. At a morning news conference, the lawmakers yesterday warned U.S. port operations -- already a major security concern -- are too sensitive to hand off to DP World, which is controlled by the government of Dubai. Among other things, the lawmakers contended in their own letter to Treasury that Dubai has been a "transfer point for shipments of nuclear components" to Iran, North Korea and Libya.

The lawmakers called for a new 45-day investigation of the deal. Such an action would be rare. The administration has only limited authority to reopen a case, typically in instances where the parties to any pending deal are found to have submitted false information, or failed to submit important information to the government.

Write to Greg Hitt at greg.hitt@wsj.com

http://www.treasury.gov/offices/internatio...rs/exon-florio/
Committee on Foreign Investments in the United States (CFIUS)

--------------------------------------------------------------------------------


U.S. DEPARTMENT OF TREASURY

OFFICE OF THE ASSISTANT SECRETARY INTERNATIONAL AFFAIRS

OFFICE OF INTERNATIONAL INVESTMENT



EXON-FLORIO PROVISION

Introduction. The United States has traditionally welcomed Foreign Direct Investment (FDI) and provided foreign investors fair, equitable and nondiscriminatory treatment with few limited exceptions designed to protect national security. The Exon-Florio provision is implemented within the context of this open investment policy. The intent of Exon-Florio is not to discourage FDI generally, but to provide a mechanism to review and, if the President finds necessary, to restrict FDI that threatens the national security.

The Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury. CFIUS seeks to serve U.S. investment policy through thorough reviews that protect national security while maintaining the credibility of our open investment policy and preserving the confidence of foreign investors here and of U.S. investors abroad that they will not be subject to retaliatory discrimination.

The Statute. Section 5021 of the Omnibus Trade and Competitiveness Act of 1988 amended Section 721 of the Defense Production Act of 1950 to provide authority to the President to suspend or prohibit any foreign acquisition, merger or takeover of a U.S. corporation that is determined to threaten the national security of the United States. The President can exercise this authority under section 721 (also known as the "Exon-Florio provision") to block a foreign acquisition of a U.S. corporation only if he finds:

(1) there is credible evidence that the foreign entity exercising control might take action that threatens national security, and

(2) the provisions of law, other than the International Emergency Economic Powers Act do not provide adequate and appropriate authority to protect the national security.

To assist in making this determination, Exon-Florio provides for the President or his designee to receive written notice of an acquisition, merger or takeover of a U.S. corporation by a foreign entity. Once CFIUS has received a complete notification, it begins a thorough review of the notified transaction. In some cases, it is necessary to undertake an extended review or "investigation." An investigation, if necessary, must begin no later than 30 days after receipt of a notice. Any investigation is required to end within 45 days.

Information provided by companies contemplating a transaction subject to Exon-Florio is held confidential and is not made public, except in the case of an administrative or judicial action or proceeding. Nothing in section 721 shall be construed to prevent disclosure to either House of Congress or to any duly authorized committee or subcommittee of the Congress.

Factors To Be Considered. The Exon-Florio provision lists the following factors that the President or his designee may consider in determining the effects of a foreign acquisition on national security. These factors are:

(1) domestic production needed for projected national defense requirements;

(2) the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services;

(3) the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the U.S. to meet the requirements of national security;

(4) the potential effects of the transaction on the sales of military goods, equipment, or technology to a country that supports terrorism or proliferates missile technology or chemical and biological weapons; and

(5) the potential effects of the transaction on U.S. technological leadership in areas affecting U.S. national security.

Amendments. Section 837(a) of the National Defense Authorization Act for Fiscal Year 1993, called the "Byrd Amendment," amended Section 721 of the Defense Production Act (the "Exon-Florio provision"). It requires an investigation in cases where:

o the acquirer is controlled by or acting on behalf of a foreign government; and

o the acquisition "could result in control of a person engaged in interstate commerce in the U.S. that could affect the national security of the U.S."

Legislative Cite. Section 721 of Pub. L. 100-418, 102 Stat. 1107, made permanent law by section 8 of Pub. L. 102-99, 105 Stat. 487 (50 U.S.C. App. 2170) and amended by section 837 of the National Defense Authorization Act for Fiscal Year 1993, Pub. L. 102-484, 106 Stat. 2315, 2463.

CFIUS

Executive Order. The Committee on Foreign Investment in the United States ("CFIUS") was originally established by Executive Order 11858 in 1975 mainly to monitor and evaluate the impact of foreign investment in the United States. In 1988, the President, pursuant to Executive Order 12661, delegated to CFIUS his responsibilities under Section 721. Specifically, E.O. 12661 designated CFIUS to receive notices of foreign acquisitions of U.S. companies, to determine whether a particular acquisition has national security issues sufficient to warrant an investigation and to undertake an investigation, if necessary, under the Exon-Florio provision. This order also provides for CFIUS to submit a report and recommendation to the President at the conclusion of an investigation.

In 1993, in response to a sense of Congress resolution, CFIUS membership was expanded by Executive Order 12860 to include the Director of the Office of Science and Technology Policy, the Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy. In February 2003, the Department of Homeland Security was added to CFIUS. This brought the membership of CFIUS to twelve under the chairmanship of the Secretary of Treasury. The other members are the Secretaries of State, Defense, and Commerce, the Attorney General, the Director of the Office of Management and Budget, the U.S. Trade Representative, and the Chairman of the Council of Economic Advisers.

Regulations. The Exon-Florio provision requested that the President issue implementing regulations. These regulations were issued in 1991. They set up a voluntary system of notification with the possibility of CFIUS member-agency notice for non-notified transactions. The President retains full authority to protect the national security with respect to any acquisition covered by this statute, regardless of whether the parties file a notification.

The Exon-Florio regulations do not define national security. The preamble to the regulations provides guidance that products, services and technologies important to U.S. defense requirements would be significant to national security. Even though notification is voluntary, CFIUS would consider notification of these transactions appropriate.

Code of Federal Regulations Citation. Office of International Investment, Department of Treasury -- Regulations pertaining to mergers, acquisitions, and takeovers by foreign persons, 31 CFR Part 800.

Procedures. Treasury, acting at the staff level through the Director of the Office of International Investment in the Office of the Assistant Secretary of International Affairs, acts as the secretariat for CFIUS. It receives and circulates notices to CFIUS agencies and coordinates reviews. Reviews are conducted on a case-by-case basis.

The Exon-Florio statute established a 30-day review following receipt of a notification. For those transactions for which an extended 45-day review (or "investigation") is completed, a report must be provided to the President, who must by law announce the final decision within 15 days. In total, the process can not exceed 90 days. The statute requires the President to inform Congress of his determination of whether or not to take action under section 721.

The parties to an acquisition subject to section 721 may submit a voluntary notice to CFIUS of the proposed or completed acquisition by sending 13 copies of the information requested in part 800.402 of the Exon-Florio regulations to:

Ms. Gay Hartwell Sills
Staff Chair
Committee on Foreign Investment in the United States ("CFIUS")
Office of International Investment
Department of Treasury
1500 Pennsylvania Avenue, N.W., Room 4201 NY
Washington, DC 20220

Phone: (202) 622-9066
Also: (202) 622-1860

E-Mail: gay.sills@do.treas.gov

http://www.cfr.org/publication/9618/intern...ted_states.html

Audio
International Investment in the United States
Speaker: Robert M. Kimmitt
Deputy Secretary of the Treasury and Chairman, Deputies Group, Committee on Foreign Investment in the United States (CFIUS)
Presider: Paul Solman
Business and Economics Correspondent, The NewsHour with Jim Lehrer

January 19, 2006


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