March 9, 2005    Volume 12, No. 5

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Pentagon Will Increase Scrutiny Of Foreign Acquisitions Of U.S. Technology Companies

The Defense Department is "fine tuning" its process for analyzing foreign company acquisitions of U.S. defense suppliers. The Pentagon's Office of Industrial Policy is taking a more detailed look at how mergers and acquisitions are impacting the defense industrial base to make sure the United States is not "inadvertently giving away our capability," says Suzanne Patrick, Deputy Under Secretary of Defense for Industrial Policy. The Pentagon is also studying past acquisitions to determine if any industrial sectors have been undermined or targeted by foreign countries and companies. "We are always alert to refining the processes that affect the defense industrial base," says Patrick.

The Defense Department is a member of the Committee on Foreign Investment in the United States (CFIUS -- pronounced "SIF-ee-ous"), a secretive interagency group chaired by the U.S. Department of Treasury that reviews foreign acquisitions of U.S. companies. "We are using the data that we have as a result of the Defense Industrial Base Capabilities studies to better focus the CFIUS transaction reviews on technologies that we deem as critical," Patrick told Manufacturing & Technology News.

DOD's Office of Industrial Policy is recommending that CFIUS and the antitrust regulators at Treasury reassess how they determine whether a U.S. industry or key technology is being harmed by an acquisition. "Numerical sufficiency doesn't always translate into a number like three," Patrick told a recent meeting of the Heritage Foundation. "When we deal with our antitrust regulators who work under the construct of the Sherman Antitrust Act, clearly any number of suppliers three or greater creates a competitive base.

"If you are conducting an acquisition competition for the purpose of multiple suppliers helping you with price, three is typically sufficient to stage such a competition. But if you are trying to build an industrial base of the most innovative technology available to the warfighter, in many cases eight or nine [suppliers] is not sufficient. You might want all 12 of those little companies that are independent of one another and are all working a separate discrete aspect of a very difficult problem.

"For that reason, we have begun communicating this body of emerging knowledge and viewpoint very carefully to our colleagues at the Department of Justice, the Federal Trade Commission and CFIUS to make sure they understand this new vernacular under which we are operating: that three is not the magic number; that just because a country and its company that might otherwise not be a problem for the U.S. acquires a company -- that might not be sufficient unless we can insure ourselves that they share the same strategic vision for that company that we do."

Patrick's office is conducting an analysis of foreign acquisitions of U.S. companies that have already been purchased by foreign entities. A study assessing both Hart-Scott-Rodino antitrust mergers and CFIUS-approved foreign acquisitions is expected to be completed this summer.

"A priority will be a trend analysis," says Patrick. Asked if such an analysis was to determine which industrial areas foreign countries have targeted she said: "We can't know what we'll find until we finish the work."

Patrick's office has been active in shaping past foreign acquisitions. "While it might not be apparent to the public, we fine tune the structure of those acquisitions quite actively at times," she told the Heritage Foundation. "We assign remedies where we think there might be harm to the industrial base. There are many ways to shape the way that transactions proceed in ways that are important to the industrial base to secure the capabilities and maintain them as we see we need them."

Foreign investment in the U.S. aerospace sector "is growing," says Patrick, "and far outpaces other foreign investment in the United States." But this, she adds, "is not a bad thing. That is one of the ways myriad jobs and tax revenues are created for our local communities and municipalities as well as brand new greenfield facilities built by foreign companies interested in participating in our industrial base for the benefit of our warfighter and for the benefit of our coalition operations."

Patrick said foreign companies and foreign countries should start using the "Defense Capabilities Assessment" studies to pre-determine if there is going to be any opposition from CFIUS to their desire to acquire a specific U.S. company involved in a strategic military technology.

"Many of the findings of the Defense Industrial Base Capability studies have directly informed CFIUS assessments that we have made," she said in an interview in her Pentagon office. "We have worked quite hard and will continue to do so as we translate the findings of our Defense Industrial Base Capabilities studies series into action regarding business combinations. We are using the structure and the data that we have as a result of these studies to better focus the CFIUS and Hart-Scott-Rodino transaction reviews on technologies and the associated components that we deem as being critical. It has actually provided more focus to our transaction reviews and a more systematic way of reviewing transactions than we have in the past."

The Industrial Base Capabilities Studies, which list the companies that supply key technologies, are located at http://www.acq.osd.mil/ip.


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