Editing by David Du

Chinese private equity firm Wise Road Capital’s $1.4 billion acquisition of South Korean display driver company MagnaChip Semiconductor is still under review by both South Korean and U.S. governments. Industry observers are awaiting the result and keeping fingers crossed, though the deal had approval from the Chinese government in late June.  

The U.S. regulator, the Committee on Foreign Investment in the United States (CFIUS), will reportedly complete the investigation before September 13.

Michael Zhang, managing partner of Wise Road, told Hongkong's South China Morning Post in late July, “Our investment decisions are market-driven and for the interests of our clients.” The firm’s clients include financial intuitions, multinational companies, and family offices, he explained.

Wise Road is a leading Chinese fund manager and an active player in semiconductor M&As. The firm has engaged in eight deals, totaling $4.5 billion, since its establishment in 2016, Bloomberg Data show. 

Zhang seemed optimistic about this deal. “The area of business we do is getting sensitive in recent years. We hope that our market-oriented approach and our cooperation with regulators can help build trust about what we do,” he said.

But Rob Enderle, president of a U.S. technology advisory firm, the Enderle Group, said in an interview with JW Insights that the deal is “problematic”. “The concern with the West is that the Chinese companies are too close with the Chinese government, and there’s a concern that as a result, the products will get compromised. That’s what’s really driving this. It’s not so much the evidence of bad things that have been done. It’s the belief that bad things will be done,” he said. 

MagnaChip spun off from SK Hynix in 2004 as a display driver integrated circuits (IC) unit. It began trading on the New York Stock Exchange (NYSE) in 2011 and is the world’s second-largest organic light-emitting diode (OLED) display driver IC maker.  

MagnaChip announced this March that it would sell its business to Wise Road and some of the PE firm’s limited partners at $29 per share. The deal amounted to $1.4 billion, and MagnaChip shareholders will receive the payment in cash for each share they hold. Reportedly, Wise Road planned to close the deal by the end of this year. 

The transaction attracted the attention of CFIUS. MagnaChip said it received notice from the U.S. regulator in May, asking the South Korean and Chinese companies to register the deal for investigation. 

On June 15, CFIUS ordered the company to halt the transaction until further investigation and prohibited MagnaChip from delisting from NYSE, according to an announcement from the South Korean company. 

Earlier the company said that it did not need CFIUS’s approval. It said its assets were in South Korea, and almost all its staff were in Asia and Germany. However, because the company trades on NYSE, some observers believe that CFIUS could exert its control over the transaction. 

Domestically, MagnaChip is subject to the South Korean government’s scrutiny. In June, the Ministry of Trade, Industry and Energy (MOTIE) added MagnaChip’s display driver IC technology to the “national core technology” list, according to a report from EE Times. South Korean companies with a national core technology need the government’s review and approval for their cross-border M&As, BusinessKorea reported. 

The purchase sparked controversy in South Korea. It reported that a petition for the government’s intervention against the deal received support from 33,451 people on April 28. They worried that the country would lose its edge in the OLED industry if MagnaChip’s technology goes to foreign firms. 

However, some South Korean industry watchers say such concerns may be overrated. They argued that although South Korean companies were the leading players in the liquid-crystal display (LCD) era, it was not likely the case for OLEDs. They said that some Chinese companies have already taken the lead in the field. MagnaChip’s technology might not be “advanced” enough to impose a threat on national interest, according to the Korea JoongAng Daily

The company’s stock reportedly fell 1.8% in premarket trading on June 9 after MOTIE introduced the national core technology addition. Its shares had been falling in months as investors speculated the result of the deal, market news agency Seeking Alpha reported.

Rob Enderle pointed to the industry background as the pandemic scared the market quite a bit. “And as a result, these large suppliers are trying to lock up manufacturing capacity. So if there are any future problems, they are not left without product, because they don’t have their own capacity.” 

“There’s a substantial potential upside, which can justify the acquisition. Because you’re basically buying something at a discount that will be worth more as a result of your purchase,” he added. 

Michael Zhang explained Wise Road’s investment approach: it usually chooses companies that have “mature” products and a potent management team in place, which could guarantee a healthy cash flow.    

MagnaChip is a “household name” in the OLED industry. Many displays, sensors, and power semiconductors use its IC products. “We call its products ‘daily commodities” because people literally use them every day,” Zhang said. 

According to CFIUS data from 2017 to 2019, 679 transactions are subject to the CFIUS investigation. Of them, 140 transactions involve Chinese funds or investors, accounting for the most (20%), with 70 relating to manufacturing. CFIUS reviewed 231 transactions in 2019, with 10.8% categorized as the “semiconductor and other electronic component manufacturing.” 

Most of the affected companies have their assets or facilities located in America. Some market observers believe that the investigation of MagnaChip’s transaction signals the U.S. latest long-arm control over foreign technology acquisitions.