The saga of American International Group's (NYSE: AIG) efforts to sell its International Lease Finance Corporation (ILFC) aircraft leasing unit continues. Earlier this week, Bloomberg, citing unnamed sources, reported that Taiwan's Richard Tsai (vice chairman of Fubon Group) and China's Xiao Jianhua (founder of Tomorrow Holdings) may join a group led by Hong Kong's P3 Investments to acquire ILFC, with Tsai and his family's affiliates possibly taking a majority stake.
According to one of Bloomberg's sources, the Committee on Foreign Investment in the United States (CFIUS) will only approve the sale of ILFC "if there is no dominant shareholder in the consortium." Assuming that Bloomberg accurately reported this statement, it reflects little understanding of the CFIUS process and/or poor strategic advice. Having a dominant investor in the acquiring consortium would simplify the CFIUS process on a number of levels and could increase both the likelihood and speed of CFIUS approval.
In general, CFIUS identifies national security risks arising from foreign acquisitions of U.S. businesses and seeks to mitigate them (under other legal mechanisms if possible, or under CFIUS' own legal authority if not). If the identified risks cannot be mitigated to the satisfaction of CFIUS, the Committee can recommend that the President block the transaction.
As noted in guidance published by the Treasury department in 2008, national security considerations in CFIUS cases fall under two categories: those relating to the nature of the acquired business, and those relating to the identity of the foreign acquirer. The national security considerations, if any, arising from the target's operations will be present no matter who acquires the business. However, the national security considerations arising from the acquirer side of the equation could vary greatly depending on the composition of the consortium.
Acquisitions by investor groups are fundamentally more complicated for CFIUS to review. CFIUS has to gather additional information and take additional time to understand how the investors will work together to reach decisions after the acquisition is complete. This is inherently problematic if there is no dominant investor, but even if there is a dominant investor, CFIUS has to consider whether the other investors have contractual rights or other relationships with the dominant investor that afford them disproportionate influence over post-closing management of the business. Meanwhile, the Office of the Director of National Intelligence, which works with the U.S. intelligence community to produce a threat analysis for each CFIUS case, must consider the background, activities, and associations of each member of the acquisition group.
Multi-investor acquirers also complicate risk mitigation should it become necessary. Whether CFIUS relies on mitigation by other parts of the government under their respective legal authorities or by CFIUS under its own authority, the U.S. government needs to know that the acquirer is authorized, able, and willing to comply with mitigation terms. In multi-investor cases, it is much easier for the government to negotiate with a dominant investor and hold that investor accountable for mitigation terms than it is for the government to deal with (and rely on) a group of smaller investors. Moreover, having a dominant investor may reduce the very unlikely, but not unprecedented possibility that CFIUS will seek disparate mitigation terms for different members of the investor group based on their respective risks.
Given the roller coaster path this sale has taken so far, more changes to the ILFC acquisition group may await. If the eventual buyer group lacks a dominant investor, however, AIG should not count on a smooth or quick CFIUS process before the deal closes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.