Number % of Total
Wholesale, Retail, and Transportation Nace Nogees ae Tennepo sit

2013 2013
Support Activities for Transportation 488 6 55%
Merchant Wholesalers, Durable Goods 423 2 18%
Merchant Wholesalers, Nondurables Goods 424 1 9%
Pipeline Transportation 486 1 9%
Warehousing and Storage 493 1 9%

Table I-20: Covered Transactions from the Wholesale, Retail, and Transportation Sector 2012

% of Total % of Total % of Total
Wholesale, Retail, NAICS Wholesale, Retail, Wholesale, Retail, Wholesale, Retail,
and Transportation | Code and Transportation | and Transportation | and Transportation
2009-2011 2010-2012 2011-2013
Support Activities for
Transportation a68 S078 40% Ab%
Merchant
Wholesalers, Durable 423 25% 24% 22%
Goods
Merchant
Wholesalers, 424 5% 12% 11%
Nondurables Goods
Water Transportation 483 10% 8% 7%
Fipeling’. .. 486 10% 8% M%
Transportation
Warehouse and
Storage 493 0% 0% 4%
Air Transportation 481 5% 4% 0%
Transit and Ground
Passenger 485 5% 4% 0%
Transportation
Electronic and
Appliance Stores 443 10% 0% 0%

Table I-21: Covered Transactions from the Wholesale, Retail, and Transportation Sector in Past

Years

15



Subject M&A Transactions by
Target Sector

Information Technology

@ Manufacturing

O Professional, Scientific, and Technical Services
OMeda

Figure Ill-2: Economic Sectors of U.S. Companies Acquired

2. National Security Effects of the Subject M&A Transactions

Each of the 12 subject M&A transactions was either formally reviewed by CFIUS under
section 721 or considered as part of the non-notified transaction procedures of CFIUS and
CFIUS agencies. Pursuant to these procedures, CFIUS agencies monitor M&A activity, identify
transactions that have not been voluntarily notified to CFIUS but may present national security
considerations, and assess whether additional information regarding the transaction or the
authority of section 721 is required to identify or address any national security concerns.

When a CFIUS agency believes that a non-notified transaction may be a covered transaction
and may raise national security considerations, the agency may self-initiate a review of the
transaction under section 721. Alternatively, if CFIUS believes that the transaction may raise
national security considerations and may be a covered transaction, CFIUS may contact the
parties and request further information about the transaction, partly to help determine whether
the transaction is a covered transaction. If CFIUS makes such a determination, it may request
that the parties file a notice. In most cases in which CFIUS has made inquiries of parties to
transactions, the parties have responded by filing a voluntary notice. Consideration by CFIUS
agencies of the subject M&A transactions so far has not resulted in requests for further
information from or filings by the parties to the transactions.

36


II-B. Whether Foreign Governments Used Espionage Activities to
Obtain Commercial Secrets Related to Critical Technologies

1. Key Finding

The USIC judges that foreign governments are extremely likely to continue to use a range of
collection methods to obtain critical U.S. technologies.

SECTION Ill: FOREIGN DIRECT INVESTMENT IN THE UNITED STATES
BY COUNTRIES THAT BOYCOTT ISRAEL
OR DO NOT BAN TERRORIST ORGANIZATIONS

Introduction

This section of the CFIUS Annual Report to Congress has been prepared in accordance with
section 7(c) of FINSA, which provides:

“(1) STUDY REQUIRED.—Before the end of the 120-day period beginning on the date
of enactment of this Act and annually thereafter, the Secretary of the Treasury, in
consultation with the Secretary of State and the Secretary of Commerce, shall conduct a
study on foreign direct investments in the United States, especially investments in critical
infrastructure and industries affecting national security, by—
(A) foreign governments, entities controlled by or acting on behalf of a foreign
government, or persons of foreign countries which comply with any boycott of
Israel; or
(B) foreign governments, entities controlled by or acting on behalf of a foreign
government, or persons of foreign countries which do not ban organizations
designated by the Secretary of State as foreign terrorist organizations.

“(2) REPORT.—Before the end of the 30-day period beginning upon the date of
completion of each study under paragraph (1) and thereafter in each annual report under
section 721(m) of the Defense Production Act of 1950 (as added by this section), the
Secretary of the Treasury shall submit a report to Congress, for transmittal to all
appropriate committees of the Senate and the House of Representatives, containing the
findings and conclusions of the Secretary with respect to the study described in
paragraph (1), together with an analysis of the effects of such investment on the national
security of the United States and on any efforts to address those effects.”

A. Summary of Findings and Conclusions

. Mergers with and acquisitions of U.S. companies (M&A), the main form of foreign direct
investment (FDI) into the United States, by investors from the countries described in
section 7(c)(1) of FINSA that were completed between January 1, 2013, and December
31, 2013 (CY 2013) (“subject M&A transactions”), represent a small percentage of the
total of such FDI flows into the United States.

32




Number

% of Total Finance,

Finance, Information, and Services et N rte _ Information, and
2013 Services 2013
Professional, Scientific, and Technical Services 541 15 A4T%.
Rental and Leasing Services 532 5 16%
Telecommunications 517 4 13%
Administrative and Support Staff 561 3 9%
Publishing Industries (except Internet) 511 2 6%
Data Processing, Hosting, and Related Services 518 2 6%
Credit Intermediation and Related Activities 522 1 3%

Table I-10: Covered Transactions from the Finance, Information, and Services Sector 2012



Covered Transactions by Acquirer Home Country/Economy and Target Sector, 2011-2013

Country/Economy —_| Manufacturing wntarneton; utintes. and Mr cca aa Total
and Services | Construction Roneron

Australia, 1 3 3 to} 7
Bermuda 0 0 0 0

Brazil 1 2 0 1 4
Canada 2 7 21 4 34
Cayman Islands 0 0 1 2
Chile 0 0 1 0 1
China 24 13 17 0 54
Denmark 0 0 1 1 2
Estonia 0 0 1 0 1
Finland 0 1 0 0 1
France 21 3 1 4 29
Germany 4 7 0 0 1
Hong Kong 1 2 0 0 3
India 3 3 0 0 6
Ireland 0 1 0 0 1
Israel 5 6 0 0 1
Italy 3 0 0 0 3
Japan 17 9 3 5 34
Korea 2 2 0 0 4
Kuwait 0 0 0 0

Luxembourg 1 0 0 0 1
Malaysia 0 1 0 0 1
Mexico 0 0 1 1

Netherlands 2 8 2 2 14
New Zealand 1 0 0 0 1
Norway 2 1 1 0 4
Qatar 0 0 0 0 0
Russian Federation 1 2 0 0 3
Saudi Arabia 1 1 0 0 2
Singapore. 1 1 3 2 7
Spain 2 5 0 0 7
Sweden 3 7 0 0 10
Switzerland 8 1 0 0 9
Taiwan 1 0 0 0

United Arab Emirates 1 0 1 0 2
United Kingdom 21 20 3 5 49
ae oe & 1 0 0 0 1

Total 131 106 59 26 322

Table I-23: Covered Transactions by Country or Economy and Target Sector: 2010-2012

19


APPENDIX

A. Definition of “Critical Technologies”

The Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons (the
“CFIUS regulations”), published in the Federal Register on November 21, 2008, and codified at
31 C.F.R. part 800, defines “critical technologies” with reference to U.S. export control
regulations, which were determined to be the most reliable and accurate means of identifying
critical technologies:

*§800.209 Critical technologies.

The term critical technologies means:

(a) Defense articles or defense services covered by the United States Munitions List
(USML), which is set forth in the International Traffic in Arms Regulations (ITAR) (22
C.F.R. parts 120-130);

(b) Those items specified on the Commerce Control List (CCL) set forth in Supplement No.
1 to part 774 of the Export Administration Regulations (EAR) (15 C.F.R. parts 730-774)
that are controlled pursuant to multilateral regimes (i.e., for reasons of national security,
chemical and biological weapons proliferation, nuclear nonproliferation, or missile
technology), as well as those that are controlled for reasons of regional stability or
surreptitious listening;

(c) Specially designed and prepared nuclear equipment, parts and components, materials,
software, and technology specified in the Assistance to Foreign Atomic Energy Activities
regulations (10 C.F.R. part 810), and nuclear facilities, equipment, and material specified
in the Export and Import of Nuclear Equipment and Materials regulations (10 C.F.R. part
110); and

(d) Select agents and toxins specified in the Select Agents and Toxins regulations (7 C.F.R.
part 331, 9 C.F.R. part 121, and 42 C.F.R. part 73).”

B. Methodology and Data Sources Used to Identify U.S. Critical Technology Companies
Acquired by Foreigners

The definition of critical technologies used in the CFIUS regulations is specific to those
regulations. There is no single source that lists all U.S. critical technology companies acquired
by foreign persons. Therefore, for purposes of Section II of the Annual Report, CFIUS agencies
responsible for administering U.S. export control regulations used a combination of publicly
available information, non-public data on M&A transactions that CFIUS reviewed, and their own
internal records to identify the U.S. critical technology companies that were acquired by or
received significant investments from foreign investors in 2013. The specific data sources and
methodology used varied, depending on the records maintained pursuant to the particular
export control regulations that pertain to the different critical technology categories. The dataset
used for Section II of this Annual Report is therefore limited. The various methodologies are
described below.

31 C.F.R. § 800.209/a): This paragraph pertains to defense articles or defense services
covered by the United States Munitions List (USML), which is set forth in the
Intemational Traffic in Arms Regulations (ITAR) (22 C.F.R. parts 120-130).

Under the provisions of the ITAR, the Department of State regulates robust registration,

licensing, and compliance processes for any person, whether U.S. or foreign, involved in the
export or temporary import of a defense article or defense service controlled by the ITAR. This

37


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The data in this report can also be analyzed by the home region of the foreign acquirers. Figure
I-28 displays the data with the following regional breakdown:

Figure Il-2. Completed transactions in critical technologies by regions

90
57

5% 404
2
Re 304
5
5 204 18
€ 8
2 104 4 7

0

Europe (excluding East Asia Canada & Australia Middle East & North Other
Russia) Africa

® The number of transactions based on country involvement exceeds the total number of transactions (79) due to some transactions
involving more than one country.

30


2. Covered Transactions by Country or Economy: 2011-2013

Table |-22 breaks down the notices of covered transactions from 2011 through 2013 by country
or economy and year. Acquisitions by investors from China accounted for the largest share of
the notices filed for the three-year period with 17 percent (54 notices), up from 12 percent of all
notices for the 2010 to 2012 period. Chinese investors also accounted for the most notices filed
in 2012 and 2013 (23 and 21 notices, respectively). Investors from the United Kingdom (UK)
were close behind with 15 percent (49 notices, including one notice from an acquirer with UK
and German owners), down from 21 percent of all notices for the 2010 to 2012 period. From
2011 to 2013, investors from Canada and Japan accounted for an additional 11 percent each
(34 notices). France accounted for an additional nine percent over the period (29 notices). In
2013, notices from Japanese investors doubled from 2012 from nine to 18 percent (nine to 18
notices)

16


In light of the number and complexity of mitigation measures implemented to date, individual
CFIUS agencies monitor compliance through a number of internal procedures, including:
o assigning staff responsibilities for the monitoring of compliance;
© designing tracking systems to monitor required reports;
© instituting internal instructions and procedures to ensure that in-house expertise is
drawn upon to analyze compliance with measures.

22


Table !-23 shows that some countries have a concentration of transactions in certain specific
industry sectors that vary noticeably from the overall concentration of CFIUS notices in that
sector. For example, while manufacturing accounted for 40 percent of all notices filed from
2011 to 2013, 72 percent (21 of 29) of the notices filed from French acquirers were in
manufacturing. Mining, utilities, and construction accounted for 18 percent of all notices filed
from 2010 to 2012, while 62 percent (21 of 34) of notices filed from Canadian acquirers and 31
percent (17 of 54) of notices from Chinese acquirers were in this sector.

18


Figure II-3’ shows the regional breakdown of activity by number of transactions in each sector.
Western European investors were the most active acquirers of U.S. critical technology
companies in all of the identified sectors.

Figure II-3. Completed transactions by region within each sector

Europe (excluding Russia)
mEast Asia

Canada, Australia & New Zealand
mMiddle East & North Africa
12 mother

ES) a

4 4
4
2 2 2 2 2
2
14 1 | | 1
a

Number of 2013 Critical Technology Transactions

Chemicals
Electronics

Aerospace & Defense
Information Technology
Machinery & Equipment

Pharma & Biotech

Professional & Technical

Services

” The number of transactions based on country involvement exceeds the total number of transactions (79) due to some transactions
involving more than one country.

31


NAICS eee % of Total Mining,
Mining, Utilities, and Construction Code Notices Utilities, and
Construction 2013
2013

Utilities 221 12 60%
Mining (except Oil and Gas) 212 3 15%
Oil and Gas Extraction 211 2 10%
Support Activities for Mining 213 1 5%
Construction of Buildings 236 1 5%
Specialty Trade Contractors 238 1 5%

Table I-16: Covered Transactions from the Mining, Utilities, and Construction Sector 2013

% of Total Mining, % of Total Mining, % of Total Mining,
Mining, Utilities, NAICS Utilities, and Utilities, and Utilities, and
and Construction Code Construction 2009- | Construction 2010- | Construction 2011-
2011 2012 2013
Utilities 221 52% 54% 56%
Oil and Gas
Extraction 211 8% 10% 15%
Mining (except Oil 212 13% 12% 12%
and Gas)
Support Activities for 213 15% 13% 7%
Mining
Heavy and Civil
Engineering 237 6% 8% 5%
Construction
Specialty Trade
Contractors a 4% 4% 3%
Construction of
Buildings 236 2% 0% 2%

Table I-17: Covered Transactions from the Mining, Utilities, and Construction Sector in Past Years

Electric Power Generation, Transmission, and Distribution Subsector

The electric power generation, transmission, and distribution subsector accounted for most of
the utilities filings in 2012, with 10. This subsector also accounted for a vast majority of utilities
filings over the 2011 to 2013 period with 79 percent, up from 71 percent during 2010 to 2012
and 72 percent over the 2009 to 2011 period.

13



Covered Transactions by Sector (2009-2013)

ow Oo N
o 6 90

fo)
fo)

1

Number of Covered Transactions

20
~—— = te *x
0
2009 2010 2011 2012 2013
—@ Manufacturing —#— Finance, Information, and Services
= —Mining, Utilities, and Construction —<— Wholesale, Retail, and Transportation
—®Total

Covered Transactions by Sector 2009-2013

Manufacturing Sector

Manufacturing accounted for 36 percent (35 notices) of all notices filed with CFIUS during 2013.
The computer and electronic products subsector continued to be the largest subsector of the
manufacturing notices with 12 (35 percent). Other significant subsectors were machinery with
six notices and fabricated metal products with five. The transportation equipment subsector
continued to decrease as a percentage of manufacturing notices filed over the past three years,
down to 15 percent from 18 percent from 2010 to 2012 and 22 percent from 2009 to 2011.


3. Frequency of Activity by Countries and Companies

Table II-1° lists the originating countries for planned and completed acquisitions of U.S. critical

technology companies in 2013:

Table 11-1: Home Country of Foreign Acquirers of U.S. Critical Technology Companies*

Country

Solo Acquisition

Joint Acquisition

Total

United Kingdom

17

4

21

France

10

o

Japan

«

Canada

China

Germany

Italy

Netherlands

Sweden

Switzerland

Ireland

BVI

India

Israel

Australia

Cayman Islands

Korea

Luxembourg

Singapore

Taiwan

Guernsey

Russia

Norway

Hong Kong

Saudi Arabia

UAE

of=|[r]=fo]=][rm]=[o}/=]-]-]-]}m}m}rojalafm}=|-faln

alo]ofo}s][=]ofofwlof=Jo]=[o]o]ofo]o}wlolasolololo

a]s]rm}s]s[r}mo}sfol=fol=[rfrm[rofrm[afalal=[olalnin

* The number of transactions based on country involvement exceeds the total number of transactions (85) due to some transactions

involving more than one country.

“The number of transactions in the table appears higher than the number of transactions reviewed for the annual report. This is due

to the nature of joint transactions.

28


(C) _ the potential for transshipment or diversion of technologies with military
applications, including an analysis of national export control laws and regulations;
(10) the long-term projection of United States requirements for sources of energy and other
critical resources and materials; and
(11) | such other factors as the President or the Committee may determine to be appropriate
generally or in connection with a specific review or investigation.

In the transactions that CFIUS will review during the next reporting period, it will continue to take
into account the national security considerations noted above. CFIUS will consider whether the

transactions may have the above-listed or any other adverse effects in determining whether the

transactions pose national security risk.

25


A. Information on 2013 Covered Transactions

The classified version of this report contains a table listing all 97 notices of transactions that
were filed with CFIUS in 2013 and that CFIUS determined to be covered transactions under
section 721. It sets forth information on the acquirer and the U.S. business acquired, including
the nature of their business activities or products, and details on any withdrawal.

CFIUS conducted a “review” with respect to the 97 notices of covered transactions filed
with CFIUS.

CFIUS also conducted a subsequent “investigation” with respect to 48 of those 97
notices.

Eight of the notices were withdrawn. In one of these cases, the parties filed a new
notice, in 2014.

Due to atemporary suspension of government operations in October 2013 as a result of
the absence of an FY2014 appropriation or a continuing resolution providing funding
for the remainder of the fiscal year, CFIUS was unable to complete its review of five
transactions, which then proceeded into investigation. CFIUS then completed action on
those transactions after the termination of the temporary suspension of government
operations.

For one transaction, the investigation period concluded during the temporary suspension
of government operations. CFIUS advised the parties that under 31 U.S.C. § 800.601,
all authority available to the President or the Committee under section 721(d), including
divestment authority, remained available at the discretion of the President with respect
to the covered transaction. The parties to the transaction chose to file a new notice
with CFIUS concerning the transaction upon termination of the temporary suspension
of government operations and resumption of normal government operations.


SECTION I: COVERED TRANSACTIONS

Introduction

This section of the CFIUS Annual Report to Congress has been prepared in accordance with
section 721(m) of the Defense Production Act of 1950 (50 U.S.C. App. 2170), as amended by
the Foreign Investment and National Security Act of 2007, or “FINSA” (Pub. L. No. 110-49).
Section 721(m)(2) requires the annual report on covered transactions to provide:

“(A) A list of all notices filed and all reviews or investigations completed during the period, with
basic information on each party to the transaction, the nature of the business activities or
products of all pertinent persons, along with information about any withdrawal from the process,
and any decision or action by the President under this section.

(B) Specific, cumulative, and, as appropriate, trend information on the numbers of filings, '
investigations, withdrawals, and decisions or actions by the President under this section.

(C) Cumulative and, as appropriate, trend information on the business sectors involved in the
filings which have been made, and the countries from which the investments have originated.

(D) Information on whether companies that withdrew notices to the Committee in accordance
with subsection (b)(1)(C)(ii) have later re-filed such notices, or, alternatively, abandoned the
transaction.

(E) The types of security arrangements and conditions the Committee has used to mitigate
national security concerns about a transaction, including a discussion of the methods that the
Committee and any lead agency are using to determine compliance with such arrangements or
conditions.

(F) A detailed discussion of all perceived adverse effects of covered transactions on the national
security or critical infrastructure of the United States that the Committee will take into account in
its deliberations during the period before delivery of the next report, to the extent possible.”

‘For purposes of this Annual Report, “filings” means notices filed under section 721.


Number
AIG NAICS of % of Total Utilities
bulties Code | Notices 2013
2013
Electric Power Generation, Transmission and 2014 10 83%
Distribution
Water, Sewage, and Other Systems 2213 2 17%

Table I-18: Covered Transactions from the Utilities Subsector 2013

Utilities NAICS % of Total Utilities % of Total Utilities | % of Total Utilities
Code 2009-2011 2010-2012 2011-2013

Electric Power
Generation, 2211 72% 1% 79%
Transmission and
Distribution
Water, Sewage, and oy 0,
Other Systems 2213 8% 7% 12%
Natufal Gas 2212 20% 21% 9%
Distribution

Table I-19: Covered Transactions from the Utilities Subsector in Past Years

Wholesale Trade, Retail Trade, and Transportation Sector

The wholesale trade, retail trade, and transportation sector accounted for 10 percent (10
notices) of all notices of covered transactions filed with CFIUS during 2013. The support
activities for the transportation subsector made up over half of this sector, with six notices. The
proportion of notices from this subsector also increased to 48 percent for the period from 2011
to 2013 from 40 percent for the period from 2010 to 2012. The proportion of notices from the
merchant wholesalers, nondurables goods subsector remained constant at 11 percent for the
2011 to 2013 period, similar to 12 percent for the 2010 to 2012 period. The proportion of
notices for the electronic and appliance stores subsector remained at zero for the 2011 to 2013
period, down from 10 percent in the 2009 to 2011 period.

14



C. Covered Transactions by Business Sector and Country
1. Covered Transactions by Business Sector of U.S. Companies: 2009-2013

The notices of covered transactions filed with CFIUS during the 2009 to 2013 period involved a
wide range of industrial subsectors.” Broadly, more than one third of such notices were in the
manufacturing sector (186, or 39 percent), while approximately one third of the notices were in
the finance, information, and services sector (165, or 34 percent). The remainder of notices
were in the mining, utilities, and construction sector (91, or 19 percent) or the wholesale, retail,
and transportation sector (38, or eight percent).

The table and chart below provide a breakdown by sector and by year of the 480 notices of
covered transactions cumulatively filed with CFIUS from 2009 through 2013. The data below
show that, as in 2012, the greatest number of filings in 2013 occurred in the manufacturing
sector and in the finance, information, and services sector. The percentage of notices in the
manufacturing sector decreased in 2012 (from 44 percent to 39 percent) and again from 2012 to
2013 (from 39 percent to 36 percent). In 2013, the percentage of notices in the finance,
information, and services sector remained constant from 2012 to 2013 (33 percent in both
years), which was a slight decline from 2011 (34 percent). The percentage of notices in the
mining, utilities, and construction sector increased slightly from 2012 to 2013 (from 20 percent to
21 percent), after a larger increase from 2011 to 2012 (from 14 percent to 20 percent).

Covered Transaction by Sector and Year, 2009-2013
Finance, rye me
| Information, Mining, Utilities, Wholesale,
Year Manufacturing and and Retail, and Total
Services Construction Transportation
2009 21 (32%) 22 (34%) 19 (29%) 3 (5%) 65
2010 36 (39%) 35 (38%) 13 (14%) 9 (10%) 93
2011 49 (44%) 38 (34%) 16 (14%) 8 (7%) 111
2012 45 (39%) 38 (33%) 23 (20%) 8 (7%) 114
2013 35 (36%) 32 (33%) 20 (21%) 10 (10%) 97
Total 186 (39%) 165 (34%) 91 (19%) 38 (8%) 480

Table I-3: Covered Transactions by Sector and Year, 2009-2013

? Broad sectors are defined using 2012 North American Industry Classification System (NAICS) codes of the target
company. The NAICS code assigned to each target company is based upon information provided in the notice.


D. Withdrawn Notices

Parties can withdraw an accepted notice of a transaction if the Committee approves a written
request for withdrawal from the parties. Parties have requested withdrawals for a number of
reasons over the years. For example, in some cases where the parties are unable to address
all of the Committee’s outstanding national security concerns within the initial 30-day review
period or 45-day investigation period, the parties might request to withdraw and re-file their
notice to provide themselves with additional time to answer remaining questions or to resolve
the remaining national security concerns. In other cases, the parties might request to withdraw
and re-file their notice because, a material change in the terms of the transaction warrants the
filing of a new notice. In still other cases, the parties might request to withdraw their notice
because they are abandoning the transaction for commercial reasons, or because the parties do
not want to abide by CFIUS’s proposed mitigation, or in light of a CFIUS determination to
recommend that the President suspend or prohibit the transaction. When appropriate, the
Committee has established processes to track the status of a withdrawn transaction or interim
protections to address specific national security concerns identified during the review or
investigation of the withdrawn transaction.

In 2013, CFIUS approved the withdrawal of eight notices. The parties withdrew three notices
during the 30-day review period and five notices after the commencement of the 45-day
investigation period. In one case, parties re-filed in 2013 a transaction that they had previously
notified to CFIUS in 2012, and CFIUS concluded action in that case in 2013.

20


COMMITTEE ON
FOREIGN INVESTMENT
IN THE UNITED STATES

ANNUAL REPORT

TO CONGRESS

Report Period: CY 2013
Issued: Feb 2015

PUBLIC//UNCLASSIFIED VERSION



Computer and Electronic Products Subsector

Of the 12 notices filed in the computer and electronic products subsector in 2013, half were in
the semiconductor and other electronic component manufacturing subsector. This subsector
also continued to increase as a percentage of notices filed during the past three years, up to 39
percent during 2011 to 2013 from 34 percent during 2010 to 2012 and 26 percent from 2009 to
2011. The navigational, measuring, electromedical, and control instruments manufacturing
subsector was a significant contributor in 2012 as well with five notices.

Number % of Total
5 NAICS of Computer and
Computer and Electronic Products Code Notices Eloctronie
2013 Products 2013
Semiconductor and Other Electronic Component
Manufacturing 3344 6 50%
Navigational, Measuring, Electromedical, and Control
Instruments Manufacturing 3345 5 42%
Communication Equipment Manufacturing 3342 1 8%

Table 1-6: Covered Transactions from the Computer and Electronic Products Subsector 2013

% of Total
% of Total

Computer and Naics | % ot Toler computer Computer and Comper end

Electronic Products | Code | proqucts 2009-2011 | Electronic Products |p, oqucts 2011-
2010-2012
2013

Semiconductor and
Other Electronic 3344 26% 34% 39%
Component
Manufacturing
Navigational,
Measuring,
Electromedical, and 3345 34% 28% 31%
Control Instruments
Manufacturing
Communication
Equipment 3342 30% 29% 23%
Manufacturing
Computer and
Peripheral Equipment | 3341 8% 8% 5%
Manufacturing
Manufacturing and
Reproducing
Magnetic and Optical 3346 2% 2% 2%
Media

Table I-7: Covered Transactions from the Computer and Electronic Products Subsector in Past

Years



Nace ee % of Total
Manufacturing Code Notices amie la
2013

Computer and Electronic Product 334 12 35%
Machinery 333 6 18%
Fabricated Metal Product 332 5 15%
Electrical Equipment, Appliance, and Component 335 3 9%
Transportation Equipment Manufacturing 336 3 9%
Plastics and Rubber Products Manufacturing 326 2 6%
Chemical 325 1 3%
Food Manufacturing 311 1 3%
Nonmetallic Mineral Product Manufacturing 327 1 3%

fo

Table I-4: Covered Transactions from the Manufacturing Sector 2013

NAICS % of Total % of Total % of Total
Manufacturing Code Manufacturing from | Manufacturing from Manufacturing
2009-2011 2010-2012 from 2011-2013
Computer and
Electronic Product Sos 50% 50% the
Transportation
Equipment 336 22% 18% 15%
Machinery 333 8% 9% 12%
Electrical Equipment,
Appliance, and 335 9% 11% 11%
Component
Fabricated Metal
Product 332 3% 3% 6%
Chemical 325 4% 5% 3%
Plastics and Rubber
Products 326 0% 0% 2%
Textile Product Mills 314 1% 2%. 1%
Primary Metal 331 1% 1% 1%
Petroleum and Coal
Products 324 1% 1% 1%
Leather and Allied
Product Manufacturing 316 1% 1% 1%
Miscellaneous 339 0% 1% 1%
Nonmetallic Mineral
Products 327 0% 0% 1%
Food Manufacturing 311 0% 0% 1%

Table I-5: Covered Transactions from the Manufacturing Sector in Past Years



° CFIUS agencies did not attempt to evaluate issues relating to other avenues of
foreign access to U.S. critical technologies, such as licensing, contracting, or
other arrangements that are not M&A transactions.

Assessing illicit attempts by government intelligence services of major economic

competitors to obtain military and dual-use critical technologies.

° CFIUS agencies did not attempt to evaluate foreign espionage in areas other
than dual-use, military, or other U.S. critical technologies, or against companies
not headquartered in the United States.

° In addition, CFIUS agencies reviewed available information about other countries
that have historically sought information on critical technologies through the use
of those countries’ intelligence services.

D. Defining “Coordinated Strategy” for Purposes of Section II of this Annual Report
CFIUS agencies continue to use the following definition of “coordinated strategy”:

Aplan of action reflected in directed efforts developed and implemented by a foreign
government, in association with one or more foreign companies, to acquire U.S.
companies with critical technologies. The efforts of a single company in pursuit of
business goals, absent indications of specific government direction, were not considered
to be a coordinated strategy. Individual company strategies encompass such business
goals as: entry into the U.S. market; increased market share, increased sales, access to
new technologies, and diversification out of mature industries.
° Examples of suspect behaviors that could be evidence of a coordinated strategy
include:

- A pattern of actual or attempted acquisitions of U.S. firms by foreign
entities;

- Evidence that specific completed or attempted acquisitions of companies
with critical technologies had been ordered by foreign governments or
foreign government-controlled firms; or

- The provision of narrowly targeted incentives by foreign governments or
foreign-controlled firms (e.g., grants, concessionary loans, or tax breaks),
especially those that appear to market observers to be disproportionately
generous, to acquire U.S. firms with critical technologies.

E. Participating Agencies and Entities — Critical Technologies Section Il

Department of Commerce

° Bureau of Industry and Security
° International Trade Administration
° National Telecommunications and Information Administration

Department of Defense — Defense Technology Security Administration
Department of Justice
Department of State

° Bureau of Economic and Business Affairs
° Bureau of Political-Military Affairs
° Bureau of International Security and Nonproliferation

Department of the Treasury

Intelligence Community Elements

° Office of the Director of National Intelligence, National Intelligence Council
° Air Force Office of Special Investigations

39


2. Summary of Foreign M&A Activity in the United States

Using the methodology described in the Appendix, CFIUS identified 85 completed foreign
mergers with, or acquisitions of, U.S. critical technology companies involving acquirers from 26
countries and territories. CFIUS agencies and the USIC evaluated all 85 transactions for
indications of a coordinated strategy to acquire U.S. critical technologies.

27


SECTION Il: CRITICAL TECHNOLOGIES

Introduction

This section of the Annual Report to Congress has been prepared in accordance with section
721(m)(3) of the Defense Production Act of 1950 (50 U.S.C. App. 2170(m)(3)), as amended.
Section 721 (m)(3) requires the annual report to include:

“(i) an evaluation of whether there is credible evidence of a coordinated strategy by one
or more countries or companies to acquire United States companies involved in
research, development, or production of critical technologies for which the United States
is a leading producer; and

“(ii) an evaluation of whether there are industrial espionage activities directed or directly
assisted by foreign governments against private United States companies aimed at
obtaining commercial secrets related to critical technologies.”

Subsection II-A addresses the requirement laid out in (i), and subsection II-B addresses the
requirement laid out in (ii).

Definitions & Methodologies

The definition of “critical technologies,” which includes technologies subject to certain U.S.
export controls, is set forth in 31 C.F.R. § 800.209, Regulations Pertaining to Mergers,
Acquisitions, and Takeovers by Foreign Persons (the “CFIUS regulations”), published in the
Federal Register on November 21, 2008. See the Appendix for this definition. “Critical
technology companies” are U.S. companies that CFIUS identified for this section of the report
involved in research, development or production of critical technologies. The Appendix also
provides the definition of “coordinated strategy” for purposes of this section of the report,
describes the methodology and data sources used to identify transactions involving critical
technology companies (“critical technology transactions”), and the approach used to conduct the
analyses required by Section 721 related to critical technologies. Finally, it lists the agencies
and other entities that participated in preparing this section of the report.

I-A. Whether There Is Credible Evidence of a Coordinated Strategy to
Acquire Critical Technology Companies

1. Key Finding

Based on its assessment of transactions identified by CFIUS for purposes of this report, the U.S.
Intelligence Community (“USIC”) believes there may be an effort among foreign governments or
companies to acquire U.S. companies involved in research, development, or production of critical
technologies for which the United States is a leading producer. Information supporting this assessment is
provided in the classified version of this report.

26


B. Specific, Cumulative, and Trend Data on Covered Transactions,
Withdrawals, and Investigations

In the years 2009 through 2013, companies filed 480 notices of transactions that CFIUS
determined to be covered transactions under section 721. Forty percent (193 notices) resulted
in an investigation. About three percent (17 notices) of all notices were withdrawn during the
review stage and eight percent (38 notices) were withdrawn during the investigation stage.
Withdrawals of notices are a function of the specific facts and circumstances of the particular
transactions reviewed by the committee and are not indicative of a trend.

There was a moderate decrease in the number of notices from 2011 to 2013. As shown in
Table |-2, the number of notices increased from 111 in 2011 to 114 in 2012 and decreased to 97
in 2013. The percentage of notices proceeding to investigation remained fairly constant during
2011 and 2012 at 36 percent and 39 percent respectively. However, the percentage of notices
proceeding to investigation increased to 49 percent during 2013, due partially to the fact that
five cases proceeded to investigation during the government shutdown in October.

Apart from the general correlation of the number of notices with macroeconomic conditions, the
information in the table below is not indicative of discernible trends. CFIUS considers each
transaction on a case-by-case basis, and the disposition of any particular case — be it
withdrawal from review or investigation, closing in review or investigation, or Presidential
decision — depends on the unique facts and circumstances of that case.

These figures, and those in the tables below and in Section |.C of this report, reflect the number
of notices filed with CFIUS as required by statute and are not adjusted to account for the fact
that some transactions were the subject of more than one notice, where the original notice was
withdrawn and then re-filed, as discussed in Section |.D of this Annual Report.

Covered Transactions, Withdrawals, and Presidential Decisions*
2009 - 2013

Notices Notices Withdrawn

Year ae er | Withdrawn Number of After Presidential
Notices During Investigations | Commencement of Decisions

Review Investigation
2009 65 5 25 0
2010 93 6 35 0
2011 111 1 40 5 0
2012 114 2 45 20 1
2013 97 3 48 5 0
Total 480 17 193 38 1

*Please see Section 1.D below for discussion of reasons parties may seek to withdraw a notice.

Table I-2: Covered Transactions, Withdrawals, and Presidential Decisions 2008-2013


Covered Transactions by Acquirer Home Country/Economy, 2011-2013

Country/Economy 2011 2012 2013 Total
Australia 4 3 0 7
Bermuda 0 0 0 0
Brazil 1 2 1 4
Canada 9 13 12 34
Cayman Islands 1 0 1 2
Chile 0 0 1 1
China 10 23 24 54
Denmark 0 2 0 2
Estonia 1 0 0 1
Finland 1 0 0 1
France 14 8 7 29
Germany 3 4 4 1
Hong Kong 0 2 1 3
India 1 4 1 6
Ireland 0 0 1 1
Israel 6 4 1 "1
Italy 2 1 0 3
Japan 7 9 18 34
Korea 1 2 1 4
Luxembourg 0 0 1 1
Malaysia 1 0 0 1
Mexico 0 0 2
Netherlands 7 6 1 14
New Zealand 1 0 0 1
Norway 2 1 1 4
Russian Federation 0 2 1 3
Saudi Arabia 0 0 2 2
Singapore 2 2 3 7
Spain 4 2 1 7
Sweden 6 2 2 10
Switzerland 1 5 3 9
Taiwan 0 0 1 1
United Arab Emirates 0 0 2 2
United Kingdom 25 17 7 49
United Kingdom & Germany 1 0 0 1
Grand Total 111 114 97 322

Table I-22: Covered Transactions by Country or Economy: 2011-2013

17


. Thomson ONE database: This database is a product of Thomson Reuters. The
information on transactions provided in the database includes the date of the
transaction, the respective countries of origin of the acquirer and the target company,
and the sector of the target company. In most cases, the database provides the
transaction value and the percentage of ownership rights acquired through the
transaction and, in some cases, the acquirer's total ownership stake after the
transaction. The transactions considered for this section of the Annual Report excluded
those that the Thomson ONE database shows resulted in an ownership stake in a U.S.
company of less than 10 percent, where data on the interest acquired was available.

C. Detailed Findings

1. Identification of the Subject M&A Transactions

The study identified 11 completed M&A transactions in CY 2013 by investors from countries that
comply with any boycott of Israel. These transactions involved investors from Kuwait, Qatar,
Saudi Arabia, and the United Arab Emirates.

The study did not find any subject M&A transactions by investors from Cuba, Iran, or Syria,
which are countries that do not cooperate fully with U.S. antiterrorism efforts and which were
subject to stringent economic sanctions during the relevant period. There was one identified
M&A transaction by investors from Venezuela, a country that was also designated as not
cooperating fully with U.S. antiterrorism efforts.

The combined value of the nine identified transactions with reported values is approximately
$504.1 million. Thomson ONE reports M&A transaction value only in those cases in which the
companies announce the value publicly. Thomson ONE did not report, and Treasury staff was
unable to determine independently, values for six of the 12 transactions analyzed in this section
of the Annual Report. The value of the 12 total transactions, therefore, is necessarily greater
than $674.9 million. Figure IIIl-1 shows the number and aggregate value of the transactions for
each of the relevant countries:

Country Number of Transactions | Known Transaction Value ($mn)
United Arab Emirates 6 $52.80
Qatar 2 $500.00
Saudi Arabia 2 $118.00
Kuwait 1 $4.10
Venezuela 1 N/A
Total 12 $674.90

databases, these information sources did not always provide information regarding the acquirer's total ownership
stake in the U.S. company after the transaction. Therefore, some of the transactions covered by this review may be
portfolio investments rather than FDI.

34


Subject M&A Transactions by Country

United Arab Emirates BQatar
OSaudi Arabia OKuwait

Venezuela

Figure Ill-1: Total Transactions by Country of Acquirer

The subject M&A transactions span several major sectors of the economy. Figure Ill-2 shows
the industries represented by the 12 transactions, noting both the number and value of
transactions for each sector. Transactions in the information technology sector — the largest
category represented — include transactions in the software, telecommunications, and data
processing and hosting industries.

Number of Known Transaction

eco Transactions Value ($mn)
Professional, Scientific, and Technical 3 N/A
Services
Media 2 $500.00
Manufacturing 6 $170.80
Information Technology 1 $4.10
Total 12 $674.90



F. Perceived Adverse Effects of Covered Transactions

Section 721(m) requires that this Annual Report include a discussion of all perceived adverse
effects of covered transactions on the national security or critical infrastructure of the United
States that the Committee will take into account in its deliberations during the period before
delivery of the next report, to the extent possible. In reviewing a covered transaction, CFIUS
evaluates all relevant national security considerations identified by its members during the
review and does not conclude action on a covered transaction if there are unresolved national
security concerns.

As discussed in the Guidance Concerning the National Security Review Conducted by CFIUS,
which CFIUS published in the Federal Register on December 8, 2008, the transactions that
CFIUS had thus far reviewed presented a broad range of national security considerations.
CFIUS examines the national security considerations to determine whether, in light of the
specific facts and circumstances related to the transaction, the transaction would adversely
affect national security and pose a national security risk. Among the considerations presented
by transactions reviewed by CFIUS are the following:

. Foreign control of U.S. businesses that:

° Provide products and services to an agency or agencies of the U.S. Government,
or state and local authorities that have functions that are relevant to national
security.

° Provide products or services that could expose national security vulnerabilities,

including potential cyber security concerns, or create vulnerability to sabotage or
espionage. This includes consideration of whether the covered transaction will
increase the risk of exploitation of the particular U.S. business's position in the
supply chain.

° Have operations, or produce or supply products or services, the security of which
may have implications for U.S. national security, such as businesses that involve
infrastructure that may constitute critical infrastructure; businesses that involve
various aspects of energy production, including extraction, generation,
transmission, and distribution; businesses that affect the national transportation
system; and businesses that could significantly and directly affect the U.S.
financial system.

° Have access to classified information or sensitive government or government
contract information, including information about employees.

° Are in the defense, security, and national security-related law enforcement
sectors.

° Are involved in activities related to weapons and munitions manufacturing,
aerospace, satellite, and radar systems.

° Produce certain types of advanced technologies that may be useful in defending,

or in seeking to impair, U.S. national security, which may include businesses
engaged in the design and production of semiconductors and other equipment or
components that have both commercial and military applications, or the design,
production, or provision of goods and services involving network and data

security.

° Engage in the research and development, production, or sale of technology,
goods, software, or services that are subject to U.S. export controls.

° Are in proximity to certain types of USG facilities.

23


TABLE OF CONTENTS

Section |: Covered Transactions

Introduction

A. Information on 2013 Covered Transactions
B. Specific, Cumulative, and Trend Data on Covered Transactions,

Withdrawals, arid INVEStIQALIONS wssssessssssissnecssesseeveseseosensenevasvesssunvenseareeneeeneeweremnseensneys

C. Covered Transactions by Business Sector and Country

1. Covered Transactions by Business Sector of U.S. Companie:

2009-2013

2. Covered Transactions by Country or Economy: 2011-2013

D. Withdrawn Notices.

E. Mitigation Measures.

F. Perceived Adverse Effects of Covered Transaction

Section Il: Critical Technologies
Introduction ... ze
Definitions and Methodologies
A. Whether There Is Credible Evidence of a Coordinated Strategy to
Acquire Critical Technology Companies
Vs Key FINGING sisssssesecsesassssieseeccevecwesionss
2. Summary of Foreign M&A of U.S. Critical Technology Companie:
3. Frequency of Activity by Countries/Economies and Companies
B. Whether Foreign Governments Used Espionage Activities to
Obtain Commercial Secrets Related to Critical Technologies
1. Key Finding

Section Ill: Foreign Direct Investment in the United States by Countries that Boycott
Israel or Do Not Ban Terrorist Organizations

Introduction
A. Summary of Findings and Conclusions
B. Study Methodology ........::ccccsesees
1. Identification of Relevant Countries .
2. Scope of FDI
C. Detailed Findings.
1. Identification of the Subject M&A Transactions
2. National Security Effects of the Subject M&A Transactions.

Appendix

A. Definition of “Critical Technologies” ....... cece ccc ce ceeeececeneeeceseseesereeesseseeeceseenenienees 37
B. Methodology and Data Sources Used to Identify U.S. Critical

Technology Companies Acquired by Foreigners
C. Analyzing the Acquisitions of U.S. Critical Technology Companies
D. Defining “Coordinated Strategy” for Purposes of Section Il of this Annual Report
E. Participating Agencies and Entities — Critical Technologies Section Il.........ccceeseseseseseseees



e©o000000000

ooo°o

Army Counterintelligence Center

Central Intelligence Agency

Defense Intelligence Agency

Federal Bureau of Investigation, National Security Branch

Department of Energy, Office of Intelligence and Counterintelligence
Department of Homeland Security, Office of Intelligence and Analysis
Department of State, Bureau of Intelligence and Research

Department of the Treasury, Office of Intelligence and Analysis

Marine Corps Intelligence Activity

Office of the National Counterintelligence Executive, Community Acquisition Risk
Section

National Counterterrorism Center

National Geospatial-Intelligence Agency

National Security Agency

Naval Intelligence (Office of Naval Intelligence and Naval Criminal Investigative
Service)

Executive Office of the President

°
°
°

Council of Economic Advisors
National Security Council
Office of Science and Technology Policy

40


Finance, % of Total Finance, | % of Total Finance, | % of Total Finance,
Information, and NAICS Information, and Information, and Information, and
Services Services 2009-2011 | Services 2010-2012 | Services 2011-2013
Professional,
Scientific, and 541 55% 54% 51%
Technical Services
Telecommunications 517 16% 12% 13%
Publishing Industries
(except Internet) a 19% 16% 11%
Rental and Leasing
Services 532 0% 1% 6%
Administrative and
Support Staff 561 5% 5% 5%
Real Estate 531 0% 4% 4%
Credit Intermediation
and Related Activities | _ 57? ue 1 3
Securities,
Commodities
Contracts, and Other
Financial 523 3% 3% 2%
Investments and
Related Activities
Data Processing,
Hosting, and Related 518 0% 0% 2%
Services
Motion Picture and
Sound Recording 512 0% 1% 1%
Industries
Other Information
Services 519 0% 1% 1%
Waste Management
and Remediation 562 1% 1% 1%
Services
Repairrand 8t 0% 1% 1%

Maintenance

Table I-11: Covered Transactions from the Finance, Information, and Services sector in Past Years

Professional, Scientific, and Related Services Subsector

Of the 15 professional, scientific, and related services notices, the computer systems design
and related services subsector accounted for over half, with eight notices. The architectural,
engineering, and related services subsector decreased to 22 percent during 2011 to 2013 from
28 percent during 2010 to 2012. The computer systems design and related services subsector
moderately increased to 39 percent from 2011 to 2013 from 35 percent during 2010 to 2012.

10



telecommunications notices filed from 2010 to 2012, a further increase from 13 percent in the
period from 2009 to 2011. The wireless telecommunications carriers subsector made up seven
percent from 2011 to 2013, similar to the eight percent of notices filed from 2010 to 2012, and
still down from 27 percent in the 2009 to 2011 period.

a waics | ot poubionl
Telecommunications Code Notices Telecommunications
2013
Wired Telecommunications Carriers 5171 2 50%
Wireless Telecommunications Carriers (except 5172 1
Satellite) 25%
Satellite Telecommunications 5174 1 25%

Table I-14: Covered Transactions from the Telecommunications Subsector 2012

Carriers (except
Satellite)

NAICS % of Total % of Total % of Total

Telecommunications | (oq, | Telecommunications | Telecommunications | Telecommunications
2009-2011 2010-2012 2011-2013

2 5174 40% 38% 43%
Telecommunications
Wired
Telecommunications 5171 13% 31% 43%
Carriers
Other .
Telecommunications ote i aa ‘he
Wireless
Telecommunications 5172 27% 8% 7%

Table I-15: Covered Transactions from the Telecommunications Subsector in Past Years

Mining, Utilities, and Construction Sector

The mining, utilities, and construction sector accounted for 21 percent (20 notices) of all notices
filed with CFIUS during 2013. Utilities made up over half of this sector with 12 notices. Other
significant subsectors include mining (except oil and gas) with three notices and oil and gas
extraction with two notices. The percentage of utilities notices has slightly increased,
accounting for 56 percent of notices filed from 2011 to 2013, up from 54 percent filed from 2010
to 2012 and 52 percent of notices filed from 2009 to 2011. Oil and gas extraction increased to
fifteen percent during 2011 to 2013 from ten percent during 2010 to 2012. Support activities for
mining decreased to seven percent during 2011 to 2013 from thirteen percent during 2010 to

2012.

12



This page intentionally left blank.


° The value of subject M&A transactions with publicly reported values was $674.9 million.
(As described in subsection III.C, not all publicly announced transactions are reported
with dollar values, so the actual value of subject M&A transactions is more than $674.9
million.) The total value of M&A transactions with publicly reported values by all! foreign
investors during CY 2013 exceeded $122 billion.

. The subject M&A transactions spanned a number of economic sectors.

. With respect to each transaction covered by this report, CFIUS either reviewed
and concluded action under section 721 with no unresolved national security
concerns; had previously reviewed and concluded action on a transaction that
gave the foreign acquirer control of the same U.S. business; or considered the
transaction through procedures that CFIUS agencies have put in place for
transactions that are not notified to CFIUS.

B. Study Methodology
1. Identification of Relevant Countries

To identify relevant countries that comply with any boycott of Israel, as required by the statute,
CFIUS considered the lists published by the Treasury Department in 2013 pursuant to section
999 of the Internal Revenue Code and the countries identified by the Department of State in
reporting to Congress during 2013 under section 564 of the Foreign Relations Authorization Act,
FY 1994-95, as well as information about the countries’ observance of a primary boycott of
Israel. Based on these considerations, CFIUS interprets the reporting requirement under
section 7(c)(1)(A) of FINSA to apply to the following countries: Algeria, Iran, Kuwait, Lebanon,
Libya, Qatar, Saudi Arabia, Sudan, Syria, the United Arab Emirates, and Yemen.

To identify relevant countries that do not ban foreign terrorist organizations, CFIUS interpreted
section 7(c)(1)(B) of FINSA to apply to countries that were certified in 2013 as “not cooperating
fully with United States antiterrorism efforts,” pursuant to section 40A of the Arms Export Control
Act, as amended. Those countries are Cuba, Eritrea, Iran, North Korea, Syria, and Venezuela.
(The same countries received this certification last year.)

2. Scope of FDI

Mergers with and acquisitions of U.S. companies are the main form of FDI into the United
States and the form of FDI that CFIUS is authorized under section 721 to review. This section
of the Annual Report considers the following transactions: (i) transactions notified to CFIUS
under section 721; (ii) M&A transactions that were not notified to CFIUS (non-notified
transactions) that CFIUS agencies considered through procedures that each agency has
adopted for this purpose; and (iii) those M&A transactions that resulted in an ownership stake in
a U.S. company of at least 10 percent,® as listed in the Thomson ONE database, a recognized
commercial/financial database.

® EDI is generally understood to imply ownership of at least 10 percent, a benchmark used by many statistical
agencies around the world, including the Department of Commerce's Bureau of Economic Analysis, the Council of
Economic Advisors (Economic Report of the President), the International Monetary Fund, and the Organization for
Economic Cooperation and Development. As noted in the descriptions of the Thomson ONE and S&P Capital |Q

33


E. Mitigation Measures

From 2011 through 2013, 27 cases (eight percent) resulted in the use of legally binding
mitigation measures. In 2013, CFIUS mitigation measures were applied to 11 different covered
transactions (11 percent). These measures involved acquisitions of U.S. companies engaged in
the telecommunications, software, mining, oil and gas, manufacturing, consulting, and
technology industries. Four CFIUS agencies served as the U.S. Government (USG) signatories
to these measures.

The Committee has adopted procedures to evaluate and ensure that parties to a covered
transaction remain in compliance with any risk mitigation measure under section 721 that
CFIUS negotiates with or imposes on the parties. For all mitigation measures executed since
FINSA became effective, Treasury, as Chair of CFIUS, has designated each USG signatory to a
mitigation measure as a lead agency for monitoring compliance with that measure. Lead
agencies carry out their monitoring responsibilities on behalf of the Committee and report back
to the Committee on at least a quarterly basis. In addition, signatories to mitigation measures
that were entered into before FINSA’s effective date also report to CFIUS quarterly on
compliance with those measures. As described below, all lead agencies for monitoring
mitigation compliance have implemented processes to carry out their responsibilities.

Mitigation measures negotiated and adopted in 2013 required the businesses involved to take
specific and verifiable actions, including, for example:

o Ensuring that only authorized persons have access to certain technology and
information.

o Establishing a Corporate Security Committee and other mechanisms to ensure
compliance with all required actions, including the appointment of a USG-approved
security officer or member of the board of directors and requirements for security
policies, annual reports, and independent audits.

o Establishing guidelines and terms for handling existing or future USG contracts, USG
customer information and other sensitive information.

o Ensuring only U.S. citizens handle certain products and services, and ensuring that
certain activities and products are located only in the United States.

o Notifying security officers or relevant USG parties in advance of foreign national
visits to the U.S. business for approval.

o Notifying relevant USG parties of any awareness of any vulnerability or security
incidents.

o Providing the USG with the right to review certain business decisions and object if
they raise national security concerns.

CFIUS agencies use a variety of means to monitor and enforce compliance by the companies
that are subject to the measures, including:
© periodic reporting to USG agencies by the companies;
© on-site compliance reviews by USG agencies;
o third-party audits when provided for by the terms of the mitigation measures;
© investigations and remedial actions if anomalies or breaches are discovered or
suspected.

21


CFIUS ANNUAL REPORT TO CONGRESS

Report Period: CY 2013
Issued: Feb 2015


As shown in Figure II-1°, the largest amount of M&A activity involving foreign acquisitions of
U.S. critical technology companies involved targets whose primary activities are in the
Machinery & Equipment and Aerospace & Defense sectors.

Figure Il-1. Completed Transactions by Sector of U.S. Target Company

@ 25
2
2 22
2 21
$
o§ 20 4
RE
3B
se 15 4 14
Se
53
23 10
Ee 10 4 9
3
s
2 6
oO
5 4
2
1
0
bd Ba oe SD a i oS
Ss 3 8 53 ee 2 os She
Be 8 S 28 25 7 28 See
Be = © wel Se ef Eg 528
ze 5 8 EE eo = as mee
ga 5 3 23 «33 2 cS 885
5O oe in 2° on - S2o
< = sg or
a a
=

° The number of transactions based on country involvement exceeds the total number of transactions (79) due to some transactions
involving more than one country.

29


approach assists in the identification of foreign acquisitions of U.S. critical technology
companies that produce defense articles or services covered under the ITAR.

31 C.F.R. § 800.209(b): This paragraph pertains to those items specified on the
Department of Commerce’s Control List (CCL), which is set forth in Supplement No. 1 to
part 774 of the Export Administration Regulations (EAR) (15 C.F.R. parts 730-774). The
items on the CCL are controlled pursuant to multilateral regimes (i.e., for reasons of
national security, chemical and biological weapons proliferation, nuclear nonproliferation,
or missile technology) as well as for reasons of regional stability or surreptitious
listening.

Firms producing items under the regulations specified in this paragraph of 31 C.F.R. § 800.209
are not required to register with the Department of Commerce (Commerce), but, in many cases,
must obtain a license from Commerce in order to export those items (including “deemed
exports” to foreign nationals in the United States). To identify acquisitions of companies
producing items that fall under this part of the definition, Commerce used a combination of
publicly available information on M&A transactions,° information on non-publicly announced
M&A transactions notified to CFIUS, and its internal records of export license applications.

31 CFR § 800.209(c): This paragraph pertains to specially designed and prepared
nuclear equipment, parts and components, materials, software, and technology specified
in the Assistance to Foreign Atomic Energy Activities regulations (10 C.F.R. part 810),
and nuclear facilities, equipment, and material specified in the Export and Import of
Nuclear Equipment and Materials regulations (10 C.F.R. part 110).

The Department of Energy used a similar approach to that adopted by Commerce, which
entailed checking a list of publicly announced M&A transactions"° against its records of export
authorizations under 10 C.F.R. part 810 and the Nuclear Regulatory Commission's records of
export license requests under 10 C.F.R. part 110.

31 C.F.R. § 800.209(d): This paragraph pertains to select agents and toxins specified in
the Select Agents and Toxins regulations (7 C.F.R. part 331, 9 CFR
part 121, and 42 C.F.R. part 73).

The agents and toxins specified under these regulations are generally subject to export controls
administered by Commerce. To this extent, the discussion above regarding Commerce’s
methodology applies to transactions involving these critical technologies, as well.

C. Analyzing the Acquisitions of U.S. Critical Technology Companies
CFIUS agencies addressed parts (i) and (ii) of section 721(m)(3) of the Defense Production Act
of 1950 (50 U.S.C. App. 2170(m)(3)), as amended, by doing the following:

. Analyzing the pattern of M&A of U.S. critical technology companies during 2013, while
also considering transactions in prior years, as appropriate.
° CFIUS agencies concentrated on foreign direct investment through M&A of
companies involved in all critical technologies, regardless of industry.

° The M&A transactions were identified using the Thomson ONE database and S&P Capital IQ database.
'° The Thomson ONE database and S&P Capital IQ database were used.

38


Acquisition of control by foreign persons that:

° Are controlled by a foreign government.

° Are from a country with a record on nonproliferation and other national security-
related matters that raises concerns.

° Have historical records of taking or intentions to take actions that could impair

U.S. national security.

CFIUS reviews all relevant national security considerations and the particular facts and
circumstances of transactions to determine whether the transaction will pose a national security
risk. Among the factors that CFIUS takes into account are the following, listed in section 721(f)
of the Defense Production Act of 1950:

(1)
(2)

domestic production needed for projected national defense requirements;

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;

the control of domestic industries and commercial activity by foreign citizens as it affects

the capability and capacity of the United States to meet the requirements of national

security;

the potential effects of the proposed or pending transaction on sales of military goods,

equipment, or technology to any country —

(A) identified by the Secretary of State -

(i) under section 6(j) of the Export Administration Act of 1979, as a country
that supports terrorism;

(ii) under section 6(I) of the Export Administration Act of 1979, as a country
of concern regarding missile proliferation; or

(iii) under section 6(m) of the Export Administration Act of 1979, as a country
of concern regarding the proliferation of chemical and biological weapons;

(B) identified by the Secretary of Defense as posing a potential regional military
threat to the interests of the United States; or

(C) listed under section 309(c) of the Nuclear Non-Proliferation Act of 1978 on the
“Nuclear Non-Proliferation-Special Country List” (15 C.F.R. Part 778, Supplement
No. 4) or any successor list;

the potential effects of the proposed or pending transaction on United States

international technological leadership in areas affecting United States national security;

the potential national security-related effects on United States critical infrastructure,
including major energy assets;

the potential national security-related effects on United States critical technologies;

whether the covered transaction is a foreign government-controlled transaction, as

determined under subsection (b)(1)(B) of section 721;

as appropriate, and particularly with respect to transactions requiring an investigation

under subsection (b)(1)(B) of section 721, a review of the current assessment of—

(A) the adherence of the subject country to nonproliferation control regimes,
including treaties and multilateral supply guidelines, which shall draw on, but not
be limited to, the annual report on “Adherence to and Compliance with Arms
Control, Nonproliferation and Disarmament Agreements and Commitments,”
required by section 403 of the Arms Control and Disarmament Act;

(B) the relationship of such country with the United States, specifically on its record
on cooperating in counter-terrorism efforts, which shall draw on, but not be
limited to, the report of the President to Congress under section 7120 of the
Intelligence Reform and Terrorism Prevention Act of 2004; and

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Transportation Equipment Subsector

Of the three notices filed in the transportation equipment subsector in 2013, two were in the
aerospace products and parts manufacturing subsector. This subsector’s share of notices filed
fell to 53 percent from 2011 to 2013 from 70 percent in 2010 to 2012.

; ; waics | or eciote:
Transportation Equipment Code Notices Transportation
2013 Equipment 2013
Aerospace Products and Parts Manufacturing 3364 2 67%
Motor Vehicle Parts Manufacturing 3363 1 33%

Table I-8: Covered Transactions from the Transportation Equipment Subsector 2013

% of Total % of Total % of Total
Transportation NAICS Transportation Transportation Transportation
Equipment Code Equipment 2009- Equipment 2010- Equipment 2011-
2011 2012 2013
Aerospace Products
and Parts 3364 70% 70% 53%
Manufacturing
Motor Vehicle Parts
Manufacturing 3363 22% 22% 21%
Motor Vehicl
Manulactutind 3361 9% 11% 16%
Ship and Boat
Building 3366 9% 9% 11%

Table I-9: Covered Transactions from the Transportation Equipment Subsector in Past Years

Finance, Information, and Services Sector

The finance, information, and services sector accounted for 33 percent (32 notices) of all
notices filed with CFIUS during 2013. Professional, scientific, and technical services continued
to make up about half of the notices filed in this sector (15 notices). The rental and leasing
services subsector made up a significant part of the sector with five notices and continued to
increase its share of noticed filed to six percent during 2011 to 2013 from one percent during
2010 to 2012 and zero percent from 2009 to 2011.



% of Total
NAGS orice Professional,
Professional, Scientific, and Technical Services Code Notices Scientific, and
2013 Technical Services
2013
Computer Systems Design and Related Services 5415 8 53%
Architectural, Engineering, and Related Services 5413 3 20%
Management, Scientific, and Technical Consulting

Services 5416 2 13%
Scientific Research and Development Services 5417 2 13%

Table I-12: Covered Transactions from the Professional, Scientific, and Technical Services

Subsector 2013
% of Total % of Total % of Total
i Professional, Professional Professional,
uraorant NAICS | Scientific, and | Scientific,and | Scientific, and
TachnicalSerticee! Code Technical Technical Technical
Services 2009- Services 2010- Services 2011-
2011 2012 2013
Computer Systems
Design and Related 5415 44% 35% 39%
Services
Architectural,
Engineering, and 5413 27% 28% 22%

Related Services

Management, Scientific,
and Technical 5416 15% 18% 19%
Consulting Services

Scientific Research and

Development Services 5417 10% 13% 15%
Other Professional,

Scientific, and Technical 5419 4% 3% 4%
Services

Specialized Design

Services Sad 0% 2% 2%

Table I-13: Covered Transactions from the Professional, Scientific, and Technical Services
Subsector in Past Years
Telecommunications Subsector
Of the four telecommunications notices filed in 2013, two were in the wired telecommunications
carriers subsector. Wired telecommunications carriers notices accounted for 43 percent of
telecommunications notices filed from 2011 to 2013, a large increase from 31 percent of the

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