November 28, 2006
On November 17, 2006, President George W. Bush accepted the recommendation of the Committee on Foreign Investment in the United States (CFIUS) and permitted the $11.8 billion acquisition of U.S.-based Lucent Technologies by the French telecommunications company, Alcatel. This approval clears the last regulatory hurdle for the deal, and the companies expect the acquisition to be completed by November 30, 2006.
Recently, two highly controversial proposed transactions have increased media attention on foreign mergers that may threaten national security. In June 2005, the state-owned Chinese National Offshore Oil Corporation abandoned its attempt to purchase U.S.-based Unocal because of negative publicity and national security fears in the U.S. In February 2006, Dubai-owned Dubai Ports World agreed to relinquish management of a recently acquired port management company that controlled operations at a number of U.S. ports, following a negative congressional response to the deal that was based on national security concerns.
Under the 1988 Exon-Florio amendment to the Defense Production Act of 1950, CFIUS reviews foreign acquisitions, mergers, and takeovers of U.S. companies for potential national security threats. The committee is comprised of twelve cabinet-level officials, who review proposed transactions and then make a recommendation to the president regarding whether he should approve or prohibit a particular deal. CFIUS conducts an initial thirty day review, and if there are potential national security implications of the deal, CFIUS can extend that period by forty-five days to conduct a more formal investigation. CFIUS then makes a recommendation to the president, and he has an additional fifteen days to consider the committee’s recommendation and ultimately approve or prohibit the deal. CFIUS has reviewed more than 1,900 deals, and only once has the president prohibited the transaction.
Alcatel and Lucent announced their plans to merge in April 2006 and filed a voluntary notification of the transaction with CFIUS in August. CFIUS extended the initial review for the additional forty-five days, and on November 6, following a rigorous investigation, CFIUS recommended to the President that he not suspend or prohibit the deal. Alcatel’s acquisition of Lucent received heightened scrutiny because Lucent owns Bell Laboratories, which conducts sensitive communications, surveillance, and advanced technology research and development work for the U.S. Department of Defense. Because Paris-based Alcatel has previously worked with China, Cuba, Iran, North Korea, Sudan, and Syria, some members of Congress expressed concern that the merger might result in the leak of sensitive national security information to hostile governments. To allay these concerns, Alcatel and Lucent agreed to create a U.S.-controlled subsidiary that would handle any work related to sensitive U.S. government contracts. The subsidiary will be headed by former U.S. Secretary of Defense William Perry, former CIA chief James Woolsey, and former NSA head Kenneth Minihan.
Despite this agreement, Representative Duncan Hunter (R-CA), Chair of the House Armed Services Committee, held a hearing in mid-November to probe deeper into the national security implications of the transaction. The hearing was closed to the public, reportedly to protect classified and confidential national security information and proprietary business information. Patricia Russo, Chief Executive Officer of Lucent Technologies, and Mike Quigley, Chief Operating Officer of Alcatel, testified at the closed-door hearing, in addition to Gordon England, Deputy Secretary of Defense at the Department of Defense, and Clay Lowery, Assistant Secretary for International Affairs at the Treasury Department. The details of the hearing remain classified, but post-hearing statements from a number of lawmakers indicated that the deal would likely move forward, although Representative Hunter expressed a desire to investigate the matter further.
On November 17, 2006, President Bush accepted the recommendation of CFIUS and approved the deal, contingent upon Alcatel’s and Lucent’s acceptance of two additional agreements with U.S. government agencies that would further safeguard sensitive information. The precise terms of these two agreements are unknown, but the White House has said that they are "robust and far-reaching." Because the deal has already been approved by shareholders of both companies, as well as the relevant antitrust enforcement agencies in both the U.S. and the EU, the deal can now proceed, and the companies expect it to be completed by November 30, 2006.
© 2006 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.