Bloomberg
November 29, 2006
Otis Bilodeau
When the U.S. government approved Alcatel SA's $11.8 billion purchase of Lucent Technologies Inc. this month, it imposed a condition with few, if any, precedents.
The U.S. can reopen its review and demand that Alcatel unwind the acquisition should federal officials ever determine that the Paris-based company has failed to comply with national- security safeguards, regulatory filings show. Lucent, the biggest U.S. maker of telecommunications equipment, has been a major supplier to the American military for decades and currently is developing a mobile-communications system for the army.
Alcatel's may be the first transaction to receive what amounts to permanent probation by the Committee on Foreign Investment in the U.S., the federal panel that reviews the security risks in takeovers of U.S. companies.
``I have never seen this before,'' said John Reynolds, a former State Department official who now counsels companies on national-security matters as a partner at Wiley Rein & Fielding LLP in Washington. ``It could give the government the chance to wade in later and say, `This deal is no good, we're going to make you divest.'''
Today, the International Trade Committee of the Bar Association of the District of Columbia is meeting to review the climate for approval of foreign takeovers of U.S. companies.
President George W. Bush signed off on the Lucent purchase Nov. 17 after Alcatel agreed to the conditions imposed by the foreign-investment committee. That day, the White House said in a statement that the panel considered ``the important research and development being conducted at Lucent's Bell Laboratories'' during its review.
Classified Work
As a result, Murray Hill, New Jersey-based Lucent agreed to form a separate unit to handle classified U.S. government work. Some contracts assigned to Bell Labs, the company's research department, will be transferred to the new area as Lucent comes under French control, according to the filings with the Securities and Exchange Commission.
``We have every intention of complying with the terms'' set by the panel, Lucent spokeswoman Joan Campion said. Alcatel spokeswoman Regine Coqueran declined to comment.
Treasury spokeswoman Brookly McLaughlin declined to say whether the conditions of Alcatel's approval reflect a change in government policy. The departments of Treasury, Defense, Justice, Commerce and Homeland Security all have representatives on the Committee on Foreign Investment, which was established in 1975, operates in secret and doesn't make its findings public.
Tougher Approach
Until now, the government has relied on softer tactics to compel foreign buyers of U.S. companies to abide by security agreements, such as threatening to cancel contracts or rescind key licenses, said James Bodner, a former Defense Department official. Bodner is now senior vice president of the Cohen Group, a consulting firm in Washington founded by ex-Defense Secretary William Cohen.
Alcatel and Lucent said in SEC filings that the security agreement they signed with the government requires ``certain undertakings'' related to Bell Labs and the ``communications infrastructure of the United States.'' U.S. officials may reopen their review of the acquisition and ``revise'' their approval if the companies ``materially fail to comply'' and the lapse ``threatens to impair'' national security, the filings show.
Lucent's ``government communications laboratory'' at Bell Labs has been developing an ``ultra-high capacity, highly secure'' communications system for the Pentagon, as well as mobile equipment that could be part of the Army's Future Combat Systems, according to the company's Web site. Lucent's other customers include Cingular Wireless LLC, the largest U.S. mobile- phone company.
Dubai Ports Controversy
The Committee on Foreign Investment drew criticism from lawmakers including Richard Shelby, the Republican senator from Alabama, in March after it approved the purchase of U.S. port facilities by a company under the control of the Dubai government.
While that deal was later scuttled, some legislators have proposed laws that would overhaul the way foreign takeovers of U.S. assets are scrutinized for security risks. House Armed Services Committee Chairman Duncan Hunter, a California Republican who has raised ``grave concerns'' about Lucent's sale, held a closed-door hearing to discuss the review process on Nov. 14, days before the White House approved the deal. He told reporters afterwards he wasn't satisfied with the information that had been presented.
The foreign-investment committee's 75-day probe of the Lucent sale was ``one of the most rigorous and thorough investigations ever,'' Assistant Treasury Secretary Clay Lowery said in testimony prepared for Hunter's hearing.
Priority for Dodd
The same day, Senator Christopher Dodd, a Connecticut Democrat and incoming chairman of the Banking Committee, said he would make concerns over the security panel a priority.
Joseph Dennin, a former assistant secretary for international economic policy at the Commerce Department, said that the unusual probation imposed on Alcatel may prompt other countries to resist acquisitions by U.S. companies.
``We have spent a lot of years and a lot of political capital to make sure companies like IBM could buy businesses in other countries,'' said Dennin, now a partner at McKenna Long & Aldridge LLP in Washington. ``This does allow someone to turn around and say, `Well, you're not totally open to outside investment yourselves.'''