How Chinese state-backed investors avoided US investment screening to acquire Imagination Technologies
Datenna continuously tracks and conducts research on China-EU joint ventures in Europe. In this series of articles, we have decided to highlight our research and data on interesting joint venture cases. This article analyses the acquisition of Imagination Technologies in the US.
- UK based Imagination Technologies was acquired for £550 million (€619 million) in 2017 by Chinese investors
- Key semiconductor technology was acquired by Canyon Bridge Fund I, a partially state-owned private-equity investor
- The acquisition went via the Cayman Islands to prevent rigorous screening by US authorities
- Post-acquisition, an attempt was made by Canyon to take over the management board
The sale of Imagination Technologies
On the 3rd of November 2017, the acquisition of Imagination Technologies by Canyon Bridge Fund I was completed. The semiconductor and software design company put itself up for sale earlier in June, that same year. The offer for sale came after Apple, its largest customer and one of its biggest shareholders, said it would stop using its technology in their products.
Canyon Bridge paid £1.82 per share in cash for each share. This valued Imagination Technologies at approximately £550 million (€619 million). The offer signified a premium of 47.4% to the share price on 21 June 2017.
A state-owned equity fund
The shares in Imagination Technologies were acquired by Canyon Bridge Fund I. The fund is based in the Cayman Islands and the custodian of the fund is China’s Bank of Communications. It is managed by Canyon Bridge, but most capital (99%) is provided by Yitai Capital (Hong Kong). Yitai is a 100% subsidiary of China Venture Capital Fund Corporation (CVC), a state-owned investment vehicle. The largest shareholder (35%) is China Reform (China Guoxin Investment) which is owned by the State Council. Other investors in CVC are China Construction Bank and Shenzhen Investment Holdings. Through various layers of ownership, the CCB is ultimately owned by the central government’s State Council. Shenzhen Investment is owned by the Shenzhen local government. T financing and ownership structure indicates that Imagination Technologies is under the control of the Chinese government.
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What does Imagination Technologies do?
Imagination Technologies has over 25 years of experience in designing and licensing market-leading processor solutions for graphics. Its technology is used in over 30% of smartphones worldwide. The global headquarters are located in Hertfordshire, United Kingdom. The company creates and licenses semiconductor System-on-Chip Intellectual Property (SoC IP). Before the acquisition, its primary activities consisted of the design of PowerVR mobile graphics processors and networking routers. The company also dedicated resources toward the supply of radio baseband processing, networking, cloud computing, and silicon and system design services.
After losing its biggest customer, Apple, Imagination Technologies devoted its activities toward the GPU business. This meant a transition from a varied provider of processor IP to an almost exclusive focus on GPUs and other visual processors. In January 2020, then owned by Canyon Bridge, Imagination Technologies once again entered into a multiyear license agreement with Apple. This new deal grants the US-based firm access to a wider range of Imagination’s intellectual properties in exchange for license fees.
Approval by UK authorities
The sale of Imagination Technologies was approved by the government of then-Prime Minister Theresa May, on the basis that Canyon Bridge was licensed and regulated by US law. However, Canyon Bridge moved its headquarters to the Cayman Islands after the failed acquisition of Lattice (a large US semiconductor company).
In 2017, CFIUS (Committee on Foreign Investment in the United States) blocked Canyon Bridge from acquiring Lattice. The acquisition was blocked due to “unresolved national security concerns”. The US Treasury Secretary stated that the “national security risk was related to the transfer of intellectual property, the Chinese government’s role in supporting the deal and the importance of the semiconductor supply chain integrity”. By moving its headquarters from the US to the Cayman Islands, Canyon Bridge falls out of US jurisdiction.
Aside from the deal with Canyon Bridge, Imagination also sold off its microprocessor business unit to Tallwood MIPS Inc, a company indirectly owned by US-based Tallwood Venture Capital. It is speculated that the sale of its microprocessor unit was a strategic move to prevent CFIUS from blocking the upcoming deal between Canyon Bridge and Imagination Technologies. By separating their US unit from the UK business, CFIUS would have no authority to block this deal.
Discord in the boardroom
In April 2020, Imagination Technologies was shaken by internal turmoil. An emergency board meeting was cancelled at the last minute by Oliver Dowden, UK Secretary of State for Culture, Media and Sport. Canyon Bridge, the investment fund that bought Imagination Technologies in 2017, would have attempted to appoint four board members with links to China Reform Holdings in this meeting.
After cancelling the meeting, Oliver Dowden demanded that Imagination Technologies’ chairman, Ray Bingham, gather more information on the alleged attempt to seize control of the board. The government’s intervention followed a campaign led by politician David Davis. Mr. Davis warned that Imagination Technologies could have been under full Chinese control, had the boardroom takeover succeeded.
The unrest within the company led to several resignations by key figures. Imagination’s Chief Executive Officer Ron Black and two of his C-level executives resigned in protest over the boardroom coup. In his resignation letter, Mr.Black reportedly told employees that China Reform’s promise to remain a passive investor had been breached. “I will not be part of a company that is effectively controlled by the Chinese government,” he said in a resignation letter reported by the BBC. Ray Bingham has since been appointed as interim CEO.
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