Two POSSIBLE complications to a future Advent International sale of IDEMIA

(UPDATE: I have indicated portions of this post that include speculation from myself and others.)

When I wrote “About THAT Reuters article” (specifically, the February 4 article speculating about a possible sale of IDEMIA by Advent International to Thales Group), I noted that I have no expertise in predicting corporate acquisitions.

However, I’ve experienced three of them, including Motorola’s acquisition of Printrak in 2000, Safran’s acquisition of Motorola’s Biometric Business Unit in 2008-2009, and Advent International’s acquisition of Safran’s Morpho unit in 2016-2017 (and Advent’s merger of Oberthur and Morpho to form OT-Morpho, later IDEMIA).

None of these was a simple matter of the acquiring company and the acquired company approving the acquisition. It was more complicated than that.

Motorola acquires Printrak

Even the most straightforward of the acquisitions that I experienced, the U.S. company Motorola’s acquisition of the U.S. company Printrak, required a number of government approvals.

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the rules promulgated under the Hart-Scott-Rodino Act, Printrak, Acquisition Sub and Motorola cannot complete the Merger until they notify and furnish information regarding the acquisition of Printrak by Acquisition Sub to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and satisfy specified waiting period requirements. Printrak and Motorola (as the sole stockholder of Acquisition Sub) filed notification and report forms under the Hart-Scott-Rodino Act with the FTC and the Antitrust Division on September 26, 2000 and received early termination of the waiting period from the Federal Trade Commission effective October 11, 2000.

From https://sec.report/Document/0000912057-00-045478/

And not just from the U.S. government.

In addition, Printrak and Motorola are required to furnish certain information and materials to the antitrust authorities of Argentina, Brazil, the Federal Republic of Germany, and Romania. Filings were made in Argentina on September 22, 2000, in Brazil on September 19, 2000 and in the Federal Republic of Germany on September 27, 2000. German antitrust authorities have one month after the parties file their application to review the transaction. During that one month period, they can either approve the transaction or initiate an examination of the transaction which could take an additional three months, during which time the parties cannot close the transaction. During this three month period, the antitrust authorities will either approve the transaction or prohibit it. Approval may be granted before the initial one month review or before the additional three month review period. If approved, the antitrust authorities can not later challenge the transaction under their merger law but could challenge the transaction under other provisions of their antitrust laws. Printrak and Motorola intend to make a post-closing filing in Romania as soon as practicable after the closing.

From https://sec.report/Document/0000912057-00-045478/

Why did the Motorola acquisition of Printrak require all of those approvals? Because Printrak did business in these countries (and many others), and the governments of those particular countries wanted to exert control over who does business in their country. For example, Printrak was the automated fingerprint identification system (AFIS) supplier in Romania, and the government of Romania had a need to know what would happen if Motorola were to become the supplier of its AFIS. Would all of the fingerprints be replaced by batwings? Would the new owner require the Romanian employees to apply Six Sigma in their everyday lives? Would Romania have to use Iridium to communicate AFIS data?

Well, everyone in the U.S. and the other countries granted approval, and the Motorola acquisition of Printrak was eventually completed, although it took roughly three months to get all the approvals. I remember that we were at a trade show (IACP, I think) with Printrak signage, and received mid-show approval to string up Motorola banners after receiving final approval.

And that was the relatively EASY acquisition of the three that I experienced. The next one was harder.

Safran acquires part of Motorola

It became more complicated when Motorola, a U.S. supplier of export-controlled fingerprint identification software and hardware, sought to sell a portion of itself to Safran, a French company.

By the time that Safran announced its intent to acquire Motorola’s Biometric Business Unit, a new government entity entered the picture – the Committee for Foreign Investment in the United States (CFIUS).

CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons, in order to determine the effect of such transactions on the national security of the United States.

From https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius

Why did CFIUS get involved?

Because Motorola not only sold fingerprint identification technology, an export controlled technology, but also managed law enforcement data for a number of states and (on a limited basis) for the U.S. Federal Bureau of Investigation and other federal government agencies.

Never mind the fact that France has been a long-standing ally of the United States. Heck, Israel is an ally of the U.S., and we didn’t like it when Israel spied on us.

CFIUS had to make sure that foreign control of Motorola’s biometric assets wouldn’t cause issues. Would French intelligence personnel steal all of the personal identifiable information (PII) from the AFIS databases in Minnesota, North Carolina, and other states?

Safran acquires other things

Eventually CFIUS decided that there was no critical threat and allowed the Safran acquisition of Motorola’s Biometric Business Unit to go through.

After all, it wasn’t like Motorola managed the main FBI criminal database, or state driver’s license databases, or anything like that.

• You see, the main FBI criminal database, then known as IAFIS, was already managed by Safran.
• And the state driver’s license databases were managed by neither Safran nor Motorola. A separate company, L-1 Identity Solutions, managed the majority of those databases.

So Safran’s acquisition of Motorola’s biometric assets was approved by all necessary government entities, and everyone was happy.

But Safran wasn’t done with its acquisitions, and a few years later acquired L-1 Identity Systems also. So now U.S. driver’s license production would be under French control.

This time around, CFIUS insisted on mitigating the effects of “Foreign Ownership, Control or Influence” (FOCI). Specifically, L-1 Identity Solutions (renamed “MorphoTrust”) was placed under a proxy structure, in which MorphoTrust’s Board of Directors was entirely composed of U.S. citizens. In addition, a number of MorphoTrust employees who were not U.S. citizens were shifted away from MorphoTrust to other Safran companies (most notably MorphoTrak, the company that contained the former Motorola Biometric Business Unit and other stuff).

By the way, I wrote about this before, but it’s in a Bredemarket Premium article so most of you can’t read it. Consider this information a freebie.

Even though they were owned by the same company, and used some of the same hardware components, MorphoTrust and MorphoTrak were managed separately. MorphoTrust had to log its contacts with foreigners, including U.S. employees of the foreign-owned MorphoTrak. Any transactions between MorphoTrust and MorphoTrak had to be carefully monitored to ensure that “foreign” components didn’t sneak their way into MorphoTrust products. And (most notably) because we couldn’t really talk to each other, MorphoTrust and MorphoTrak actually competed against each other on several occasions, including instances in which both subsidiaries proposed fingerprint livescan stations to the same customers.

But we were one big happy fractured family, and CFIUS was satisfied.

Well, until the next acquisition took place.

Advent International (and Oberthur) acquires part of Safran

Remember how I said that I couldn’t really predict acquisitions? After Safran acquired Motorola’s Biometric Business Unit, I thought I was home free. Printrak was the odd man out in Motorola, since our part of Motorola (later becoming Motorola Solutions) specialized in the sale of lots and lots of police radios, while we in Printrak specialized in the sale of a few AFIS systems. Once we joined Safran, we became part of a huge division (Sagem Sécurité, later known as Morpho) that ONLY performed identity functions.

Little did I know that Safran, whose main business was in aerospace, would decide to jettison the entire Morpho division.

So now an American investment firm would buy a French company.

You can bet that this required a round of approvals on both sides of the Atlantic.

France and the European Union certainly had an interest. As I noted in a recent post about Alaska’s HB389 bill, Advent International was not the sole owner; Advent had to bring the French government-owned entity Bpifrance on as a minority owner. And the European Union had to grant antitrust approval.

But on the U.S. side, CFIUS got involved again because MorphoTrust was part of the acquisition. Never mind the fact that MorphoTrust was now majority American-owned; MorphoTrust’s corporate parent was headquartered in France, and Bpifrance owned part of MorphoTrust.

So what happened?

MorphoTrust was removed from FOCI control, sort of, and merged with MorphoTrak and some parts of Oberthur to form IDEMIA Identity & Security USA LLC.

IDEMIA created a new FOCI-mitigated entity, IDEMIA National Security Solutions.

And my job became really complicated, because I, a former MorphoTrak employee, reported to someone who was a former MorphoTrust employee. And even though the U.S. part of IDEMIA (excluding IDEMIA NSS) was no longer FOCI-mitigated, some leftovers from the old MorphoTrust days were still around.

Initially there were still two separate computer networks, and I had to have access to both of them, which meant that I had to obtain a second computer from the Billerica, Massachusetts office to access the old MorphoTrust network. (Before obtaining that second computer, I had to undergo a security screening.)

Eventually the two separate networks went away…after I left IDEMIA. Actually, I’m not entirely certain that they COMPLETELY went away, but at least the email addresses were all standardized throughout the United States after I left. (Yes, I had two email addresses also.)

Two new complications when some future entity acquires IDEMIA

So what happens in the future? Reuters has speculated what may happen, and I am speculating also.

As I noted previously, Advent International acquires businesses, revamps them, and sells them (hopefully) at a profit.

So even if the Reuters article turns out to be factually incorrect, Advent is going to sell IDEMIA someday.

Based upon past acquisitions, I believe it is pretty likely that the French government is going to have some say in the sale. Reuters speculated that nothing will happen until after next month’s Presidential election in France. (See my LinkedIn post in Bredemarket Identity Firm Services about the French election.) The French President, whoever he or she may be when Advent finally tries to sell IDEMIA in 2022, 2023, or 2033, is going to exert control over who the final buyer will be. Perhaps the President may insist that IDEMIA be sold to a French company, or at least a European Union company.

And based upon past acquisitions, I believe it is pretty likely that the U.S. government is going to have some say in the sale. The U.S. President, whoever he or she may be when Advent tries to sell IDEMIA (again, whenever that may occur), is going to exert control over who the final buyer will be, because of the significant business that IDEMIA NSS and the rest of IDEMIA does with U.S. federal, state, and local government entities. Oh, and there’s also the matter of fingerprint identification export control.

But those are not the two complications that I’m talking about. There are two NEW complications.

Possible Complication Number One: IDEMIA has locations all over the world, including a location in Moscow.

As I write this post, a number of Western businesses are ceasing their business operations in Russia because of the war in Ukraine. This has caused issues with the Russian government.

As of Monday (March 14), at least 375 companies had announced some sort of pullback from Russia, according to a list maintained by the School of Management at Yale University. The list includes companies that have cut ties with Russia completely, as well as those that have suspended operations there while attempting to preserve the option to return.

According to multiple media reports, dozens of Western companies have been contacted by prosecutors in Russia with warnings that their assets, including production facilities, offices, and intellectual property, such as trademarks, may be seized by the government if they withdraw from the country.

From https://www.voanews.com/a/putin-threatens-to-privatize-western-companies-that-exit-russia-/6485253.html

Unless IDEMIA is acquired by a Russian company (which is extremely unlikely, given French and U.S. interests), anyone who acquires IDEMIA (or any company with Russian offices) has to consider how Russia will react. Will the Russian portion of the business be a total loss? Will Russian entities acquire IDEMIA intellectual property? (This would be ironic, considering some past allegations that have been made but not IMHO proven.)

But Russia isn’t the only potential complication of a sale of IDEMIA.

Possible Complication Number Two: IDEMIA also has locations in Beijing, Hong Kong, and Shenzen. And it’s possible that the Chinese government is going to have some interest in who IDEMIA’s future owner will be.

It is possible that China’s State Administration for Market Regulation (SAMR) might review any acquisition.

In early September of 2021, China’s competition authority, the State Administration for Market Regulation (“SAMR”) issued a report (“SAMR 2020 Report”) summarizing its Anti-Monopoly Law enforcement activities during the period covering the 13^th Five-Year Plan (2016-2020).

From https://www.competitionpolicyinternational.com/a-reflection-on-chinas-merger-reviews-key-messages-from-the-latest-five-year-report-and-insights-from-economists/

Yes, Five-Year Plan. While China has private companies, the Communist Party still oversees things.

From 2016 to 2020, SAMR concluded 2,147 merger reviews and completed 179 antitrust investigations, imposing fines totaling RMB 2.79 billion (or USD 413 million).

From https://www.competitionpolicyinternational.com/a-reflection-on-chinas-merger-reviews-key-messages-from-the-latest-five-year-report-and-insights-from-economists/

While relations between the West and China are certainly better than current relations between the West and Russia, there is always an underlying tension in those relations. For example, if a Taiwanese company were to acquire IDEMIA, this could be considered a declaration of war.

And in the specific case of IDEMIA, the biometric algorithms from IDEMIA directly compete with biometric algorithms from China. The February 2022 printed version of the NIST FRVT 1:1 report indicates that dozens of tested facial recognition algorithms are of Chinese origin, including algorithms from Cloudwalk, Dahua, Fujitsu, Hikvision, Megvii, Sensetime, Tencent, Xforward, and a host of other companies and universities.

What if (again, I’m speculating) China decides to oppose an acquisition of IDEMIA unless it receives assurances that IDEMIA will not threaten the domestic Chinese biometric providers?

Conclusion

So whoever buys IDEMIA from Advent may have to pay attention to government regulators in the U.S., France, the European Union, and possibly Argentina, Brazil, China, Germany, Romania, and Russia.

International business is complicated.