Sept 1 (Reuters) - A China-backed private equity fund will seek U.S. President Donald Trump's approval for its proposed $1.3 billion acquisition of U.S. chipmaker Lattice Semiconductor Corp, people familiar with the matter said on Friday.
Buyout firm Canyon Bridge Capital Partners' decision comes after it spent eight months trying unsuccessfully to persuade the Committee on Foreign Investment in the United States (CFIUS), a U.S. government panel which scrutinizes deals for potential national security threats, to clear the Lattice deal.
The U.S. President has the final authority to approve or prohibit such investments. Lattice will be the first CFIUS case to reach Trump's desk, at a time when relations between the United States and China are being strained by disagreements over trade and the containment of North Korea's nuclear ambitions.
Canyon Bridge had offered CFIUS to commit to almost doubling the number of Lattice's employees, the sources said. The Portland, Oregon-based company reported 986 full-time employees worldwide as of the end of December.
However, this commitment did not sway CFIUS, the sources added.
The sources asked not to be identified because the decision by Canyon Bridge and Lattice has not yet been announced. Lattice, Canyon Bridge and CFIUS could not be immediately reached for comment.
Critics of the deal, including some U.S. lawmakers, worry that technology gained through the acquisition of Lattice could be used by China's military, but the companies have argued that it poses no such risk.
The deal's woes underscore a U.S. drive to prevent the transfer of sensitive technology to China. Chinese suitors have faced intense regulatory scrutiny in their pursuit of U.S. chip makers, which has quashed some deals in recent years.
The latest 75-day CFIUS review of the Lattice deal, the third since it was announced in November, expired this week. CFIUS does not disclose the outcome of individual reviews. Canyon Bridge and Lattice have extended their merger agreement to the end of September.
U.S. regulatory scrutiny of the Lattice deal grew after Reuters reported in late November that Canyon Bridge, based in Palo Alto, California, was funded partly by cash originating from Chinas central government and had indirect links to its space program.
Lattice makes programmable chips known as "field programmable gate arrays" that allow companies to put their own software on silicon chips for different uses. It does not sell chips to the U.S. military, but its two biggest rivals, Xilinx Inc and Intel Corp's Altera, make chips that are used in military technology.
Trump's approach to relations with China has been mixed. He has criticized Chinese trade practices but also wants Chinese cooperation in tackling North Korea's nuclear ambitions.
The Lattice deal will be the fourth time in the last three decades that a CFIUS case will go to a U.S. President for review. U.S. Presidents have sided with the committee to block the past three questionable deals. As a result, most companies have been reluctant to ask a U.S. President to defy the consensus of the country's national security establishment.
In the most recent example of a direct rejection by a U.S. President of a CFIUS application, Barack Obama in December blocked China's Grand Chip Investment GmbH from acquiring German semiconductor equipment supplier Aixtron SE.
Canyon Bridge, based in Palo Alto, California, is a private equity fund whose major investor is China Reform Holdings Corp, an entity that invests the money of China's central government and also has indirect links to the country's space program.
OTHER DEALS AT STAKE
Canyon Bridge's ability to acquire other Western semiconductor companies could be diminished should the Lattice deal collapse. This is because most acquisition targets have U.S. operations, making them subject to a CFIUS review.
Canyon Bridge is currently working on a bid for British semiconductor company Imagination Technology Group Plc, the sources said. Were Canyon Bridge to clinch that deal, it would be subject to CFIUS review because Imagination Technologies acquired a U.S. chip designer called MIPS in 2013.
While Canyon Bridge could choose to divest MIPS, which accounts for a small fraction of Imagination Technologies' business, there is no certainty that this measure would resolve all CFIUS issues, according to the sources.
Imagination Technologies did not immediately respond to a request for comment.
Other technology deals with Chinese acquirers are awaiting CFIUS approval, including China's Unic Capital Management's $580 million acquisition of U.S. semiconductor testing company Xcerra Corp.
Some experts said Canyon Bridge's direct appeal to Trump may not change anything.
"I worry that the most likely outcome is that they go to the President, the President says no and that means that other CFIUS deals continue in limbo," said Stewart Baker, a partner at law firm Steptoe and Johnson LLP who is not involved in the Lattice deal.
Reuters reported in July that CFIUS was objecting to more deals this year than in previous years, indicating that the secretive committee is becoming more risk-averse under Trump. (Reporting by Liana B. Baker and Greg Roumeliotis in New York; Additional reporting by Diane Bartz in Washington, D.C.; Editing by Muralikumar Anantharaman)