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UPDATE 1-Chinese-backed fund to seek Trump approval of Lattice deal

(Updates with announcement from the companies)

Sept 1 (Reuters) - A China-backed private equity fund will seek U.S. President Donald Trump's approval of its proposed $1.3 billion acquisition of U.S. chipmaker Lattice Semiconductor Corp , the companies said on Friday.

Buyout firm Canyon Bridge Capital Partners' decision, first reported by Reuters earlier on Friday, 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.

A 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, coming as relations between the United States and China are strained by disagreements over trade and the containment of North Korea's nuclear ambitions.

Canyon Bridge has told CFIUS it will commit to almost doubling the number of Lattice's employees, according to people familiar with the matter who asked not to be identified because details of the regulatory process are confidential. Portland, Oregon-based Lattice reported 986 full-time employees worldwide at the end of December.

However, the commitment has not swayed CFIUS, the sources added.

Critics of the deal, including some U.S. lawmakers, worry that the technology gained through the acquisition of Lattice could be used by China's military, but the companies have argued it poses no such risk.

"Lattice remains of the view that the proposed transaction does not raise any national security concerns that cannot be addressed by the comprehensive mitigation measures that Lattice and Canyon Bridge have proposed to implement," Lattice said in a filing with the U.S. Securities and Exchange Commission.

The deal's problems underscore U.S. efforts to prevent the transfer of sensitive technology to China. Chinese suitors have faced intense regulatory scrutiny in their pursuit of U.S. chip makers, leading to some deals being quashed in recent years.

The latest 75-day CFIUS review of the Lattice deal, the third since it was announced in November, ended this week with the agency informing Canyon Bridge and Lattice it would recommend Trump block the acquisition if they take it to him for review.

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 coming from Chinas central government and had indirect links to its space program.

Lattice makes programmable chips known as field programmable gate arrays, which 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 used in military technology.

Trump's approach to relations with China has been mixed. He has criticized Chinese trade practices but also wants Chinese help in curbing 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 deals. As a result, most companies have been reluctant to ask a president to go against the consensus of the country's national security establishment.

In the most recent example of a direct rejection by a president of a CFIUS application, Barack Obama in December blocked China's Grand Chip Investment GmbH from acquiring German semiconductor equipment supplier Aixtron SE. Axios technology is used to upgrade U.S. and foreign-owned Patriot missile defense systems.

Canyon Bridge, based in Palo Alto, California, is a private equity fund whose major investor is China Reform Holdings Corp, an entity that invests money from China's central government and it 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 if the Lattice deal collapses. 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. If Canyon Bridge clinches that deal, it would be subject to CFIUS review since Imagination Technologies acquired U.S. chip designer 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 would be enough to resolve all CFIUS issues, according to the sources.

Imagination Technologies did not immediately respond to a request for comment.

Chinese buyers are awaiting CFIUS approval on other technology deals, including Unic Capital Management's $580 million acquisition of U.S. semiconductor testing company Xcerra Corp.

Canyon Bridge's direct appeal to Trump may not change anything, according to some experts.

"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 in 2017 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; Editing by Muralikumar Anantharaman and Jeffrey Benkoe)