S/TMUS: Lobbying Efforts and House Subcommittee Hearing Provide Potential Clues to CFIUS Review of Deal

Relevant Documents:
Walden Opening Statement
Blackburn Opening Statement
Charles Clancy Statement
Clete Johnson Statement
Samm Sacks Statement

Event Driven Takeaways
 

• Sprint/T-Mobile have beefed up their lobbying efforts on Capitol Hill in preparation for a June hearing before the Senate Judiciary Committee. A congressional staffer said that the merging parties are using their “A-Team” lobbyists to push Congress to support the tie-up and the parties have expressed confidence in the proposed deal.
• Separately, the U.S. House Subcommittee on Communications and Technology, a panel with jurisdiction over the FCC and U.S. export controls, today held a hearing on “Telecommunications, Global Competitiveness, and National Security.” The hearing was originally announced as part of the Energy & Commerce Committee’s review of CFIUS reform efforts, but today’s hearing took a more expansive look at the topic.
• Although not mentioned by name, the policy concerns expressed by members and witnesses provide insight into the questions that CFIUS may seek to answer in its upcoming review of the Sprint/T-Mobile proposed merger.
• In particular, the panel addressed the aggressive technology acquisition strategy of Chinese telecom giant Huawei. The fluid state of U.S. sanctions on China’s other major telecom company, ZTE, was also a subject of discussion.
• The relationship between Sprint’s parent Softbank and Huawei was the subject of intense CFIUS scrutiny when Softbank first acquired Sprint in 2013. Both Sprint and Softbank were faced with a variety of conditions designed to limit interaction with Huawei as predicate for CFIUS clearance. Softbank’s purchase of Fortress Investment Group in 2017 was also subjected to lengthy CFIUS review. It has been reported that that deal only gained clearance after Softbank agreed to waive operational control of Fortress.

The U.S. House Subcommittee on Communications and Technology today held a hearing to discuss strategies to protect the national security and competitive interests of the U.S. telecommunications industry. Entitled “Telecommunications, Global Competitiveness, and National Security,” the hearing focused on potential solutions to a variety of vulnerabilities in the U.S. telecom supply chain.

The subcommittee hearing – which had previously been announced as part of the Energy & Commerce Committee’s review of CFIUS – instead took a more broad approach to address national security threats to the U.S. telecom industry. However, a number of policy issues arose during the hearing that provide insight into likely areas of inquiry by CFIUS when it reviews the Sprint/T-Mobile transaction.

Sprint/T-Mobile Congressional Lobbying Efforts and June Hearings

A more direct focus on the merger will come from at least one Senate panel. A spokesman for Senator Mike Lee (R-UT), who chairs the antitrust subcommittee, told Event Driven the full committee will hold a hearing on the merger in June and ideally will call the companies’ executives as witnesses. The committee has not yet announced a date for the hearing nor has it set a witness list.

In light of congressional interest, lobbyists representing both Sprint and T-Mobile are continuing to meet with Republican and Democratic members of both the House Judiciary and Energy and Commerce Committees, according to a congressional staffer familiar with the process.

Though they seem confident in the merger, the parties have their “A-team” working on the deal, the staffer said. The companies have hired top lobbyists from Wilmer Hale and TwinLogic Strategies to meet with lawmakers from both sides of the aisle, the staffer said.

According to the congressional aide, the lobbyists extolled the quicker 5G rollout and spectrum efficiencies that they claim could result from the deal in these meetings. The aide noted, however, that the companies have yet to resolve competitive concerns presented by the merger.

National Security Concerns in Sprint/T-Mobile CFIUS Review

As Event Driven previously reported, Softbank’s pre-existing ties to Huawei have posed national security concern to CFIUS in the past. As a condition of Softbank’s purchase of Sprint in 2013, Softbank entered into an agreement with the Departments of Commerce, Defense, and Homeland Security, whereby the company agreed to sever any ties with the Chinese telecom equipment supplier.

During the hearing, panelist Charles Clancy, a professor and director at Virginia Tech’s Hume Center for National Security and Technology, addressed the threat posed by Huawei and other Chinese telecom suppliers to the U.S. telecom industry, both from a competition and national security standpoint.

“If the current trends hold, Huawei will be the world’s top contributor to Internet Standards within five years,” Clancy told the subcommittee. “In most every telecommunications subsector, Huawei’s market share is in the top three, if not number one. Huawei accomplished this position not through buying American companies, but rather through buying American innovators, and therefore was invisible to [CFIUS].”

Speaking with Event Driven after the hearing about potential concerns that CFIUS may have with a Sprint/T-Mobile merger, Clancy said that the U.S. government should conduct a careful and thorough review of the merger.

“These are both U.S. companies,” Clancy told Event Driven. “Of course, in addition to past and existing government regulatory and legislative requirements, there should be attention paid to look into any other threats throughout the supply chain [that might result from this deal].” Clancy declined to comment more specifically on potential national security concerns presented by the merger.

Huawei’s and China’s ambitions in the 5G space were cited by CFIUS in recommending to President Trump that he issue his order blocking Broadcom, at the time a Singapore domiciled company, from pursuing any attempt to acquire rival chipmaker Qualcomm. Earlier in 2017, the Department of Defense commissioned a report, entitled “China’s Technology Transfer Strategy,” which has been cited repeatedly by proponents of expanded CFIUS authority. The term details what it terms both “licit and illicit” behavior by Huawei to undermine the U.S. lead in telecommunications technology.

Also speaking with this publication after the hearing, fellow panelist and Wilkinson Barker Knauer partner Clete Johnson, who specializes in technology-related security issues, echoed comments made during the hearing about the need for a risk-management approach to threats to the U.S. supply chain. “Any activity that threatens the health of the supply chain should be carefully looked at by CFIUS and other government entities,” Johnson told Event Driven.

Event Driven’s past coverage of this transaction can be found HERE.

--Kathryn Haake, Matt Tracy and Andrew Lowenthal