The Biden administration warned companies lining up for funding from the US Chips and Science Act that the money will come with major strings attached, including restrictions on investing in other countries and a limit on much-prized stock buybacks.
(Bloomberg) — The Biden administration warned companies lining up for funding from the US Chips and Science Act that the money will come with major strings attached, including restrictions on investing in other countries and a limit on much-prized stock buybacks.
The Commerce Department released the rules Tuesday ahead of doling out $39 billion in incentives, which are aimed at helping pay for semiconductor factories in the US. Some of the biggest chip producers such as Intel Corp. had lobbied for the funding package, which passed last year, but now they’re learning the consequences and risks of taking the cash.
That includes having to return the money if projects don’t meet certain milestones or don’t get completed as planned. Companies also have to limit funding production in “countries of concern” — implicitly, China — for a decade.
“I suspect a lot of companies are going to have to work harder than they thought they would in order to receive the funding,” said Secretary of Commerce Gina Raimondo. “We need to see the financial model for each of these projects, and we need to be confident that these projects are sustainable and financially viable and will be successful. Companies are going to have to show us why these projects wouldn’t be possible without government investment.”
The hope of the Chips and Science Act is to revitalize US chip manufacturing after decades of production shifting to Asia. But the Biden administration also sees it as an opportunity to implement some of its social policy priorities. For instance, the White House has said that companies accepting the money must require day-care activities near new manufacturing sites.
But restrictions on dividends and buybacks may be a harder pill for companies to swallow. Intel and peers such as Texas Instruments Inc. have relied heavily on such tactics to keep investors happy.
US companies aren’t the only ones standing to benefit from the funding package. Asian chipmakers such as Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. are looking to expand their production in the US, and the legislation should help them on their way — assuming the hurdles aren’t seen as too onerous. In addition to showing that production plans are commercially viable, companies will need to demonstrate that plants wouldn’t be possible without public money.
Companies that get more than $150 million in direct funding will also be required to share with the US government a portion of any cash flows or returns that exceed their projections by an agreed-upon threshold.
These are some key provisions and how they might influence applicants:
National Security
Companies will have to return all the funding they receive if they “knowingly engage in any joint research or technology licensing effort with a foreign entity of concern that raises national security concerns.” They also can’t expand their manufacturing capacity in one of these “countries of concern” for 10 years beginning on the date they get the money.
China would be the biggest target of this provision. The Biden administration has sought to limit US chipmakers from exporting technology to the Asian nation. That’s caused upheaval for a semiconductor industry already coping with a slowdown in the past year.
Still, US companies such as Intel and Micron Technology Inc. will be relatively free from any burden imposed by this rule since they don’t operate advanced production sites in China. That contrasts with Asian manufacturers like Samsung, SK Hynix Inc. and others. But there may still be some wiggle room. The precise definition of “significant transactions” will be provided later, Commerce officials said.
Shareholder Rewards
The rules go further than just prohibiting companies from using the funds for dividends or buybacks. The government will “require all applicants to detail their intentions with respect to stock buybacks over five years.” They’ll have to show whether they intend to limit or cease the practice, and the review process will include looking at how much companies have relied on stock repurchases in the past.
Chipmakers such as Texas Instruments have won over investors with long-term commitments to return all of their surplus cash to shareholders in the form of dividends and repurchases. Others, such as Intel, have long offered generous dividends — though that company has had to pare back its payout to preserve cash for its turnaround plan.
You Have to Need It
Raimondo wants applicants to explain why they need government money, rather than just why they want it. That could force deep-pocketed companies to come up with reasoning that might ultimately prove tough to sell.
While some producers of the electronic components are already reporting losses because of slumping smartphone and computer sales, others continue to report strong profitability and robust finances. Even Intel, which has been struggling, may have a harder case to make under these rules.
Chief Executive Officer Pat Gelsinger, one of the biggest industry proponents of the bill, has repeatedly said that Intel’s planned projects in Arizona and Ohio will go ahead regardless of government funding. Still, the timing and scale of those efforts will depend on the level of government support, he has said, and that will likely be how he petitions for funding.
Taiwan Semiconductor Manufacturing Co., or TSMC, is also already expanding its production in the US. The company is building a plant near some of Intel’s existing and planned facilities in Phoenix. And it’s in an even stronger financial position: The company reported a 60% jump in net income to $34 billion last year.
Due Diligence
The Commerce Department plans to require a rigorous process, with multiple application steps and due diligence work. That may lengthen the timeline for projects and add uncertainty as to who will get funding and when.
As part of a five-step process — with several stages of submissions from companies and due diligence by the Commerce Department — companies will have to submit information on national security, finances, environmental impact and other issues. The department will also engage with outside advisers, consultants and attorneys, a Commerce official said.
The government will start to accept applications on a rolling basis beginning at the end of March. But it’s still too soon to tell when any awards will actually be made because that will depend on the applications and engagement with companies, according to the official.
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