Who says the state cannot generate wealth? Years before a stock market explosion, the sale of AppLovin was rejected by the CFIUS, a little-known tribunal with a growing market influence.
In 2016, Adam Foroughi consented to pay $1.4 billion to China’s Orient Hontai Capital for the majority stake in AppLovin, the mobile advertising startup he co-founded in California. According to the press statement announcing the acquisition, Foroughi and his two AppLovin co-founders had secured just $4 million from angel investors to build the company in just five years. It appeared that a good paycheck had arrived.
Washington then stepped in. In 2017, the AppLovin sale was halted due to national security concerns by the Committee on Foreign Investment in the U.S., or CFIUS, a small but influential federal government group.
It appeared to be a significant setback at the time. Foroughi and his colleagues were compelled to keep their business, rework the agreement, and continue on their own instead of paying out. AppLovin and Orient Hontai Capital renegotiated the arrangement in response to CFIUS’s concerns, deciding on a $841 debt financing agreement and Orient acquiring a comparatively small 10% share in the business. This allowed AppLovin’s founders to continue running the firm while fostering its expansion.
Foroughi and his AppLovin co-founders, Andrew Karam and John Krystynak, found that the CFIUS intervention was the best thing that had ever happened to them. The hottest stock in America right now is AppLovin (APP). According to Dow Jones Market Data, it has increased by 689% over the past year, more than any other U.S.-listed stock with a market capitalization of more than $10 billion over the same time period. According to Forbes, Foroughi is worth $18.3 billion, and the three co-founders of AppLovin are all billionaires. The company’s market valuation was reportedly $150 billion. Herald Chen, the president of AppLovin, is a billionaire himself.
Had CFIUS permitted the sale to Orient Hontai to proceed, these enormous American riches would never have been created.
The AppLovin narrative is, on the one hand, a case of government red tape unintentionally generating one of the largest digital riches in America, while neglecting its potential Chinese buyer. However, regardless of the political party in power, it also demonstrates the growing influence of CFIUS in the global economy, identifying winners, losers, and anomalous financial results in the name of U.S. national security and containing China.
The nearly completed transaction
The notion that AppLovin posed a national security threat to the United States would have been unrealistic when Foroughi cofounded the company in 2011. Founded in Palo Alto, California, AppLovin first achieved success by creating a successful company that assisted mobile game creators in increasing user acquisition and maximizing ad revenue. By 2016, Orient Hontai Capital stepped up with a $1.4 billion check, making the company a viable acquisition prospect.
On paper, the arrangement made sense: Hontai’s goals in mobile gaming would be complemented by AppLovin’s technology, and the three founders would receive a sizeable payout as they continued to expand the business and increase the value of the remaining shares.
The deal “validate[d] the outstanding product we’ve built,” according to Foroughi at the time, and it was of “profound significance for the entire advertising industry” because it was “the most sizable outcome for a mobile-advertising company ever.”
The federal government, however, had different plans. CFIUS, which was led by the Treasury Department and included officials from nine federal government departments, has become more and more cautious about Chinese enterprises purchasing American technology companies. According to news sources at the time, CFIUS vetoed the AppLovin transaction because of worries about the company’s data and possible susceptibility to foreign ownership.
More than anything else, Trump’s first presidential campaign reflected a surge of anti-Chinese political sentiment, which was fueled by growing apprehension about China’s technological superiority and its effects on geopolitical competition and domestic employment.
According to the council’s biannual report, in 2017, the year CFIUS canceled the deal, the panel examined a record-breaking 237 transactions, 60 of which had to do with China.
Companies in the “finance-information and services” sector accounted for around half of all CFIUS reviews that year, surpassing manufacturing companies as the most scrutinized sector.
AppLovin, being an adtech company, was definitely in the group that was receiving the most resistance from the government. The agreement was essentially dead by the end of 2017.
A defeat? At the moment, perhaps. AppLovin wouldn’t have been the first business to be undermined by a canceled deal and the CFIUS review process. The Dutch company Philips (PHG) (NL:PHIA) was forced to sell 80% of its California-based Lumileds division to Chinese investors for $3.3 billion after the U.S. government blocked the sale. The sale was made to Apollo Global Management (APO), a U.S.-based private equity firm, for $1.5 billion, which was a significant reduction from the original deal.
The shares of the venerable Pennsylvania corporation fell sharply when President Biden used CFIUS to stop Nippon Steel’s (JP:5401) (NPSCY) acquisition of U.S. Steel (X). This action reignited criticism of the CFIUS review process and its detrimental effects on certain American businesses. Additionally, CFIUS has been at the core of the controversy surrounding the future of the well-known video-sharing software TikTok in the United States. According to President Trump, he is attempting to negotiate a deal for the business, which is owned by ByteDance of China, that would prevent Tik Tok from being banned from the United States due to security concerns.
According to Martin Chorzempa, a CFIUS specialist and senior fellow at the Peterson Institute for International Economics, the assessment process can be taxing on businesses, particularly since they frequently require immediate investment to maintain their operations.
According to him, it’s practically unheard of for a business to be happy that CFIUS rejected an acquisition.
“Anybody can sell a company and then turn around and see it worth more a year later, but that’s not a reason to say, ‘Praise God, CFIUS was there to save me,'” “Chormzempa said.” “That’s not really what they’re there for.”
However, the benefits of keeping AppLovin rather than selling would soon beyond anyone’s expectations.
AppLovin grows into a $150 billion behemoth.
The CEO of AppLovin, Foroughi, doubled down with his staff because there was no clear way out. AppLovin evolved into a major force in advertising rather than merely assisting game companies in purchasing customers.
In 2018, AppLovin received a $400 million equity investment from KKR (KKR), a private equity firm that valued the company at $2 billion. It utilized that money to fund a series of acquisitions that solidified its standing as a dominant force in mobile game advertising.
AppLovin went public in 2021 at a valuation of over $28 billion, which is 20 times the sale price that was originally planned in the 2016 agreement. Then the actual growth started.
Analyst and Cannonball Research founder Vasily Karasyov told MarketWatch that the company’s creation of Axon 2.0, an AI-powered ad-buying platform, has turned into a jewel in the organization and stoked strong interest in the stock.
Investors are keen to see if AppLovin’s game-based marketing methods can be applied as well to other e-commerce endeavors, he said, adding that the technology being created by the company now was not feasible when it was exploring its sale back in 2016.
“There’s no reason why they shouldn’t be able to branch outside of gaming to direct-to-consumer and other merchants,” Karasyov stated.
Though forced, the decision to not sell the company in 2017 ultimately made Foroughi and his co-founders significantly richer than if CFIUS had simply ignored it. Foroughi and AppLovin declined to comment. Additionally, it cleared the path for the stock that has grown to be the most popular on Wall Street in the past year. Shares of AppLovin have increased 1,200% since the IPO.
According to Chorempa of the Peterson Institute, CFIUS reviews “skyrocketed” during the first Trump administration, and there is reason to think that the panel will only become more significant for entrepreneurs seeking foreign investment, whether that money comes from friendly or hostile nations.
“You increasingly hear of firms abandoning planned investments,” he stated, “either in M&A or expanding their U.S. footprint, due to CFIUS concerns.”
