March 13, 2018
Broadcom executives should’ve seen this coming.
For months now, Singapore-based Broadcom has pursued a merger with US-based Qualcomm, raising its bid for the largest US-based technology firm to $117 billion, which is developing chips that are expected to be integral to 5G network technology in the US. Then, national security issues reared their head.
Earlier this month, the Committee on Foreign Investment in the US inserted itself into the negotiations (following a request from lawmakers) by ordering Qualcomm to delay its March 6 shareholder meeting to give CFIUS more time to investigate the takeover bid.
CFIUS’s involvement presented yet another obstacle to the deal. Qualcomm had actively resisted the Broadcom’s overtures, but the Singapore-based firm’s willingness to repeatedly raise its bid, along with its plans to redomicile in the US, impressed upon investors that the company was committed to closing the merger.
Then last night, President Trump definitively quashed the deal by issuing an executive order blocking the deal on national security grounds.
“There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom) … through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States…”
The move, as many analysts noted, was unusual. But Kyle Bass of Hyman Capital anticipated the intervention, telling CNBC last week that QCOM’s importance to 5G tech meant that “we can’t possible let the Broadcom Qualcom merger to go through.
And on Monday, the Treasury Department sent a letter to lawyers involved in the deal expressing concerns about Chinese competitors in 5G network development, which raises national security concerns over the Broadcom-Qualcomm merger.
Broadcom said in a letter to Congress regarding its offer to acquire Qualcomm that the company would not sell any “critical national security assets” to any foreign companies.
But clearly those assurances weren’t enough. And today, as Bloomberg explains, Trump’s swift rejection of the hostile takeover sent a clear message to overseas investors and companies: Any deal that could give China an edge in critical technology will be blocked on national security grounds.
And right now, Qualcomm is locked in a race with China’s Huawei Technologies Co. over which company will dominate the development of next-generation wireless technology. By blocking the deal, Trump is sending a strong message to foreign firms: Vital American technology is not for sale.
“This decision hangs a huge ‘not-for-sale’ sign on just about every American semiconductor firm,” said Scott Kennedy, who studies China’s economic policy at the Center for Strategic & International Studies in Washington. “A Chinese entity doesn’t need to be anywhere near a transaction now in semiconductors for the deal to be nixed.”
The White House is mulling a broad range of imports to punish Beijing for its alleged theft of intellectual property – measures that could include imposing tariffs on an even broader range of imports, and blocking Chinese investments in the US.
And while Broadcom is a Singapore-based company (and is in the process of redomiciling in the US) it’s believed that China would’ve exerted undue influence over the combined firm.
As Bloomberg points out, only five takeovers of American firms have been blocked by US presidents on national security grounds since 1990. Barack Obama blocked two deals during his eight years in office. Trump has blocked two deals in six months. And already, CFIUS has played a role in opposing at least nine takeover bids. Most of these involved Chinese companies.
Lawmakers have internalized Trump’s national security rhetoric by considering legislation that would expand the universe of overseas investments that require national security approval from CFIUS. Trump has endorsed the bill, which was proposed by Sen. John Cornyn with China in mind.
The reasoning for blocking the deal is relatively straightforward: Any disruption in Qualcomm’s dominant position in the semiconductor market would cede an edge in the global tech arms race to China’s Huawei. This represents a shift away from blocking deals for fear that China could steal their technology, to blocking deals because they might impact the competitiveness of American companies…
“China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover,” CFIUS said in the letter. “Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.”
“Concern has expanded from existing technologies with national security implications potentially falling into rivals’ hands to ensuring American companies continue to invest in R&D to maintain their technological edge,” he said.
While blocking the deal will no doubt play well with Trump’s base, it will elicit howls of disapproval from Wall Street, which stands to lose hundreds of millions – if not billions – in revenue from all of these blocked mergers. In fact, as a result of just this one busted deal it may be time to revise Q1 financial EPS lower: according to preliminary estimates, Qualcomm-Broadcom was expected to earn banks $280 million in advisory fees.
Bankers are probably already reminiscing about the days of the now long gone “China M&A premium…”
This article was posted: Tuesday, March 13, 2018 at 9:34 am