Does the Blocked Broadcom/Qualcomm Merger Signal a Policy Shift?

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Last week, as investors breathed a sigh of relief over President Trump exempting Canada and Mexico from steel and aluminum tariffs, skeptics warned the levies were a red herring—the real protectionist threat lay in potential measures targeting China. So when the president blocked a potential hostile takeover of Qualcomm by Singapore’s Broadcom, people worried this was the opening salvo in a real trade war. Normally we don’t dive into security-specific matters in this space, but people are drawing pretty sweeping conclusions. Tensions are running high, with observers warning the move increases protectionism and regulatory risks for Tech firms. However, there are some extenuating circumstances that, in our view, render these worries premature.

Our story starts last November, when chipmaker Broadcom made an unsolicited, $103 billion hostile bid for rival Qualcomm, which it sweetened after the board rejected the original. Qualcomm hemmed and hawed over the revised offer, warning any deal would be subject to extreme regulatory scrutiny and could be shot down. In turn, Broadcom hoped to take its increased offer directly to shareholders at a March 6 meeting by proposing the election of board candidates who favored the deal. Meanwhile, however, Qualcomm sought and obtained a review of the proposed deal by the Committee on Foreign Investment in the United States—CFIUS, a body that reviews potential investments in America for potential national security issues. Unusually, CFIUS kicked off its review even though no deal was complete.

CFIUS’ investigation hinged on concerns China would take the lead on 5G networking standards if the merger proceeded. This isn’t so much because Broadcom is affiliated with China. Not only are they Singapore-based, but 8 of 10 board members are Americans. The issue is that Broadcom is widely thought a cost-cutting powerhouse, and US officials worried such moves would jeopardize Qualcomm’s 5G leadership. The number two firm in the field is China’s Huawei.

On multiple occasions in early March, CFIUS requested detailed information pertaining to Broadcom’s plans (and their planned switch in country of incorporation to America—more on this later). CFIUS also delayed Qualcomm’s shareholder meeting. Yet it appears they believed Broadcom didn’t fully comply. In a strongly worded March 11 letter, CFIUS notified Broadcom it had violated their orders three times. The letter warned Broadcom that if it continued down this path, CFIUS would refer the matter directly to President Trump. Broadcom’s CEO Hock Tan met with US officials on March 12, hoping to resolve the issues. Yet that resolution doesn’t seem to have come. It appears CFIUS referred the matter to President Trump, who then issued an executive order blocking the merger due to national security concerns. This ended merger talks and prohibited Broadcom’s proposed candidates from standing for election to Qualcomm’s board. Broadcom officially withdrew its bid on March 14.

At first blush, the executive order appears a disturbing development, potentially signaling an uptick in protectionism and regulatory risk for IT companies. Most critically though, the fact CFIUS appears to have referred the matter to President Trump after Broadcom violated its orders signals this is likely idiosyncratic to this merger. It isn’t necessarily a new regime of heavy-handed IT regulation. Moreover, there is further context to consider. Broadcom is pending reorganization as a US-based entity, which it began pursuing last November to clear the way for its planned acquisition of Brocade, another US-based chipmaker. CFIUS also held that up initially, but Broadcom got the green light after announcing its intent to relocate. The relocation completes in April and once that happens, CFIUS no longer has jurisdiction. In a typical investigation, the acquirer and the target approach CFIUS together. Then there is a pre-filing period, formal filing, review, investigation and presidential review. The whole process can take several months depending on administrative backlog, way beyond April. Hence the accelerated process, which is most of what people consider “unusual” about this saga.

Most coverage added this to the list of acquisitions Trump has blocked, including a Chinese-backed purchase of Lattice Semiconductors. Presumption being, this is a shift toward using national security as a cover for protectionism, something new. But it isn’t. Past administrations have done the same things. President Obama blocked Chinese acquisitions of semiconductors, wind farms and a lighting company—as well as a Chinese firm’s attempt to buy a German company. President Bush blocked a telecom deal in 2003 and a Tech deal in early 2008, and in 2005 CFIUS reviewed IBM's sale of its PC business to Lenovo (but eventually let it go through). Even further back, the Reagan Administration pressured a potential Japanese acquirer to drop a bid for Fairchild Semiconductor—yup, another chip firm. None of these activities caused a trade war or signaled excessive government meddling in Tech. If this did lead to heavier Tech sector intervention or a trade war with China (if they retaliate for US stonewalling), then that would be something to be wary of. But for now—despite all of the sensational press—it looks largely like business as usual.