This weekend, I published a comprehensive overview of the epic hundred-billion-dollar Qualcomm versus Broadcom merger battle that has taken place over the past few weeks. In that post, I concluded that … the Trump administration is going to attempt to maintain jurisdiction over the merger regardless of Broadcoms redomicile process [back to the US], and will likely end up negative on the deal although it may not outright block it. Not only did the Trump administration move faster than expected to make a decision on the merger through CFIUS — the Committee on Foreign Investment in the United States ( TechCrunchs overview of the committee here) — but it decided to unilaterally block the transaction from taking place. While not unprecedented in the history of CFIUS, this is an incredible decision on a U.S. tech merger, and has massive ramifications for tech company valuations and strategy going forward. While there are many issues at stake in the merger, the one that drove interest in Washington has been Qualcomms leadership role in 5G, a technology that the Trump administration considers to be a national security priority. Only two companies in the world have the technological prowess today in this emerging standard: U.S.-based Qualcomm and China-based Huawei. The Pentagon and national security beltway types have been deeply concerned about Huawei technology encroaching on U.S. telecom infrastructure, even going so far as to block the introduction of Huaweis new mobile phone from being introduced on AT&Ts network. Broadcom is Singapore-domiciled, but has the majority of its workers and office space in North America. However, it has a reputation — whether earned or not — of playing a classic private equity game of massively cutting R&D to boost short-term profits. Washingtons concern has been that a Broadcom takeover of Qualcomm would mean that Americas only player in the 5G race would be eliminated through budget cutting, leaving China to monopolize a key technology standard for a generation. There are a lot of unique properties here: the size of the transaction, the complicated background of Qualcomm and Broadcom, the recent timing of Trumps tariffs and other protectionist measures and the focus on telecom, which has traditionally been very sensitive in DC security circles. That said, it is now clear that the Trump administration intends to empower CFIUS to review more technology deals, particularly when companies are potentially transacting with China and other declared strategic competitors. If such a pattern continues, we can expect to see potential declines in valuations for technology companies, which will no longer have deep-pocketed Chinese buyers as potential acquirers. Thats not all, though. A reform measure currently in Congress would extend CFIUS authority to potentially include minority investments as well — such as rounds of venture capital. While that bill is not yet firmed up, it could massively chill Chinese venture investment in Silicon Valley, which has been robust and expanding over the past few years. Its important to note that whatever the rhetoric, this was not about jobs or the economy directly. Qualcomm was expected to stay in the United States along with most of its workers, and Broadcom has already announced its decision to redomicile back to the United States following the passage of the tax cuts at the end of 2017. This is about security, and which country is going to hold power in the 21st century. The Trump administration has declared that its foreign policy will be America First, and this decision lives up to that slogan. China is the second largest economic market in the world, and almost certainly the second most important technology market after the United States. A disruption in the flow of talent and capital between these markets — as we witnessed today — will force company CEOs to resist foreign capital and potentially accept lower valuations as a result. It will also limit the strategic opportunities for global expansion, requiring companies to adapt their strategies not just in China, but elsewhere in the world. In short, todays decision is the pen stroke heard around the world.
President Trump has blocked Broadcoms proposed $117 billion buyout of Qualcomm over security concerns, according to a White House statement. News of the presidents decision was first reported by CNBC. The move could send shockwaves rippling through the broader global economy, as the president continues his push to put America first in trade negotiations with global partners. Broadcoms acquisition offer, which was a risky prospect heading into todays decision from the White House, isnt the first time that the president has blocked a deal. But the proposed deal between the two chipmakers had broad implications for the entire technology industry and the ramifications of the presidents decision will be enormous. The combination of the two chipmakers would have potentially been the biggest tech merger of all time, and would have brought together two of the largest companies that manufacture the processors that power phones, computers and almost the entire array of connected devices. Its a saga that had played out for months amid resistance from Qualcomm — and more recently the US government, whose Committee on Foreign Investment in the United States (CFIUS) last week said it would be investigating the deal on the grounds of national security. In an unprecedented move, Qualcomm actually approached CFIUS to quash the Broadcom bid — as TechCrunch reported over the weekend. Originally… analysts thought that CFIUS was responding to pressure from Congress to act unilaterally on the proposed deal. What we have learned though is that Qualcomms board had secretly asked CFIUS to review the transaction on January 29th this year. In other words, Qualcomm is using Americas regulatory authority as a potential weapon to thwart Broadcoms bid and protect itself. Its a brilliant maneuver, and also fairly unprecedented: CFIUS is usually only engaged once both parties to a transaction have finalized a deal and submitted it for review. Broadcom attempted to avoid CFIUS by re-domiciling to the US, announcing today that it would complete the transition by April 3. That wasnt fast enough though and likely prompted the President to pull his already itchy trigger finger to quash the deal. Despite the decision by President Trump to act as a white knight from the White House and save Qualcomm from Broadcoms clutches, the company still faces some daunting challenges. Its still facing a looming lawsuit from Apple over allegedly unfair business practices and it has yet to fully digest its acquisition of NXP. It was amid these woes that the company was forced to restructure its board. Last week the company said that Dr. Paul E. Jacobs will no longer serve as executive chairman for the companys board of directors. While he will remain a director, the move was a sign from Qualcomms board that it recognized all was not well at the venerable chipmaker. The NXP acquisition was actually central to Qualcomms argument that it is undervalued. At one point the company wrote an open letter to Broadcom, stating that your proposal ascribes no value to our accretive NXP acquisition, no value for the expected resolution of our current licensing disputes and no value for the significant opportunity in 5G. Your proposal is inferior relative to our prospects as an independent company and is significantly below both trading and transaction multiples in our sector. In other words, it doesnt think Broadcom is appreciating the value gathered from Qualcomms recent acquisition of NXP Semiconductor. It also believes that Broadcom is underestimating Qualcomms potential 5G wireless technology. The 5G factor was critical to the presidents decision to block the bid. A letter from the Treasury Department, released last week, actually laid out the case for the presidents rejection. In it, CFIUS said that Broadcoms history of slashing research spending and its ability to compromise Qulacomms assets through relationships with foreign governments was concerning. Theres a race on for global influence over the newest 5G connectivity technology — which holds out the promise of super fast connectivity to enable the autonomous, automated future of driving and manufacturing that tech executives salivate over. Its one reason why Google and Microsoft were vocal in their opposition to the Broadcom acquisition. Qualcomm acknowledged receiving the Presidential order with the following statement: Qualcomm Incorporated (NASDAQ: QCOM) today received a Presidential Order to immediately and permanently abandon the proposed takeover of Qualcomm by Broadcom Limited (NASDAQ: AVGO). Under the terms of the Presidential Order, all of Broadcoms director nominees are also disqualified from standing for election as directors of Qualcomm. Qualcomm was also ordered to reconvene its 2018 Annual Meeting of Stockholders on the earliest possible date, which based on the required 10-day notice period, is March 23, 2018. Stockholders of record on January 8, 2018 will be entitled to vote at the meeting.