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.
Hoping to avoid a prolonged national security review, Singapore-based Broadcom said it will move its international headquarters back to the U.S. by April 3 as it continues a hostile takeover bid for rival Qualcomm. In a press release today, Broadcom confirmed the date for the first time while also emphasizing its roots in the U.S. Indeed, the whole snarled mess surrounding the notion of a foreign company buying a prize like Qualcomm goes right to the heart of what one means by U.S. company. Politicians are worried by the thought of an Asia-based company seizing control of Qualcomm, which is emerging as a leader in next-generation 5G chips. Qualcomms board has fought the bid since last November even as Broadcom raised the price to $121 billion. Last week, the U.S. Treasurys Committee on Foreign Investment in the United States (CFIUS) released a letter saying it was reviewing the transaction for national security risks, putting the deal temporarily on hold. This was not entirely surprising and was one of the reasons Broadcom announced at a ceremony with President Trump last November that it plans to relocate to the U.S. The company said in its press release today that it supports the CFIUS process and noted that the agency had previously reviewed and cleared its acquisition of Brocade in November 2017. At the close of that transaction, Broadcom agreed to relocate. The move to the U.S. will be a homecoming for a company that in many ways never really left. Broadcom began life in Irvine, California as a fabless semiconductor company. It was acquired in 2016 by Avago Technologies, which started as a product division of Hewlett-Packard and was spun off in 1999 into Agilent Technologies. After that deal, Avago renamed itself Broadcom and established joint headquarters in Singapore and San Jose. In many ways, what Broadcom refers to as a plan to redomicile to the U.S. is a largely symbolic move. The company hasnt said how many executives or what, if any, operations may be shifted. But it emphasized that it believes the change should eliminate any fears around national security. In short, U.S. national security concerns are not a risk to closing, as Broadcom never plans to acquire Qualcomm before it completes redomiciliation, the company said. Whether that does actually satisfy the CFIUS remains to be seen. Meanwhile, amid delays in reaching a deal, rumors have emerged that rival Intel is considering making a bid for Broadcom.