( Reuters) — U.S. President Donald Trump on Monday blocked microchip maker Broadcoms proposed takeover of Qualcomm on national security grounds, ending what would have been the technology industrys biggest deal ever amid concerns that it would give China the upper hand in mobile communications. The presidential order reflected a calculation that the United States lead in creating technology and setting standards for the next generation of mobile cell phone communications would be lost to China if Singapore-based Broadcom took over San Diego-based Qualcomm, according to a White House official. Qualcomm has emerged as one of the biggest competitors to Chinas Huawei Technologies Co [HWT.UL] in the sector, making Qualcomm a prized asset. Qualcomm had earlier rebuffed Broadcoms $117 billion bid, which was under investigation by the U.S. Committee on Foreign Investment in the United States (CFIUS), a multi-agency panel led by the Treasury Department that reviews the national security implications of acquisitions of U.S. corporations by foreign companies. In a letter on March 5, CFIUS said it was investigating whether Broadcom would starve Qualcomm of research dollars that would allow it to compete and also cited the risk of Broadcoms relationship withthird party foreign entities. While it did not identify those entities, the letter repeatedly described Qualcomm as the leading company in so-called 5G technology development and standard setting. A shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States, CFIUS said. While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover. A White House official on Monday confirmed that the national security concerns related to the risks of Broadcoms relationship with third party foreign entities. A source familiar with CFIUS thinking had said that, if the deal was completed, the U.S. military was concerned that within 10 years,there would essentially be a dominant player in all of these technologies and thats essentially Huawei, and then the American carriers would have no choice. They would just have to buy Huawei (equipment).Huawei has been forging closer commercial ties with big telecom operators across Europe and Asia, putting it in prime position to lead the global race for 5G networks despite U.S. concerns. Huawei has a dominant position in China, which is set to become the worlds biggest 5G market by far, and has also made inroads in the rest of world to compete with rivals such as Ericsson (ERICb.ST) and Nokia (NOKIA.HE) in several lucrative markets, including countries that are longstanding U.S. allies. Qualcomm is also a major player in 5G, estimated to have 15 percent of 5G-essential patents in the world, compared with 11 percent for Nokia and 10 percent for all of China, according to a Jefferies report citing LexInnova research. Many smartphone makers are counting on Qualcomm to deliver its 5G chipset on time in late 2018 to roll out their 5G phones in 2019. Shares of Broadcom rose less than 1.0 percent to $264.10 in after-hours trade while Qualcomm fell 4.3 percent to $60.14. Broadcom said it was reviewing the presidential order. Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns, it said in a statement in response to the decision. Qualcomm, which had delayed its annual shareholder meeting during the CFIUS review, set the new date for March 23. The move by Trump to kill the deal comes only months after the U.S. president himself stood next to Broadcom Chief Executive Hock Tan at the White House, announcing the companys decision to move its headquarters to the United States and calling itone of the really great, great companies. This is the fifth time a U.S. president has blocked a deal based on CFIUS objections and the second deal Trump has stopped since assuming office slightly over a year ago. The proposed takeover of Qualcomm by the Purchaser (Broadcom) is prohibited, and any substantially equivalent merger, acquisition, or takeover, whether effected directly or indirectly, is also prohibited, the presidential order released on Monday said. The order citedcredible evidence that led Trump to believe that Broadcoms taking control of Qualcommmight take action that threatens to impair the national security of the United States. Broadcom had struggled to complete its proposed deal to buy Qualcomm, which had cited several concerns including the price offered and potential antitrust hurdles. The presidential decision to block the deal cannot be appealed. However, it is not clear what rules Broadcom would have to follow if it goes ahead with announced plans to move its headquarters to the United States. Companies may challenge CFIUSs jurisdiction in court but may not challenge the inter-agency panels national security findings, a CFIUS expert said. If Broadcom decides to press on with its effort to buy Qualcomm, it would be wise to drop the matter for now while the company quietly wraps up its move to the United States, a second CFIUS expert said. Once the move is done, Broadcom could argue that CFIUS does not have jurisdiction, the second expert said. Both spoke privately to protect business relationships.
Last week, Treasury official argued deal would let China dominate 5G development. Had the proposed deal gone through, it would have allowed the Singapore-based Broadcom to purchase the San Diego-based Qualcomm for $117 billion. The hostile takeover also would have been the biggest deal in the history of the tech industry. The order, which did not fully explain on what basis the president made this assessment, suggests that the Trump administration is willing to protect American companies against foreign competitors even more than some had realized. Trump recently ordered that tariffs on imported steel and aluminum be put in place, propping up those American industries. Trump's executive order comes a week after the Department of the Treasurys Committee on Foreign Investment in the United States came to a similar conclusion. In a four-page letter, Aimen N. Mir, Deputy Assistant Secretary for Investment Security, wrote that the national security concerns stem from the fact that: ...a weakening of Qualcomms position would leave an opening for China to expand its influence on the 5G standard-setting process. Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology. For example, Huawei has increased its expenditures and owns about 10 percent of 5G essential patents. While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover. Broadcom is expected to lessen Qualcomms research and development in favor of short-term profitability — in other words, China cant be given the opportunity to dominate 5G, Mir suggested. Non-Qualcomm SoCs usually require a separate modem, which takes up more space in the already tight smartphone design. In short, non-Qualcomm-powered phones are generally inferior and more expensive to make. On November 2, 2017, Broadcom CEO Hock Tan appeared with Trump at the White House and promised to "re-domicile" the company in Delaware. (The company, while officially based in Singapore, is currently co-headquartered in San Jose, California.) "I am American, as are nearly all my direct managers, my board members, and over 90 percent of my shareholders," Tan said. "So today, we are announcing that we are making America home again. Thank you. Our commitment to re-domicile into the United States is a huge reaffirmation to our shareholders, to the 7,500 employees we have across 24 states in America today, that America is once again the best place to lead a business with a global footprint. Thanks to you, Mr. President, business conditions have steadily improved." However, such a move does not appear to have taken place. Adding to the intrigue, last Friday, the Wall Street Journal reported that Intel is interested in buying Broadcom. In a two-sentence statement issued Monday evening after the executive order, Broadcom wrote: "Broadcom is reviewing the order. Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns."