( 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.
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.