President Donald Trump issued an order Monday evening blocking any merger of the chipmaking giants Broadcom and Qualcomm, saying it was necessary to protect national security. There is credible evidence, the order says, that if the Singapore-based Broadcom took control of the US-based Qualcomm that the company might take action that threatens to impair the national security of the United States. Broadcom has been trying to purchase Qualcomm for the last several months, but has continually been rebuffed. Its since tried to stack Qualcomms board with friendly members. Trumps order says that Broadcom will not be allowed to purchase or merge with Qualcomm in any way, and that all of the people Broadcom has proposed to Qualcomms board are disqualified. It seems that Broadcom was aware that Trump or his Justice Department might attempt to block the merger on these grounds and has been trying to avoid it. Trump has blocked similar takeovers before, having stopped a Chinese state-owned company from buying an American semiconductor firm back in September. Broadcom is currently in the process of moving its headquarters from Singapore to the US, according to Bloomberg, and planned to complete the transition by April 3rd. With the move, Broadcom seems ready to fight Trumps order. In a statement, the company said US national security concerns are not a risk to closing, as Broadcom never plans to acquire Qualcomm before it completes redomiciliation. Its not clear whether thatll be allowed to happen. Trumps order says that the two companies should permanently abandon the proposed takeover, indicating that Broadcoms move wont make a difference, unless its willing to take the order to court.
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.