March 13, 2018 12:35:05by

Broadcom block sends ripples across corporate America

Broadcom block sends ripples across corporate America

Donald Trump has long fashioned himself as the ultimate dealmaker, writing in The Art of the Deal that he “aims very high” and just keeps pushing “to get what I’m after”.

That makes his decision to block a $142bn takeover on Monday all the more remarkable. Never before has a sitting US president barred a deal over national security concerns ahead of two companies agreeing to a merger, highlighting Mr Trump’s readiness to test the limits of his constitutional powers to secure America’s primacy in the world.

Dealmakers warned that the move to bar Broadcom from pursuing a hostile takeover of rival chipmaker Qualcomm — which comes just days after Mr Trump invoked a cold war-era national security statute to justify tariffs on steel and aluminium — would send ripples across corporate America, stoking fears that foreign nations could take retaliatory action against US companies.

“The fact that the president took pre-emptive action before a deal was even signed is extremely disturbing and inconsistent with all of our notions of due process,” says Frank Aquila, a top mergers and acquisitions lawyer at Sullivan & Cromwell. 

“It will also make it more difficult for American companies to cry foul when they are blocked in other countries for political reasons. ‎This action does not bode well for robust cross border M&A activity in a number of sectors.”

Some national security experts question whether the US president has the authority to block the deal, given that Singapore-registered Broadcom was in the process of moving its legal base back to America — a move announced with great fanfare by the company’s chief executive Hock Tan at a White House event with Mr Trump just days before he launched the bid for Qualcomm.

Although the presidential action came days after the Committee on Foreign Investment in the United States (Cfius), an inter-agency group that vets foreign deals, issued a warning against the hostile takeover bid by Broadcom on the grounds that a deal might lead to China overtaking the US in critical 5G technology, it was not expected that Mr Trump would intervene so swiftly. 

The potential cuts that Broadcom could have made to Qualcomm’s investment in 5G may have presented a national security risk to the US by effectively handing the lead in the race to develop the next generation of wireless technology to China’s Huawei, says Patrick Moorhead of Moor Insights & Strategy. 

“Qualcomm is one of only two companies to do long-term investment in next-generation wireless. Huawei and Qualcomm — that’s it,” he says. “That would have gone away because that’s not how Broadcom works.”

The acquisitive company is known for cutting back early-stage research in favour of technology that can be commercialised within just two or three years, rather than seven to 10 years in the future, he adds. Broadcom’s culture and that of Qualcomm would have been like “oil and water”.

Nonetheless, Mr Moorhead says he is “very surprised” that the deal was blocked so swiftly.

Steven Mnuchin, US Treasury secretary who chairs Cfius, sought to play down the idea that the latest presidential actions marked a hardening of US attitudes toward foreign investment. He pointed to the body’s “focused mandate” to examine the national security implications of deals involving foreign investors seeking control of US companies.

“This decision is based on the facts and national security sensitivities related to this particular transaction only,” Mr Mnuchin said in a statement. 

Some experts believe that Mr Trump’s move highlights an expensive miscalculation by Broadcom and its advisers rather than an attempt by the US president to mask a protectionist action in the mantle of national security. 

Had Broadcom waited until the completion of its corporate move back to the US — the company said on Monday that it expected to complete the shift next month — it is unlikely that the takeover of Qualcomm would have been subject to scrutiny from Cfius. “A US investor does not have to deal with Cfius,” says one former US official and Cfius expert, calling Broadcom’s move to rush the deal a “screw up”.

Another Cfius expert says the committee appeared to have set a very low threshold for blocking Broadcom. “Basically it looks like Cfius is extending to Qualcomm's products the same security of supply approach it traditionally applies to defence equipment,” the expert said.

Broadcom did not reveal whether it would take on the US government in an effort to overturn Mr Trump’s decision. Late on Monday, Broadcom said it “strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns”, adding that it would review the order.

When the deal was announced in November last year, many analysts saw Broadcom’s move as opportunist, coming at a time when Qualcomm was weakened by legal and regulatory battles on several fronts. Now, though, the episode leaves Broadcom’s reputation badly bruised. 

“It has done them more harm than good,” says Mr Moorhead. “People inside the Washington beltway — and the technology beltway — will look at this and wonder, ‘Why is Broadcom perceived as such a security risk by the US national government?’ . . . There is no way for Broadcom to challenge this.”

For Qualcomm’s senior management and advisers, Mr Trump’s intervention has handed them a huge victory after almost five straight months of fierce opposition to Broadcom’s offer. The US chipmaker said the $142bn bid was too low and faced an intense antitrust review. 

On Monday, the company said it would convene its postponed annual meeting on March 23, after Broadcom’s nominees to its board were disqualified by the presidential order.

But Mr Trump’s move also highlights the increasing scrutiny US presidents have been paying to protecting technology, particularly the semiconductor industry amid what Washington sees as a growing strategic threat from China.

Last year, Mr Trump blocked the $1.3bn acquisition of Lattice Semiconductor, citing national security concerns over the Chinese government’s financial backing for the deal.

“When you put this executive order together with the administration’s increasing focus on Chinese technology transfer, approach to US intellectual property, and Chinese competitive concerns, it seems pretty clear that . . . there must be macro and micro adjustments in the Sino-US economic relationship,” says Tony Balloon, partner at law firm Alston & Bird.

Congress is now considering legislation to expand Cfius’s mandate to outbound investment in order to block US companies from handing over vital technologies in areas such as artificial intelligence and robotics when they join overseas joint ventures. In places such as China, foreign companies are required to enter into such joint ventures in order to gain market access.

Senator John Cornyn, the lead sponsor of that legislation, last month called on Cfius to investigate Broadcom’s bid for Qualcomm, stressing the need to protect the California company’s 5G technology.

In one of its last acts in office, the Obama administration issued a report in January 2017 calling for the Trump administration to find ways to protect the semiconductor industry. Mr Obama also blocked the Chinese-backed takeover of Aixtron, a German company with US operations. 

In its national security strategy issued in December last year, the Trump administration listed protecting the US “national innovation base” as an important priority. 

The administration is also now considering imposing tariffs and investment restrictions against China as part of a trade case intended to bring an end to Beijing’s practice of forcing US companies to transfer key technologies to Chinese joint venture partners.

Reporting by James Fontanella-Khan and Eric Platt in New York, Shawn Donnan in San Antonio and Tim Bradshaw in Los Angeles