For the second time in a year, President Donald Trump has taken the historically extraordinary measure of issuing an executive order to block a foreign company’s takeover of a US technology company based on national security concerns. This time, it was to thwart Broadcom’s proposed takeover of US-based chipmaker Qualcomm.
Late last year, Broadcom, a diversified semiconductor maker headquartered in Singapore, made an unsolicited offer to purchase its San Diego-based competitor Qualcomm for $117 billion, a purchase price that would have made it the largest technology industry acquisition in history. Qualcomm has emerged as a leader of next generation mobile wireless (5G) technologies and standards, and the acquisition would have solidified Broadcom’s position as the world prepares to transition to the next generation of wireless.
President Trump’s decision to block Broadcom from attempting to takeover Qualcomm was not unexpected, because, as his order indicates, the transaction would have directly resulted in Broadcom (and its foreign investors) acquiring control of critical technology, resulting in Chinese and other foreign interests indirectly gaining the upper hand in the closely concentrated wireless communications chips and standards industry. Mr. Trump’s order was based on the recommendation from the Committee on Foreign Investment in the US (CFIUS), an inter-agency committee of the federal government, which reviews proposed transactions that may impact national security.
CIFUS’ Broadcom review and Trump’s consequent order are enlightening for several reasons. First, CIFUS reviews are conducted behind “closed doors” and an adverse determination is conveyed privately so as to enable the proposed buyer to withdraw its bid rather than face the harsh light of the 24 hour news cycle. Here, that did not happen, and President Trump seized the opportunity to ostensibly further the administration’s position on trade with China and other foreign powers. Also, while Broadcom is not a Chinese company, the CIFUS recommendation (and Trump’s order) sends a clear message to the Chinese and other powers that this administration, despite public pronouncements to the contrary, will not permit a technology industry with limited competitors that is vital to the US economy (in this case, that will be used in the wireless Internet of Things, autonomous vehicles, among other technologies) to be controlled by non-US interests. Time will tell as to whether this is sound policy.
Moreover, Broadcom’s announcement that it would move to the US as well as take over actions intended to alleviate CIFUS’ concerns apparently will not be sufficient to overcome the national security concern (and query whether CIFUS review will be applied to a domestic company taking over another domestic company if the result could also enhance a foreign enterprise’s position in an industry). Finally, the Broadcom/Qualcomm decision potentially provides Boards with another arrow in their quiver to thwart unwanted offers from Chinese and other foreign investors or competitors by involving CIFUS to review (and recommend blockage of) the transaction on “national security” grounds. Indeed, while the CIFUS proceedings are confidential, there were indications that Qualcomm may have done exactly that (and achieved the desired result; termination of the takeover bid).