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Trump Administration Stalls Largest Tech Merger in New Sign of Protectionism

March 06, 2018

A possible merger of two giant makers of computer chips could revolutionize the all-important industry — which touches everything from smartphones to cars — and shift the balance of power from California to Asia.

[MARCH 5, 2018 | NY Times]

Washington isn’t so sure that is a good idea.

In a rare intervention by the government, the Trump administration moved on Sunday night to stall the potential takeover of Qualcomm, the leading American chip maker, by Singapore-based Broadcom on national security grounds. The action, by a little-known and secretive government panel, represents a newly aggressive posture by the administration to protect national corporate champions and scrutinize acquisitions by overseas companies.

The panel, the Committee on Foreign Investment in the United States, or Cfius, typically works behind closed doors and reviews deals only after they are announced. In the case of Qualcomm, the panel, which includes representatives from multiple government agencies, is looking at the acquisition before it is complete. In practice, reviews by Cfius often lead to the demise of deals.

The heightened scrutiny reflects the growing concern by President Trump and lawmakers over the flurry of deals in the United States by foreign companies. The worry is that the United States is giving up an edge in areas like technology, as China and other countries gain ground.

Cfius is intervening as Mr. Trump prepares this week to burnish his “America First” economic and national security policy by imposing hefty tariffs on imports of steel and aluminum.

“This is not the last part of this story,” said Derek Scissors, a scholar at the conservative American Enterprise Institute who has called for Cfius to stall the deal. “People woke up to realize that if steel is important to national security, then telecoms and semiconductors are also important to national security.”

With the White House making the case for more government intervention, Cfius is expected to gain more authority. A bipartisan group of lawmakers wants to expand the panel’s scope beyond mergers, giving it the power to review joint ventures and investments in start-ups.

Already, Cfius has taken a more proactive role, blocking several major deals by Chinese buyers in recent months. Among them were proposed acquisitions of MoneyGram, a money transfer company, and Lattice Semiconductor.

On Sunday, Cfius instructed Qualcomm to delay by 30 days its annual shareholder meeting, which had been scheduled for Tuesday. Investors were poised to vote at the meeting on the Broadcom bid. The delay will give the panel time to review the transaction.

Experts said they couldn’t recall another instance of the committee’s intervening in a transaction that hadn’t been completed, much less one that is as fluid and bitterly contested as this one.

Broadcom unveiled its bid for Qualcomm in November. Together, the two make chips for most of the world’s smartphones, and a merger would be the largest technology deal in history.

But Qualcomm rebuffed the approach, arguing that Broadcom was fundamentally underestimating the company’s value.

Broadcom had sought to pave the way for its bid by changing its headquarters to the United States, an announcement that the company’s chief executive, Hock Tan, made alongside Mr. Trump at the White House last year. Mr. Trump hailed the relocation as a sign that the United States business climate was improving under his watch. Broadcom argued that its status as a soon-to-be-American company meant the Qualcomm deal should not be subject to review by Cfius.

Qualcomm nonetheless appealed to regulators to get involved.

The committee, which is made up of officials from agencies including the Treasury, Commerce, Defense, State and Justice Departments, ultimately concluded that it had the authority to order the 30-day delay of the shareholder meeting.

The Trump administration has been under intense pressure from lawmakers in recent weeks to block Broadcom’s bid for Qualcomm on the grounds that the acquisition could threaten national security and cripple America’s ability to compete with China in the race for telecommunications supremacy.

“Qualcomm’s work is too important to our national security to let it fall into the hands of a foreign company — and in a hostile takeover, no less,” said Senator Tom Cotton, Republican of Arkansas. “I would like to see Cfius more active especially regarding China and regarding critical industries.”

Until a few years ago, the biggest investments in American tech companies came from Britain and Canada. Chinese companies — through state-owned enterprises, venture capital investors and private companies with ties to the government — have recently emerged as prolific investors in the United States.

“There is a feeling that tech should not leave the country and go to China,” said Andrew Hunter, a director at the Center for Strategic and International Studies and a former Defense Department official who worked with Cfius.

Qualcomm is viewed as a crown jewel of the United States tech industry. Its chips are used in most mobile phones, and its semiconductors will be used in the next generation of ultrafast wireless networks known as 5G. It is also a key provider of products and expertise to the Chinese government and companies in China.

If Broadcom bought Qualcomm, the deal would advance Asia’s position in a global race for leadership in artificial intelligence and the creation of technologies that will connect trillions of gadgets and driverless cars.

“Broadcom is ostensibly viewed as a Singapore-based company with entanglements in China,” said Tony Balloon, head of the corporate China practice for Alston & Bird, a law firm in Atlanta. “If this was a European company, it probably would have less scrutiny by Cfius.”

The tech industry has been trying to deflect the increased scrutiny of foreign investments. Many American tech companies are essentially global, with operations and licensing deals with Chinese and other international companies. They worry that the American regulatory interventions are getting in the way of deals that cross international borders.

“Increasingly, Cfius creates uncertainty about whether those deals will have to be subject to review before they can be completed,” said Dean Garfield, president of the Information Technology Industry Council, a trade association.

The intervention by Cfius thrusts the obscure agency into the middle of a complex corporate fight.

Broadcom aims to elect six directors to Qualcomm’s board at the annual meeting, which would give Broadcom a majority.

Last month, in a parallel takeover battle, Qualcomm increased the amount it is offering to pay for NXP Semiconductors, another large chip maker. Broadcom responded by reducing its offer for Qualcomm by $3 per share to $79, valuing the deal at about $117 billion.

On Monday, the war of words between Qualcomm and Broadcom continued.

“This was a blatant, desperate act by Qualcomm to entrench its incumbent board of directors and prevent its own stockholders from voting for Broadcom’s independent director nominees,” Broadcom said in a news release.

Qualcomm said Broadcom’s response was “a continuation of its now familiar pattern of deliberately seeking to mislead shareholders and the general public by using rhetoric rather than substance to trivialize and ignore serious regulatory and national security issues.”

The company said it would comply with Cfius’s request that it delay the shareholder meeting.


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