Trump Blocks Qualcomm Acquisition to Preserve U.S. Dominance in 5G and Important Supply Chains (Part 1)
President Trump, on Monday, issued
an executive order prohibiting Broadcom Ltd.’s proposed takeover of
Qualcomm Inc., and “any substantially equivalent merger, acquisition, or
takeover, whether effected directly or indirectly.” The order stated there was “credible
evidence” that a Broadcom-controlled Qualcomm “might take action that threatens
to impair the national security of the United States.” The order also comes on
the heels of a
letter from the Committee on Foreign Investment in the United States
(“CFIUS”) highlighting security risks involved with the acquisition, including
the potential loss of U.S. leadership in the 5G standards-setting process and
the disruption of important supply chains. Although not the first time the
President has blocked such a transaction, the order appears to reiterate the
administration’s focus on maintaining technological leadership in certain technology
industries, including those technologies with both a consumer and military
This is the
first of a two-part series in which we discuss the implication of President
Trump’s order. The order represents the second instance where President Trump
has blocked a transaction on national security grounds. In September 2017, as previously
covered by V&E, President Trump prohibited the proposed $1.3 billion
acquisition of Lattice Semiconductor Corporation by Canyon Bridge Capital
partners, a U.S. headquartered private equity fund whose sole investor was
reportedly owned and controlled by the Chinese government. In that transaction,
Lattice had reportedly ceased supplying its products to the U.S. military, but
was blocked anyway with the order citing national security concerns.
In this transaction, the President found national security issues with
Broadcom, a Singaporean company, with alleged ties to Chinese businesses with
whom the U.S. defense agencies have concern. It is clear from this order and
prior orders that under the Trump Administration, as was the case under the
Obama Administration, the U.S. military is concerned with acquisitions of U.S.
companies that could erode U.S. technological leadership. This is being applied
to emerging technologies, such as Qualcomm’s developing 5G technology, as well
as technology used in both the military and civilian context. Further, the
order appears to suggest that national security was threatened by removing a
reliable U.S. source of supplies.
Notably, there is debate as to whether this action is designed as part
of the Trump Administration’s effort to protect U.S. business rather than
protect national security.
Broadcom Ltd. is a Singapore-based semiconductor manufacturer. As
described by CFIUS, California-based Qualcomm Inc. is “a global leader in the
development and commercialization of foundational technologies and products
used in mobile devices and other wireless products, including network
equipment, broadband gateway equipment, and consumer electronic devices.” Qualcomm’s
technology has been instrumental in the wireless industry’s progression from 2G
to 3G and from 3G to 4G LTE mobile networks, and it is currently “the leading
company in 5G technology development and standard setting.” CFIUS emphasized
that Qualcomm is trusted by the U.S. government and provides confidence in the
integrity of the U.S. telecommunications infrastructure.
attempted to acquire Qualcomm in an unsolicited $103 billion bid in
November 2017. But Qualcomm rejected both that bid and Broadcom’s subsequent
$121 billion offer in February 2018. After its first bid rejection, Broadcom
simultaneously sought to replace members of Qualcomm’s Board of Directors with
Broadcom’s own nominees who would presumably support the acquisition.
On January 23, 2018, Qualcomm sent a letter
to its stockholders urging them to vote to re-elect Qualcomm’s current Board
of Directors. In that letter, Qualcomm warned that Broadcom would face
significant hurdles in getting CFIUS approval. Days later, Qualcomm unilaterally
filed a notice with CFIUS seeking review of Broadcom’s efforts to replace Qualcomm’s
Board of Directors. We suspect that the CFIUS notice raised national security
concerns in an effort to have CFIUS block the hostile takeover.
CFIUS’s subsequent investigation reportedly revealed that the proposed
takeover presented risks to U.S. national security. On March 4, CFIUS issued an
order, pushing back Qualcomm’s March 6 stockholder meeting and Board of
Directors election by 30 days, to allow CFIUS to continue its investigation. The
following day, March 5, CFIUS sent a letter to Broadcom and Qualcomm outlining
the “non-classified” concerns that Broadcom’s takeover presented.
two main concerns. First, the takeover could result in a “weakening of
Qualcomm’s technological leadership in a manner that is detrimental to U.S.
national security.” CFIUS explained that the heavy debt load Broadcom would
assume in order to finance the takeover would likely force it to focus on short-term
profitability, to the detriment of long-term investments – particularly in research
and development. CFIUS explained that any void left by Qualcomm would likely be
filled by Chinese companies, and the U.S. would lose its dominance in the
critical 5G standard-setting process. Second, CFIUS explained that the
acquisition could jeopardize the trusted supply relationship between Qualcomm
and important U.S. Department of Defense and other national security programs. According
to CFIUS, the U.S. government depends on Qualcomm products and services to address
issues such as “cybersecurity in the next generation of wireless, 5G, and the
Internet of Things.” CFIUS stated that any disturbance in that supply of goods
and services could impact national security.
The letter contemplated CFIUS using the 30-day window leading up to Qualcomm’s
Board of Directors election to continue its ongoing investigation into the
proposed takeover. Meanwhile, Broadcom had taken actions towards redomiciling
in the United States. Broadcom explained that its plan to redomicile was not an
effort to avoid CFIUS review and that it had announced its intentions well
before attempting to acquire Qualcomm. Nonetheless, CFIUS issued a second
letter explaining that redomiciling efforts were in violation of its
original interim order that required Broadcom to notify CFIUS five days in
advance of taking any steps towards redomiciling. The President’s order supersedes
the CFIUS interim order and permanently prohibits the transaction. On March 13,
Broadcom terminated the deal, putting the final nail in the coffin.
The implications of the President’s decision, and CFIUS’s involvement,
are wide ranging and likely have yet to be fully realized. Therefore, we expect
to provide further insights in future blog posts. Stay tuned.