The threat of China factored heavily into the U.S. government's decision to block Broadcom's proposed buyout of Qualcomm.
President Donald Trump, for his part, officially declared on Monday that the proposed $117 billion deal was prohibited on national security grounds. The president said in his order that "there is credible evidence" leading him to believe that Broadcom through control of San Diego-based Qualcomm "might take action that threatens to impair the national security of the United States."
That conclusion may seem extreme given that Broadcom is based in Singapore — and looking to redomicile to the U.S., where it conducts most of its operations — but it's not a fear of the Southeast Asian city state that is raising national security concerns.
"The case that has been constructed is that, given Broadcom's business practices, the worry is that they will cut investment significantly, particularly in the 5G roadmap, weaken Qualcomm, as well as the U.S. position and allow Huawei, a Chinese company to take the lead," explained Stacy Rasgon, chip analyst at Bernstein.
The Treasury Department said last week in a letter to lawyers involved in the deal that Qualcomm was trusted by the U.S. government and cited Huawei as a competitive threat in the development of 5G, which is a telecommunications standard that will allow for faster transfer of data.
Image copyright Qualcomm Image caption Qualcomm has already showcased 1Gbps mobile internet speeds using a 5G chip
US President Donald Trump has blocked a planned takeover of chipmaker Qualcomm by Singapore-based rival Broadcom on grounds of national security.
His order cited "credible evidence" that the proposed $140bn (£100bn) deal "threatens to impair the national security of the US".
There were concerns the takeover could have led to China pulling ahead in the development of 5G wireless technology.
The deal would have been the biggest technology sector takeover on record.
A takeover of Qualcomm by Broadcom would have created the world's third-largest maker of microchips, behind Intel and Samsung.
The chipmaking sector is in a race to develop chips for the latest 5G wireless technology and Qualcomm is considered to be a leader in this field, followed by Broadcom and China's telecoms giant Huawei.
Analysts say Qualcomm is highly regarded for its commitment to research and development (R&D), particularly in the field of 5G technology. Huawei is equally committed to R&D in the area.
However, Broadcom is better known for selling assets and growing through acquisitions, and deemed to be weaker on R&D.
With this in mind, analysts have said a deal between Qualcomm and Broadcom could have given Huawei the chance to take over the top spot in years to come - a situation US politicians wanted to prevent given their ongoing security concerns around Chinese telecom firms doing business with US carriers.
Image copyright Qualcomm
Others have said Mr Trump's decision was more about competitiveness than security concerns.
"Given the current political climate in the US and other regions around the world, everyone is taking a more conservative view on mergers and acquisitions and protecting their own domains," said Mario Morales, vice president of enabling technologies and semiconductors at global research firm IDC.
"We are all at the start of a race, and you have 5G as a crown jewel that everyone wants to participate in - and every region is racing towards that," he told the BBC.
"Semiconductor technology and companies like Qualcomm will be an important weapon in that 5G arms race [and] the US like other nations and regions want to be first."
Analysis: Andrew Walker, BBC economics correspondent
Image copyright Reuters
Is there a pattern emerging in President Trump's use of national security concerns as an international economic weapon?
Perhaps, but his predecessor, Barack Obama did use the issue to block takeovers, including a technology acquisition attempted by a Chinese investment fund.
The would-be acquirer in the current case is not Chinese, but the concern expressed by the Committee on Foreign Investment was about creating space for an increased Chinese presence in 5G wireless technology.
Mr Trump has also invoked security concerns in slapping new tariffs on imported steel and aluminium.
There are plenty of people who don't believe it. The EU's Trade Commissioner Cecilia Malmström called it a "safeguard in disguise" - a response to a surge in imports that affects a country's own industry.
Mr Trump's willingness to grant exemptions, partly on the basis of what he sees as a fair trade relationship with the US, is consistent with the idea that it's not just about security.
Steady pursuit
Broadcom said it was reviewing the order and "strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns".
The company had been pursuing San Diego-based Qualcomm for about four months.
Last week, however, Broadcom's hostile takeover bid was put under investigation by the Committee on Foreign Investment in the US (CFIUS), a multi-agency body led by the US Treasury Department.
The US company had rejected approaches from its rival on the grounds that the offer undervalued the business, and also that any takeover would face antitrust hurdles.
Earlier this year, Chinese telecoms giant Huawei said it had not been able to strike a deal to sell its new smartphone via a US carrier, widely believed to be AT&T.
The US also recently blocked the $1.2bn sale of money transfer firm Moneygram to China's Ant Financial, the digital payments arm of Alibaba.
President Donald Trump issued an executive order Monday blocking Broadcom Ltd. from pursuing its hostile takeover of Qualcomm Inc., scuttling a $117 billion deal that had been scrutinized by a secretive panel over the tie-up’s threat to U.S. national security.
Trump acted on a recommendation by the Committee on Foreign Investment in the U.S., which reviews acquisitions of American firms by foreign investors. The decision was unveiled just hours after Hock Tan, the chief executive officer of Singapore-based Broadcom, met with officials at the Pentagon in a last-ditch effort to salvage what would have been the biggest technology deal in history.
"There is credible evidence that leads me to believe that Broadcom Ltd.," by acquiring Qualcomm, "might take action that threatens to impair the national security of the United States," Trump said in the order released Monday evening in Washington.
The order underscores the tough stance the Trump administration is taking on foreign takeovers of U.S. technology firms. In September, he blocked the sale of Lattice Semiconductor Corp. to a Chinese-backed investor. That was just the fourth time in a quarter century that a U.S. president stopped a foreign takeover of an American firm on national security grounds. At least a half-dozen technology deals have collapsed during the Trump administration in the face of concerns raised by CFIUS.
Broadcom said in a statement it was reviewing the order and that it "strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns." Qualcomm didn’t respond to requests for comment.
Shares in Qualcomm fell 4.83 percent at 9:20 a.m. in Frankfurt.
Killed or Abandoned Under Trump Committee on Foreign Investments in the U.S. steps up opposition to takeovers from abroad Source: Data compiled by Bloomberg
The order marked an unprecedented move by the White House to stop a hostile bid for a company. Broadcom didn’t have an agreement to buy San Diego-based Qualcomm. It was fighting to win support from Qualcomm shareholders to gain control of its rival’s board and move forward with its offer. Before waiting for an actual deal, CFIUS opened an investigation to review the risks to national security.
Initially, CFIUS was split on whether to weigh in. Pentagon officials insisted on a review of Broadcom’s proxy battle, while Treasury had pushed back, according to people familiar with the matter.
But then on March 4, Treasury ordered Qualcomm to postpone its shareholder vote by 30 days, saying that a takeover by Broadcom threatened Qualcomm’s leadership in developing the next generation of wireless technology. The government said it feared Broadcom would cut investment in research and development in order to increase short-term profits. That could allow Chinese companies, namely Huawei Technologies Co., to become the dominant supplier, the U.S. said.
Trump’s order came as Broadcom was in the midst of moving its headquarters from Singapore to the U.S. Broadcom had announced the move in November after Tan met with Trump at the White House. After the meeting, CFIUS approved Broadcom’s takeover of Brocade Communications Systems, conditioned on the headquarters move, according to Broadcom.
How China’s Huawei Killed $117 Billion Broadcom Deal: QuickTake
On Monday, Tan went to the Pentagon to meet with CFIUS officials in a bid to address their concerns. Tan argued that combining Broadcom and Qualcomm would actually further U.S. interests by advancing the development of the next generation of wireless technology known as 5G, according to a person familiar with the meeting.
Tan’s meeting followed a letter from Treasury to the companies Sunday that said national security risks from the takeover may prompt a recommendation to Trump to block the deal.
"In the absence of information that changes CFIUS’s assessment of the national security risks posed by this transaction, CFIUS would consider taking further action, including but not limited to referring the transaction to the president for decision," Treasury said in the letter, which Qualcomm made public earlier Monday.
— With assistance by Ian King
The Committee on Foreign Investment in the United States (CFIUS) has blocked Singapore chipmaker Broadcom's $140 billion cash-and-shares hostile bid to take over its American rival Qualcomm. Chaired by Treasury Secretary Steve Mnuchin, CFIUS is an interagency committee that reviews foreign takeovers of U.S. companies. The executive order giving force to the CFIUS decision concluded that the proposed deal "threatens to impair the national security of the United States."
Just how a Singaporean takeover of an American company impairs the national security of the United States was not spelled out. Singapore is an important U.S. economic and security partner. It is home to a major U.S. Navy logistics center and regularly hosts U.S. land, air and naval forces. Though Singapore is not technically a U.S. treaty ally, the security relationship between the U.S. and Singapore is about as close as you can get without an alliance.
Still, Broadcom was taking no chances. Anticipating CFIUS resistance, Broadcom was actually in the process of moving its headquarters back to the United States. Broadcom was founded by UCLA academics in southern California in 1991. It only became a Singaporean company in 2016, after it was purchased by Singapore-based Avago Technologies, which has since taken on the Broadcom name. Broadcom pulled out all the stops to secure a positive CFIUS ruling, praising Trump's tax bill at the White House and promising to inject an additional $1.5 billion into U.S. research and development.
To no avail. Not only did CFIUS find against Broadcom, but President Trump's rejection of the deal was particularly expansive, ordering that Broadcom "shall immediately and permanently abandon the proposed takeover." Barring a miracle, the deal is dead.
It is not at all clear why CFIUS is so alarmed. Qualcomm management fiercely opposed the deal, but that's no surprise. A hostile takeover can overturn years of hard work--and put highly-paid executives out of a job. Anyway, CFIUS is neither a jobs body nor even a competition authority. It is a security committee.
The last high-profile CFIUS ruling, the rejection of Alibaba's $1.2 billion friendly bid for payments provider Moneygram, made complete national security sense: letting a Communist Party-linked Chinese company take control of a chunk of American payments infrastructure, even a small one, would certainly have been risky. But Broadcom is Singaporean, not Chinese, and very American in culture. Most of its executives are either American or at least American-educated. Unless CFIUS has access to intelligence that the rest of us lack, there seems no reason to be suspicious of Broadcom.
More on Forbes: Do 'National Security' Threats Signal The Beginning Of The End For U.S.-China Trade Relations?
Unfortunately, national security decisions like the CFIUS ruling are always opaque, and all we can do is speculate as to the real reasons behind them. Qualcomm is indeed a systemically important telecommunications company. But beyond a vague commitment to keeping American great, it's not clear why an American mobile phone chipmaker can't have strong Singaporean ties (wherever it is technically domiciled). In today's globalized economy, there are two ways to make sure a company doesn't threaten U.S. national security: make sure it has substantial assets in the United States, and make sure a lot of the people running it are loyal to the United States. Broadcom checks both boxes.
China uses security policy to develop its industrial base, most famously with the Great Firewall of China that excludes many American internet companies from competing in the Chinese market. With its strategic steel and aluminum tariffs and aggressive CFIUS rulings, the Trump administration seems determined to do something similar in the United States. But excluding Broadcom won't necessarily protect America's technological leadership.
The injection of some Singaporean know-how might actually have been good for Silicon Valley. Instead Singaporeans might learn the unintentional lesson that they're not welcome in America. China has actively courted Singaporean knowledge and advice since the 1980s. It would be a shame if the U.S. put up a wall just as the Chinese are learning that it's past time to tear theirs down.
Read more: The Problem With U.S. Tariffs On Steel And Aluminum That No One Is Talking About
