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 purpose.

Implications

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.

Background

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.

Originally, Broadcom 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.

CFIUS Involvement

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 interim 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.

CFIUS identified 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.