President Trump’s decision yesterday to effectively block Broadcom’s $117 billion proposed takeover of Qualcomm on national security grounds confirmed what had become increasingly apparent in recent days – that the US authorities had taken a dim view of the deal and the prospect of a foreign company buying America’s undoubted leader in wireless technology.
On Sunday the Committee on Foreign Investment in the US (CFIUS) wrote to both companies to raise concerns over the offer on grounds of national security. That followed another CFIUS letter last week, again to both companies, which questioned what a deal might mean for Qualcomm’s position in the development of 5G technology.
Any weakening of that position, the letter explained, might leave Chinese tech giants such as Huawei to take the lead on standardisation in the next iteration of mobile technology.
The size of the deal (it would have been the largest ever tech tie-up if it had gone through) and the high profile of both companies, ensured that yesterday’s announcement garnered plenty of media coverage.
It is rare for a President to step in to block a deal in this manner, but it’s not unprecedented. In 2016 President Obama effectively killed the proposed takeover of German chipmaker Aixtron by Chinese company Fujian (credit to Ropes & Gray’s Matthew Rizzolo who highlighted the Obama executive order in a LinkedIn post).
What makes Trump’s action surprising, however, is that Broadcom is not a Chinese company — it’s headquartered in Singapore — and in fact is in the process of redomiciling to the US. The company’s CEO even met with Trump last year at the White House and the President used it as an opportunity to trumpet Broadcom’s proposed move to the US.
In IP terms there’s a complex web of implications that Trump’s order throws up. For one thing, it is only going to become harder for foreign tech companies — not just Chinese — to acquire US technology businesses as the White House appears receptive to any argument around the diminution of American corporate might.
Huawei’s efforts to penetrate the US market have been hampered for several years because of concerns over its possible ties to the Chinese government. The frosty reception it has received from US legislators only looks set to grow.
One way around the block on US acquisition could be pursuing organic growth with foreign companies focusing on hiring US tech talent as well as acquiring US patents to give them freedom to operate. The latter is something that Xiaomi has been heavily focused on as it has eyed a possible US launch, picking up a large portfolio in 2016 from Microsoft.
It is also ironic that the US is blocking a takeover of Qualcomm out of fears for what it might mean for Chinese leadership in mobile, just when the San Diego based business is increasingly dependent on the Chinese market. Since it was reprimanded in early 2015 by the local authorities over its licensing practices, Qualcomm has put in place a series of technology and licensing deals with a string of China’s leading device makers.
More recently, it has announced the launch of the 5G Pioneer Initiative with Lenovo, Oppo, ZTE, Vivo, Xiaomi and Wingtech to develop advanced mobile devices. In an infographic that it recently filed with the SEC, Broadcom even highlighted Qualcomm’s growing ties to the world’s most populous country declaring that it is “time to set the record straight about Qualcomm’s business relationships in China”.
The company’s prospects in the largest Asian market have grown brighter just as its relations with its most important customer, Apple, have soured considerably over the chip giant’s licensing practices. The pair have now been in a bitter, global litigation battle for over a year.
In announcing its 2017 results Qualcomm made clear just how big an impact that dispute is having on its financial performance, with revenues for its licensing arm forecast to be between 40% and 49% down year-on-year in the current quarter as Apple continues to withhold licensing payments.
The chip manufacturer has also been in dispute with another recalcitrant licensee which the Wall Street Journal reported last week is Huawei and revealed that the two companies were close to reaching an agreement.
Any resolution of that dispute would leave Apple as the main holdout, arguably posing the greatest risk to the ongoing health of Qualcomm’s profit-driving licensing business. If President Trump wants to go a step further in protecting America’s 5G leader then might he put in a call to Apple’s new Silicon Valley HQ to encourage the iPhone giant to settle the epic patent battle? Now that would be unprecedented.