Donald Trump stops Qualcomm-Broadcom merger citing state security

Tuesday March 13 2018

Trump

President Donald Trump in Pennsylvania on March 10, 2018. Trump stopped the Broadcom-Qualcomm merger, citing national security. PHOTO | NICHOLAS KAMN | AFP 

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SAN FRANCISCO,

US President Donald Trump on Monday blocked an unsolicited bid by Singapore-based Broadcom to take over smartphone chipmaker Qualcomm, citing national security concerns.

Trump issued an order barring the proposed mega-acquisition, saying there was credible evidence such a deal "threatens to impair the national security of the United States," according to a White House statement.

SHAREHOLDER

The order came despite Broadcom's assurances that it would complete its move to the US by early April, ahead of a previously-planned Qualcomm shareholder vote on the $117 billion deal — meaning any national security concerns were moot.

"Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns," the company said, adding that it was reviewing the order.

ADVANCE NOTICE

The Treasury Department said in a letter over the weekend that Broadcom had violated a Committee on Foreign Investment in the US order on three separate occasions by failing to give advance notice before taking actions such as lodging takeover-related securities filings in the United States.

A CFIUS investigation of the proposed acquisition so far has "confirmed" national security concerns earlier identified by US officials, according to the letter.

BAD IDEA

Trump ordered Broadcom and Qualcomm to "immediately and permanently abandon the proposed takeover."

The rival chip giants were told to notify CFIUS in writing that all aspects of the order had been followed.

"This deal was a bad idea from the start," said analyst Patrick Moorhead of Moor Insights and Strategy.

Broadcom shares closed the trading day up 3.5 per cent to $262.84 and gained slightly more in after-market trades.

PROTECTIONIST

Qualcomm shares sank 4.4 per cent to $60.04 in the after-market.

Qualcomm has been manoeuvring for weeks to rebuff Broadcom's unwanted advances, and had asked CFIUS to look into national security implications of a merger.

Concern over China's potential influence, and rising US protectionist sentiment, hung over the Singaporean firm's hostile takeover bid.

ANNUAL MEETING

Qualcomm rejected multiple Broadcom offers during weeks of parries and thrusts between the two firms since the proposed deal emerged in November.

Qualcomm, which makes most of the world's microprocessors for smartphones, postponed its annual shareholders' meeting after secretly requesting the national security review of Broadcom's bid.

DISQUALIFIED

Qualcomm announced late on Monday that the new meeting date will be March 23, and that the six Broadcom-backed candidates vying for spots on the 11 person board were off the ballot.

"Under the terms of the presidential order, all of Broadcom's director nominees are also disqualified from standing for election as directors of Qualcomm," the California-based company said in a statement.

CFIUS noted that a Broadcom-Qualcomm merger could weaken Qualcomm's leadership in the field.

5G CONNECTIONS

This would likely help Chinese competitors such as telecommunications firm Huawei, particularly in the emerging 5G blazing fast wireless internet, where a stronger China could present a national security issue.

While they are rival chip companies, Broadcom and Qualcomm are very different in their approaches to the market, according to Moorhead.

Qualcomm is known for mobile chip innovations that set industry standards, for example in 5G wireless connection technology, he said.

In contrast, he said Broadcom is adept at using intellectual property developed by others and making products at low cost, referring to them as "implementors."

HUAWEI

Moorhead likened the idea of merging the companies to mixing oil and water.

CFIUS likely had China concerns, possible Broadcom's relationship with entities there or the fact that the only company other than Qualcomm investing heavily in long-term mobile chip research is Huawei, the analyst speculated.

Along with self-driving cars, drones and robots depending on super-fast wireless data connections, such networks will also be relied on by the military.

POLITICS

"I'm a technology analyst, not a military analyst, but it makes sense to me that troops will be wirelessly connected in the air, on the water and on the ground," Moorhead said.

"There will be drones and robots."

Broadcom's initial offer was tinged by politics, coming just after the company's chief executive, Hock Tan, appeared at the White House with Trump to announce plans to move the firm back to the United States from Singapore.

TAX PURPOSES

"Because Broadcom is based in the Southeast Asian financial hub essentially for tax purposes, the US government's case is terribly misinformed regarding a purchase of Qualcomm," Stacy Rasgon, an analyst at market research firm Bernstein said before Trump's announcement.Stacy Rasgon

"I get the concerns about China taking our intellectual property etc... but I think they are misplaced in this specific case," Rasgon said.