Trump’s Broadcom Veto

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March 13, 2018 11:22 pm Published by

President Trump’s veto of Singapore-based Broadcom ’s hostile takeover of Qualcomm is playing in the media as political protectionism. But unlike with its steel tariffs, the Administration’s national-security concerns in this case are legitimate.

Broadcom sought to grow its wireless and broadband portfolio with its $117 billion bid for Qualcomm. The San Diego-based chip manufacturer, which helped set the standard for 3G and 4G wireless communications, leads the 5G arms race along with Chinese telecom Huawei. This latest generation will enable driverless cars, drones and other automated applications that will be critical to defense.

The question for the Committee on Foreign Investment in the United States (Cfius), the interagency group that reviews foreign investments for national security, was whether Broadcom’s takeover would give the Chinese an edge. Cfius thought so, which prompted the President’s injunction on Monday.

Normally, Cfius doesn’t review deals until after they are completed, but the proxy battle for control of Qualcomm’s board merited an exception. After commandeering Qualcomm’s board, Broadcom could have waved through the deal and imposed other changes to the chipmaker’s business.

In a March 5 letter to the companies’ attorneys, Treasury outlined Cfius’s national security concerns, which were “in significant part . . . classified.” But with an unusual level of transparency, Treasury noted they “relate to the risks associated with Broadcom’s relationships with third party foreign entities and the national security effects of Broadcom’s business intentions with respect to Qualcomm.”

Qualcomm ranks second after Intel in research and development expenditures among semiconductor companies, and any “reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security.” Qualcomm is an important defense contractor. A 2012 report by the House Intelligence Committee found that Huawei could incorporate surveillance technology into its equipment that would give the Chinese government access to U.S. communications networks and citizens’ personal information.

Broadcom’s statements indicated that it intended to take a “private equity” direction to Qualcomm, which can mean reducing long-term investment to increase short-term profitability. In the last dozen years Broadcom has spent six times as much on acquisitions as on R&D. Qualcomm’s lucrative licensing agreements have allowed it to invest in new technologies, but Broadcom CEO Hock Tan wanted to change its business model. While a change could have been healthy amid Qualcomm’s patent-licensing disputes, Mr. Tan risked handicapping Qualcomm with $106 billion in debt.

The Cfius review was laced with politics on both sides, including pro-Qualcomm Members of Congress. Broadcom tried to win favor with the White House by announcing it was moving its headquarters to the U.S. a few days before making its Qualcomm bid last November. When Cfius began poking around, Broadcom expedited the move apparently to evade the committee’s oversight.

Qualcomm had appealed to Cfius in January to stop the takeover. One risk now is that without the market discipline it may relax and lose the 5G race anyway. Qualcomm will have to demonstrate to shareholders that it can lead in 5G. But Apple’s decision to replace Qualcomm chips in some of its newer iPhones and iPads should raise the stakes, which may have been another reason why the company worried about its R&D getting chopped up.

The White House supports an effort by Sen. John Cornyn and others in Congress to broaden Cfius’s review powers, but it isn’t clear that’s warranted. The Broadcom review shows Cfius has ample tools to block foreign takeovers of U.S. firms that threaten national security. The U.S. economy doesn’t need more political control over investment.

Appeared in the March 14, 2018, print edition.


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