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20th of March 2018


CFIUS intervenes in Broadcom’s attempt to buy Qualcomm

IT WAS only five months ago that President Donald Trump lauded Broadcom, a chipmaker, as “one of the really great, great companies” for announcing its plan to move its legal headquarters to America from Singapore. With such praise in the bank, the firm’s chief executive, Hock Tan, may have expected his subsequent offer for a rival, Qualcomm, to enjoy an easy ride. Its course has been anything but smooth. The $142bn bid, which would be the largest-ever tech deal, was rebuffed by Qualcomm’s management. Broadcom next turned to shareholders, asking them to elect its nominees to Qualcomm’s board at a meeting scheduled for March 6th.

Then, in a dramatic twist, the Committee on Foreign Investment into the United States (CFIUS), which oversees the national-security implications of foreign transactions, stepped in to delay the meeting while it conducts a review. It had been drawn in by Qualcomm, in what its furious suitor has branded a “desperate” attempt to prevent the vote. The panel’s surprise intervention suggests a more activist approach to deals involving any kind of cutting-edge technology.

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CFIUS has considerable power. It is chaired by the treasury secretary, and its members include the secretaries of defence and of homeland security. It can block deals or insist on remedies to mitigate national-security risks; in rare cases it passes decisions on to the president. It has tended in the past to block only a small number of deals but many worry this could change under Mr Trump. In January the committee blocked the acquisition of Moneygram, an American money-transfer firm, by Ant Financial, an online-payments affiliate of Alibaba, a Chinese e-commerce giant. At its recommendation, Mr Trump blocked the takeover of Lattice Semiconductor by a consortium of Chinese investors in 2017. (Concerns about Chinese acquisitions are not new: in 2016, Barack Obama blocked the takeover of the American unit of a German robotics firm, Aixtron, by a Chinese firm.)

The panel’s scrutiny of a takeover of Qualcomm is unsurprising. The deal pushes a lot of buttons in America, notes James Lewis, of the Centre for Strategic and International Studies, a think-tank. Qualcomm is a leading innovator in 5G, the next generation of wireless technology, which the government sees as a national-security priority to protect against Chinese cyber-espionage. CFIUS laid out in a letter its fears that the takeover could give Chinese competitors—notably Huawei—an edge, if Broadcom, with its “private-equity style” intentions, cuts back on research spending at Qualcomm to boost profits. (Broadcom has since pledged to make America the “global leader in 5G” and to maintain the resources Qualcomm devotes to R&D).

CFIUS’ latest intervention departs from recent form in two ways. The first is that Broadcom is not a Chinese firm, though CFIUS noted “risks associated with Broadcom’s relationships with third-party foreign entities”, which appears to hint at links to China. Another unusual feature is the timing of its review: the panel is getting involved before a deal has been agreed. But greater activism might not imply that all deals involving chips or Chinese acquirers are doomed, says Joseph Falcone, from Herbert Smith Freehills, a law firm. In January CFIUS cleared the takeover of Akrion, a chip manufacturing equipment company, by a Chinese firm. And Broadcom’s purchase of Brocade, yet another semiconductor firm, got the go-ahead in 2017.

That said, more scrutiny from CFIUS can be expected. Legislation expanding its scope, which has bipartisan support, is making its way through Congress. That would bring into its purview not only big deals but joint ventures and even some licensing agreements. Mr Tan and many other executives may need to spend more time getting their paperwork in order.

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