Background:
It has been several days since President Trump blocked Broadcom’s $117 billion hostile takeover bid of Qualcomm. Broadcom announced just yesterday that it has withdrawn and terminated its offer saying it was, “disappointed with this outcome”, but would comply with the order. The President’s order cited “credible evidence” that the proposed deal “might take action that threatens to impair the national security of the United States”. If the deal had gone through, it would have been the biggest tech acquisition in US history and would have created the third-largest chipmaker in the world.
The move fits into the President’s playbook of protecting American interests in terms of security and technology at home. He is advised by the Committee on Foreign Investment in the United States (CFIUS), which has made several recommendations to block foreign interests in the past. One example being when Trump blocked China-backed Canyon Bridge Capital Partners Inc.’s $1.3 billion acquisition attempt of Lattice Semiconductor Corp. in September 2017. However, what makes this block more interesting is that Broadcom announced it would moving its headquarters from Singapore to the US in April of this year.
The truth is, Broadcom was caught in the middle of a much larger battle over foreign interests in the US telecommunications space and the nation’s future 5G developments and roadmap. Trump has long been wary of Chinese interests in the US and with Broadcom having over half of its sales in China, the President made a protectionist move. More concretely, CFIUS feared that the acquisition would allow Broadcom to curtail Qualcomm’s R&D funding, allowing Chinese company Huawei to steer the direction of wireless communications development, and thus jeopardize US 5G development.
Potential implications:
National 5G roadmap: The biggest implication of the blockage and the one that will be most watched from the mobile world is how this will shape the future of 5G. Is 5G an issue of national security? The development of 5G infrastructure is well on its way. Qualcomm and the major carriers have announced initial 5G rollout plans. Commercialization is projected to come in 2019-2020 with some 5G-capable devices already promised at the end of this year. The Broadcom acquisition block by Trump shows a clear interest in protecting the national 5G network from outside influences and potential espionage risks. However, how heavy-handed government influence will be with the national rollout of 5G is yet to be fully understood. It should not be forgotten that the US has continued to block China-based Huawei as a network infrastructure supplier, even after it had won a contract with Sprint Nextel back in 2010.
Signals for other US companies: While it is highly doubtful, this order could signal a go-ahead for US-based companies to consider new possibilities of takeovers again. Chinese investments are being thwarted which would create a better playground for US companies. There have been rumors about Intel making a move to acquire Qualcomm in late 2017 as it feared its two rivals joining forces. Now with the block in place, companies such as Intel could re-visit their position in the market and look to strengthen their hold by considering smaller acquisitions in areas they are soft in. In another vein, once Broadcom completes its headquarter transition to the US, it will presumably have no acquisition restrictions placed on it by CFIUS.
Qualcomm vs Apple: Now that Trump has put Qualcomm under his protectionist wing, the ongoing legal battles due to patent infringements and royalty charges takes on a new twist. This could potentially be a signal that the government is slightly endorsing Qualcomm’s licensing practices, which could help bring the Apple-Qualcomm battle to a quicker resolution.
Qualcomm’s M&A future: Amidst the hostile takeover by Broadcom, Qualcomm has been in a $45 billion M&A attempt of NXP Semiconductors, which has been going through an approval process for a year. The only country left to give approval is China, which given the most recent events, could choose to play spoiler. The Chinese Ministry of Commerce may very well decide to retaliate against the US government’s move to block Broadcom’s acquisition by not approving Qualcomm’s NXP bid.
China and retaliations: Lastly, we also need to express some caution to how this blockage will impact existing relationships on a macro level. The use of national security as a justification by the President is a broad one and leaves the door open for other countries to use the same reason to protect their own interests. Top of mind is China. Retaliations to Trump’s protectionist stance could go well beyond just blocking the NXP Semiconductor acquisition and turn the whole tech sector into a tit-for-tat retaliation battleground. This could have lasting impacts on how the industry developments in the future.
5G development has been all over the news over the last months and especially since MWC 2018 as companies are gearing up to lay claim to new emerging market opportunities. If this protectionist streak continues in the future, it may start shaping 5G-centric business opportunities and strategies to become more US-centric. However, all these implications remain speculative but will warrant scrutiny over the next months and years.
