The surprising intervention of President Donald Trump into Broadcom Ltd.’s takeover attempt of Qualcomm Inc. could have a major chilling effect on any foreign deals for U.S. tech companies, and could throw a wrench into American companies’ bids for foreign rivals.
On Monday night, Trump blocked Broadcom AVGO, -0.62% from any further attempts to gain control of Qualcomm QCOM, -4.95% citing national security concerns. Trump halted what would have been the largest tech merger in history just days after Qualcomm delayed a crucial shareholder vote at the request of the Committee on Foreign Investment in the United States, or CFIUS.
Trump’s apparent rationale to opposing the deal is the fear that Broadcom would take a different approach than Qualcomm in developing next-generation cellular technology, known as 5G. In that scenario, the U.S. could fall behind China — and especially its corporate bogeyman, Huawei Technologies Co. Ltd. — in the 5G technology race.
That sounds similar to a series of CFIUS denials of Chinese bids for U.S. semiconductor companies, which have been denied to keep key intellectual property in American hands. But it is not the same, as Broadcom is largely an American company that placed its legal headquarters in Singapore, not China, largely for tax purposes. Broadcom and Qualcomm both work with Chinese partners, including Huawei, and Broadcom is expected to complete its move to the United States in the next month.
Even the editorial board of the San Diego Union-Tribune, the newspaper in Qualcomm’s backyard, was not clear on the rationale behind Trump’s move. Stacy Rasgon, a Bernstein Research analyst, disagreed with the threat assessment. “We believe Broadcom will continue to invest in 5G (a core part of the cellular franchise they are buying) but we recognize that it is often tough to fight city hall,” Rasgon said in a note last week when a deal was still possible.
The specious reasoning for the block could have some important unintended consequences, with any company that is headquartered outside the U.S. forced to think twice about making a bid for a domestic company, and U.S. companies potentially facing tougher approvals for overseas acquisitions in response.
“M&A is alive and well…BUT foreign purchases of domestic semiconductor companies are no longer likely to pass CFIUS,” said Christopher Rolland, a Susquehanna Financial analyst, in an email. “While Qualcomm is likely a one-off, even those that planned to re-domicile may be scrutinized.”
One such deal could again test the administration. Marvell Technology Group MRVL, -5.87% has a pending $6 billion deal to buy Cavium Inc. CAVM, -4.40% While Marvell’s U.S. operations are in Santa Clara, Calif., its legal domicile is in the tax haven of Hamilton, Bermuda. Gary Mobley, an analyst with the Benchmark Company, said in a note to clients on Tuesday in one scenario, it was possible that Marvell could be asked to redomicile to the U.S.
“After speaking with Marvell, it is possible for Marvell to finalize the Cavium acquisition conditional on Marvell re-domiciling to the U.S. shortly after,” Mobley said in an email. “This is what happened to Broadcom when it was buying Brocade.” Marvell’s tax rate would increase to close to 10% from 3% as a possible result, he said. The two shareholder groups are set to vote Friday, according to regulatory filings. Marvell officials did not respond to a request for comment.
Another pending deal that involves a foreign company is Qualcomm’s $44 billion offer for NXP Semiconductors Inc. NXPI, -0.80% NXPI, -0.80% in the Netherlands. The two deals that Trump has stopped so far were to buy U.S. companies (the other was a potential deal for Lattice Semiconductor by Chinese investment group Canyon Bridge Partners). It is unclear what his view on foreign acquisitions by American companies is.
Even so, Qualcomm may not see smooth sailing on NXP with regulators on either side of the Atlantic. It still faces a lawsuit by the Federal Trade Commission, which is set to go to trial in early 2019, for monopolistic pricing practices. And earlier this year, Qualcomm was slapped with a $1.23 billion antitrust fine by the EU for making payments illegally to Apple Inc. AAPL, -0.96% for exclusive rights to use its chips in iPhones and other products.
Getting companies to move back to the U.S. is a good thing for the economy, and that has been part of Trump’s agenda as seen by his tax plan. At the same time, a harsh stance against much of the M&A engine helping drive renewed investor interest and consolidation in the semiconductor industry may need more thoughtful decisions, not those raised by hyperbole and a bunch of what-ifs.