U.S. Circles Wagons on Foreign Tech Deals
The seemingly inevitable consolidation of the global semiconductor industry, plagued as it is by overcapacity and an unending search for new markets, was slowed at least temporarily by a Republican administration that invoked national security as a reason for intervening in technology markets. Previously, economic conservatives would have called the Trump administration move a case of “picking winners and losers.”
In the case of Singapore-based Broadcom’s (formerly Avago, NASDAQ: AVGO) attempt to acquire Qualcomm Technologies Inc., regulators have for now made the U.S. wireless chip giant a “winner.”
The Trump administration moved Monday (March 12) to block the proposed merger of the communication chip rivals. The order also prevents Broadcom’s proposed candidates to run for Qualcomm’s (NASDAQ: QCOM) board of directors.
Broadcom’s control of Qualcomm “threatens to impair the national security of the United States,” the administration asserted in a statement killing the deal.
The fate of the proposed acquisition was largely sealed last week when the Treasury Department’s Committee on Foreign Investment in the United States (CFIUS) notified both companies of its concerns. Along with national security risks, those concerns reportedly included Broadcom (and Avago’s) reputation for taking a “private equity- style’ approach to acquisitions that would place short-term profits ahead of investments in research.
Along with Treasury, the committee includes officials from the departments of Commerce, Defense, Energy, Homeland Security, Justice, State and the U.S. trade representative.
Singapore-based Avago Technologies acquired Broadcom in May 2015 for $37 billion. The acquisition of the Silicon Valley mainstay gave the Singapore-based chip maker a firm foothold in the North American communications market.
The proposed $117 billion bid for San Diego-based Qualcomm, which holds key wireless chip patents—technologies that have been adopted in key markets like China—was a bridge too far. The deal also was doomed by an activist CFIUS that has recently moved to block a number of cross-border technology deals, including German chip maker Infineon Technologies proposed $850 million deal last year to acquire Cree Inc.’s RF components unit.
Broadcom said Monday it is reviewing the administration’s order, adding that it “strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns.”
The acquisitive communications chip maker recently closed a deal to acquire Brocade Communications Systems, a U.S. wireless and wired device manufacturer that also serves the enterprise storage market with storage switches for all-flash datacenters.
Among the flashpoints in the proposed Qualcomm deal was the rollout of 5G wireless technologies that are expected to play a key role in connecting billions of Internet of Things devices. The first 5G trials are scheduled to begin this summer, with the first commercial availability in 2019. Qualcomm is at the forefront of development of modems and other devices that would provide the first wide-bandwidth 5G data connections.
The emerging wireless standard is “less of an evolutionary step than it is an exponential leap,” Qualcomm’s Cristiano Amon told the recent World Mobile Congress. The new standard will deliver “enough bandwidth to support not just billions of connected humans, but tens of billions of connected devices,” Amon added.
Hence, U.S. regulators decided this week that a U.S.-based wireless capability was a strategic economic and military asset that should not be acquired by a foreign investor.