How Trump’s Order Is A Fitting End To Qualcomm-Broadcom Drama

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Trump on Monday signed an order that marked only the fifth occasion in history that saw a U.S. President block a merger based on national security concerns, with the rare move being a fitting end to the Qualcomm-Broadcom drama that's been spinning the heads of many investors and causing even more headaches in the industry over the last four months. A lot of details of Broadcom's proposed Qualcomm merger were delving deep into the uncharted territory of regulatory uncertainty and international power plays, so it's apt that the matter has now ended with an equally unprecedented move; while technically the fifth consolidation blocked on national security grounds in the U.S. history, Broadcom's bid for Qualcomm was the first such deal to be killed with an order that doesn't make a single direct reference to China.

China is still understood to have been factored into the recommendation of the Committee on Foreign Investment in the U.S. that advised President Trump to stop the deal from happening, with the panel fearing Broadcom would quickly cut Qualcomm's R&D budget in order to save costs and start generating a return on its investment as quickly as possible, as it often did with its acquisitions in the past. With Qualcomm presently being widely touted as a 5G leader as far as modems and other mobile solutions are concerned, any hit to its innovation efforts would present an opportunity for China's Huawei, another company that Washington quite publicly labeled a national security risk earlier this year, the committee feared, as revealed in one of its recent letters published by Qualcomm. The manner in which CFIUS got involved in the deal is also without real precedent, with the panel usually waiting for mergers that could threaten the U.S. national security interests to be agreed in principle before intervening instead of opting for preemptive measures.

Broadcom's bid itself was unprecedented on multiple levels, with the company suggesting by far the largest merger in the technology industry's history. As things stand right now, Dell will still be holding that title for the foreseeable future thanks to its $67 billion purchase of EMC announced in 2015. Broadcom initially bid $104 billion in November, then upped that offer to $121 billion in early February, only to bring it down to $117 billion after a couple of weeks, cutting it by the same amount by which Qualcomm increased its NXP Semiconductors offer. The Qualcomm-NXP consolidation is crucial to understanding the proxy takeover war that took place in recent months; Qualcomm has been trying to complete it for over a year when Broadcom initially attempted snatching the American chipmaker, with many industry watchers speculating the company's inability to conclude the tie-up with the Dutch firm in a timelier manner is what prompted Broadcom to attempt purchasing Qualcomm on the cheap, hoping it will be able to do so with the support of Qualcomm's investors fed up with the many roadblocks standing in the way of the NXP deal, Qualcomm's clearest avenue to substantial near-term growth that could double its revenue once completed, as per previous estimates.


According to recent reports, the aggressive takeover strategy worked, with Broadcom being on course to replace the majority of Qualcomm's board at the latter's annual shareholder meeting before CFIUS stepped in and delayed it, then advised President Trump to permanently put an end to the affair. Broadcom's planned coup was gaining so much traction among Qualcomm investors that the move seized its first executive victim even before any voting took place, with Qualcomm scion Paul Jacobs being relieved of his duties as Executive Chairman last week as the company attempted to preemptively dismiss allegations that the son of its co-founder Irwin Jacobs may not be entirely objective when given a major say on whether to sell the firm.

Broadcom's bid was also notable in the context of how much it would have benefitted the banks that it convinced to lend it close to $100 billion to fund the Qualcomm purchase. According to recent estimates, Broadcom's cash reserves are hovering around the $11 billion mark, meaning its final $117 billion bid would have required it to loan a sum that's close to its $113 billion market cap, which is yet another reason why U.S. regulators were wary of the deal which they saw as a straight road to a highly overleveraged business. The final aspect in which the proposed merger was unprecedented is in regards to the aforementioned NXP affair which Broadcom said – doesn't matter. All three bids launched by the tech giant clearly stated they stand irrespective of the fate of the Qualcomm-NXP merger, which is now valued at $44 billion. The move was meant to provide some assurances to Qualcomm's investors but also clearly signaled Broadcom believes it's getting the chipmaker on the cheap given how the purchase of the Dutch company remains uncertain, especially in the aftermath of the affair. As outlined by CFIUS, China had many reasons to believe it could directly benefit from a Qualcomm-Broadcom tie-up and hence cannot be pleased with the latest turn of events, yet it's precisely Beijing that's blocking Qualcomm's bid for NXP to this date, being the only remaining regulator to do so. Given the current level of trade-related tensions between the U.S. and China, there's little reason to believe the Far Eastern country will be quick to greenlight a consolidation that would directly benefit an American company over which it holds jurisdiction by virtue of the fact that both Qualcomm and NXP have a major business presence on its market.

The latest development makes a major near-term stock buyback on Qualcomm's part much more likely, not just because the chipmaker could see its NXP bid blocked by China which would force it to look for other methods of generating additional shareholder value it previously promised, but also because such a move would directly strengthen its resilience to hostile takeover attempts, something that the episode with Broadcom showed it clearly lacks. As far as Broadcom is concerned, President Trump's order marks a highly public defeat for the company, yet one that's unlikely to significantly impact its modus operandi, some analysts believe, predicting the firm may soon make a move for American Xilinx, Israeli Mellanox Technologies, or both. Broadcom isn't in the position to appeal the Monday order directly and already confirmed it's dropping its bid after spending a day reviewing President Trump's directive.

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The development also won't affect the company's re-domiciliation plans that will see its headquarters being returned to San Jose by April as part of a move that was announced by President Trump himself late last year when CEO Hock E. Tan visited the White House and heard the U.S. chief call Broadcom "one of the really great, great companies." For Qualcomm, the dramatic episode is an indirect but perfectly clear indicator that its 5G innovation efforts and other R&D endeavors are a segment that it must be fully committed to going forward because unlike most other entities in the industry, falling behind in any tech race wouldn't just lead to it losing some market share but could also take away its independence. For now, the San Diego, California-based firm continues leading the 5G sector, with its bizarre episode with Broadcom ending just like it started – in a sudden and unprecedented manner that will go straight into the history books.