Broadcom Limited (NASDAQ:AVGO)
Historical Stock Chart
1 Year : From Dec 2017 to Dec 2018
By Ted Greenwald, Kate O'Keeffe and Tripp Mickle
The Trump administration's extraordinary intervention against the $117 billion takeover of Qualcomm Inc. surfaced suddenly last week. But it was months in the making.
In December, Qualcomm's leaders, reeling from a year of battles with customers and regulators in the U.S. and abroad, faced the prospect of losing the company to a hostile takeover by Broadcom Ltd. in what would be tech's biggest-ever takeover.
One potential hurdle to the bid, Qualcomm executives discussed, was a protracted national-security review, according to people familiar with the matter. Qualcomm lawyers reached out to Covington & Burling LLP, which suggested filing unilaterally and proactively for review of a possible deal by the Committee on Foreign Investment in the U.S. to understand the risks, the people said.
It was an unusual strategy. Normally both parties in a deal seek approval by making a joint filing before CFIUS, the secretive federal panel that vets foreign purchases of U.S. companies on national-security grounds. And they don't usually file until there is an actual deal on hand. But in January, Qualcomm approved.
"You don't treat a hostile the same way you do when someone walks in and says, 'You want to get married?' " said a person familiar with the discussions.
Qualcomm's Jan. 29 filing to CFIUS helped trigger a chain of events that culminated in President Donald Trump's decision Monday to block the deal.
Qualcomm's appeal tapped into gathering concern among some congressional Republicans and the Trump administration about U.S. national security and competitiveness with China, especially in advanced technologies -- sentiment that already was fueling an effort to expand the power of CFIUS. The company also got help from sympathetic senators and representatives who pressed the administration.
The confluence of corporate self-interest and geopolitical considerations not only enabled Qualcomm to turn the tables on Broadcom, but canonized the San Diego company as a sort of national champion essential to battling China's might in the next-generation wireless communications technology known as 5G.
The administration's intervention was all the more unusual because it centered less on Broadcom's origin -- it is a Singapore-domiciled company with about half of its employees in the U.S. -- than on the idea that its stewardship could undermine Qualcomm's innovative prowess, and by extension U.S. clout against China and its tech juggernaut, Huawei Technologies Co.
"The administration's decision is a recognition that, in the digital age, national security has different requirements," said James Lewis, a technology-policy specialist at the Center for Strategic and International Studies in Washington. "The line between security and industrial policy is almost nonexistent in this case."
Qualcomm's U.S. government connection dates back to founding in 1985 by Irwin Jacobs and six others who adapted U.S. military technology known as CDMA, for Code Division Multiple Access, to transmit digital signals over cellphone equipment. As mobile networks grew globally, Qualcomm's CDMA technology became the U.S. standard battling in markets like China against a competing European technology called GSM.
Broadcom was founded six years after Qualcomm in Los Angeles. When Broadcom later sought to move into the business of modem chips -- Qualcomm's specialty -- it triggered a protracted patent dispute and aroused the ire of Mr. Jacobs and his son, Paul, who thought Broadcom's technology inferior, former employees said.
In 2016, Singapore-based Avago Technologies Ltd. acquired Broadcom and took on its name. Avago CEO Hock Tan had built it through a series of acquisitions, and had a reputation for emphasizing cost discipline over R&D.
Irwin Jacobs, who served as Qualcomm's chairman until 2009, said in an interview Monday he and his son had feared Broadcom would curtail research and development and fundamentally change Qualcomm's business.
Paul Jacobs, who was Qualcomm executive chairman before stepping down Friday, dismissed Broadcom's offer as an opportunistic financial move. He didn't respond to requests for comment.
Qualcomm had suffered setbacks last year, including lawsuits by Apple Inc. and the U.S. Federal Trade Commission alleging it used improper tactics to enforce its dominance on certain smartphone technology. Qualcomm denied those claims, but its stock fell by more than 20% from January through October. Both cases are pending.
Qualcomm's board rejected Broadcom's initial offer as too low and subject to regulatory risks, though it later said Broadcom had agreed to take steps to mitigate those risks. Qualcomm CEO Steve Mollenkopf and General Counsel Donald Rosenberg argued internally that Broadcom's approximately 12-month timetable for closing a deal was unrealistic, according to a person familiar with their thinking. Broadcom's previous acquisition, a $5.5 billion takeover of Brocade Communications Systems Inc., had taken longer than expected because of a CFIUS review.
Mr. Tan had tried to address such concerns. Just before the Qualcomm bid became public in November, he stood with President Trump at the White House to announce that Broadcom would redomicile in the U.S.. That move could have rendered CFIUS review inapplicable. Broadcom expected to complete the move by spring.
Meanwhile Qualcomm went to lawyers at Covington & Burling to gauge the likelihood any potential Broadcom deal would pass CFIUS review, said people familiar with the discussions.
Qualcomm's Jan. 29 CFIUS filing laid out its pitch that a Broadcom takeover would weaken Qualcomm -- and thereby the U.S., according to one of the people.
CFIUS members already were growing wary of deals with potential national-security ramifications linked to China, and the Trump administration had declared the establishment of a national 5G network a priority.
Looming over the considerations was China's Huawei, which had grown into the No. 1 global supplier of telecom equipment and a major force in the development of 5G technology despite being largely blocked from the U.S. market. A 2012 congressional report had determined that its equipment could be used for spying or crippling the U.S. telecommunications network, which the company has denied.
Still, CFIUS remained divided on when it could review Broadcom's proposed deal for Qualcomm. Qualcomm wanted it to step in before March 6, when shareholders were to vote on whether to replace six of its 11 directors with nominees put forward by Broadcom, a result that could have sealed the takeover.
Qualcomm's concerns were shared on Capitol Hill. Senate Majority Whip John Cornyn (R., Texas) in November had introduced a bill to broaden CFIUS's authority, especially to scrutinize Chinese technology deals.
Mr. Cornyn sent a letter to Treasury Secretary Steven Mnuchin, who chairs CFIUS, on Feb. 26, requesting the panel review the deal. Multiple House Republicans also wrote to Mr. Mnuchin about Qualcomm.
Two days before Qualcomm's March 6 meeting, on Sunday night, CFIUS told the companies it would review the potential deal immediately, skipping a typical 30-day preliminary assessment period and plunging into its investigation of potential national security threats, according to people familiar with the matter. Broadcom said it was blindsided.
Broadcom sprang into action. It issued a statement touting its commitment to invest in Qualcomm's 5G technology, and moved to accelerate its move from Singapore to the U.S., which required shareholder approval.
But that only angered CFIUS, which had ordered Broadcom to give it five days' notice before taking any action to redomicile.
Broadcom says it complied with CFIUS's order and that its deal presented no national security concerns.
On Sunday, CFIUS sent another letter to Qualcomm and Broadcom, signaling it would ensure the deal was blocked.
Broadcom's Mr. Tan met with the CFIUS agencies Monday, expressing why it should be permitted to proceed, according to a person briefed on the encounter. Officials listened but said nothing, the person said.
Broadcom published a presentation Monday highlighting its extensive U.S. operations and "50-year American heritage," and calling itself "an American success story."
It was too late. Hours after Mr. Tan's meetings, Mr. Trump issued a presidential order blocking the deal.
--John D. McKinnon contributed to this article.
Write to Ted Greenwald at Ted.Greenwald@wsj.com, Kate O'Keeffe at firstname.lastname@example.org and Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
March 13, 2018 20:31 ET (00:31 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.