A Broadcom-Qualcomm Deal Would Face a Regulatory Minefield
By Ted Greenwald
Broadcom Ltd.'s $105 billion gambit to acquire Qualcomm Inc. faces challenges not only in winning over shareholders but in navigating a host of potential roadblocks from regulators over market dominance, innovation and national security.
For now, any marriage is in limbo after Qualcomm rejected the bid last week, leaving Broadcom to decide whether to raise its offer or seek board seats.
Combined, they would form the No. 3 chip maker by revenue behind Intel Corp. and Samsung Electronics Co. -- a colossus spanning markets from consumer devices to phone-service providers to data centers.
That alone may give antitrust enforcers pause. Add in, authorities in the U.S. and other countries already have Qualcomm's patent-licensing business in their crosshairs, and regulatory reviews have held up other multibillion-dollar deals initiated by both companies.
Regulators would have to consider the merged entity's dominant position in parts critical to smartphones. Broadcom and Qualcomm are the top suppliers in Wi-Fi and Bluetooth chips for wireless devices with a combined market share of roughly 60%, and together they would dominate in GPS chips with a 52% share, according to the market-research firm Gartner Inc. They also compete in components that amplify, filter and route cellular radio signals. Qualcomm leads the market for cellular communications chips with a nearly 59% share.
The Justice Department's lawsuit on Monday to block AT&T Inc.'s proposed $85 billion takeover of Time Warner Inc. sent a signal that even Republican enforcers, who generally have been friendly toward mergers, could take an interventionist attitude toward large tie-ups.
Broadcom Chief Executive Hock Tan has expressed confidence that the deal would pass muster. "There's nothing we can't work through in our review in terms of regulators, which is why we believe there's a very clear path to completion," he told the Wall Street Journal shortly after he submitted his bid.
Qualcomm declined to comment. The proposed merger "comes with significant regulatory uncertainty," the company said in a statement when it rejected Broadcom's bid.
The combination could undermine consumers, device makers, software coders and service providers by creating an entity capable of dictating what wireless devices can and can't do, said Sascha Meinrath, a professor of telecommunications at Pennsylvania State University.
U.S. regulators have paid particular attention to deals that allow a single company to package complementary technologies in ways that could thwart smaller competitors, said Harry First, a professor at New York University who specializes in antitrust law. In the early 2000s, for example, regulators ruled Microsoft Corp. unfairly blocked Netscape Communications Corp. by bundling its Internet Explorer browser with its Windows operating system.
In Europe and China, a Broadcom-Qualcomm merger likely would entail "a lot of required divestitures and behavior requirements" such as selling or sharing intellectual property, said Eleanor Fox, a specialist in international antitrust law at New York University.
European regulators lately have been eager to ensure continued spending on innovation, Ms. Fox said. Earlier this year, they conditioned approval of the $130 billion merger between Dow Chemical Co. and DuPont Co. on the latter's sale of a research-and-development center.
Mr. Tan isn't averse to divestitures. After merging Avago Ltd. and Broadcom in 2016, he sold Broadcom's wireless internet-of-things unit to Cypress Semiconductor Corp. because it didn't fit his yardstick for market dominance or predictable revenue, among other criteria, Bernstein Research analyst Stacy Rasgon said.
China, meanwhile, hasn't shied from using antitrust decisions to help local industry. In settling a complaint against Qualcomm, for instance, Chinese authorities in 2015 demanded the chip maker cut its royalty-rate basis in that country, a requirement some observers interpreted as an effort to give Chinese device makers an advantage.
Mr. Tan already has suggested he might revamp Qualcomm's patent-licensing business, despite its pretax profit margin far outstripping that of the company's chip sales. In an interview with Mr. Rasgon, he said he "sees an opportunity to rationalize and restructure the licensing business." That could hearten competition watchdogs world-wide as well as Apple Inc., which is waging a bitter war against Qualcomm over royalty rates.
Broadcom has said it expects the transaction to clear regulatory reviews within 12 months of striking a deal. That is not unrealistic, according to antitrust experts. However, both Broadcom and Qualcomm have encountered obstacles in getting other deals past regulators.
Qualcomm's $39 billion deal for automotive chip leader NXP Semiconductors NV has been delayed by the European Commission. Broadcom's proposed acquisition of Brocade Communications Systems Inc. for $5.5 billion was held up in a U.S. national security review before closing last week.
The Committee on Foreign Investment in the U.S., which vets foreign acquisitions of U.S. companies on national security grounds, lately has combed chip deals for involvement from China, which been trying to extend its semiconductor capabilities. Late last year, for instance, the committee quashed the sale of Aixtron SE, a German maker of chip-fabrication equipment that has U.S. operations, to Chinese investor Fujian Grand Chip Investment Fund LP.
Broadcom's Mr. Tan recently took what appeared to be a step toward easing such scrutiny. Shortly before presenting his bid to Qualcomm, he stood beside President Donald Trump to announce a plan to relocate Broadcom's headquarters from Singapore to the U.S.
The committee is likely to investigate anyway if it suspects Chinese backing, said James Lewis, a senior fellow at the Center for Strategic and International Studies in Washington. However, he believes that is unlikely. The tie-up would cause "a little discomfort," he said, but probably not enough to trigger a national security investigation.
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
November 22, 2017 07:14 ET (12:14 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.