A Deal With Broadcom May Weaken Qualcomm's Innovation, CFIUS Says

03/06/18 11:46 AM EST
By Stu Woo 

The U.S. Treasury, which chairs the Committee on Foreign Investment in the U.S., sent Broadcom Ltd. and Qualcomm Inc. a letter Monday explaining the panel's concerns about Broadcom's proposed hostile takeover of Qualcomm. The letter, made public Tuesday, lays out in detail Washington's concerns.

CFIUS rarely weighs in publicly on a deal it is scrutinizing, and the panel debated last week whether it even had the jurisdiction to intervene in the Broadcom-Qualcomm battle, since an agreed deal hadn't yet be reached. But over the weekend the panel, which can recommend the president block deals, ordered Qualcomm to delay its annual shareholder meeting by 30 days so it would give CFIUS time to review the takeover bid.

Further, the panel took the step of laying out its concerns in a detailed letter, which Qualcomm made public Tuesday. For deal makers who have grown increasingly conscious about how, when and why CFIUS decides to get involved in a takeover effort, the letter offers a rare window into the U.S. national security panel's thinking.

The committee said it was restricted in sharing much of its national security concerns in the letter because they were classified. But it said, "to the extent that some of the potential national security concerns can be described in an unclassified manner, CFIUS notes that they relate to the risks associated with Broadcom's relationships with third party foreign entities and the national security effects of Broadcom's business intentions with respect to Qualcomm."

The letter didn't detail the third-party foreign entities it was worried about. Broadcom is based in Singapore, but has promised to relocate to the U.S.

One of the U.S. government's biggest concerns: Qualcomm is a global leader in the development of telecommunications innovation, and a deal might weaken it, especially, the CFIUS letter noted, if Broadcom uses its professed "'private-equity'-style" approach to Qualcomm. That, the committee says, could lead to lower investment, including in research and development, and a focus on short-term profitability.

Here are some other highlights from the letter.

--The committee credits Qualcomm with leading wireless-technology innovation for more than two decades. The panel writes that "Qualcomm is a global leader in the development and commercialization of foundational technologies and products used in mobile devices and other wireless products, including network equipment, broadband gateway equipment, and consumer electronic devices."

--Looking ahead, the panel also says all that experience has "positioned Qualcomm as the current leading company in 5G technology development and standard setting."

--5G is the next generation mobile network technology. Qualcomm's leadership role technology development, CFIUS wrote, is good for national security: "Qualcomm has become well-known to, and trust by, the U.S. government. Having a well-known and trusted company hold the dominant role that Qualcomm does in the U.S. telecommunications infrastructure provides significant confidence in the integrity of such infrastructure as it relates to national security."

The committee says it sees any diminishing of that role as a potential opening for China and, specifically, Huawei Technologies Co., a Chinese telecommunications-equipment maker that is also a biggest force in 5G.

The risk of a diminished Qualcomm "would significantly impact U.S. national security. This is in large part because a weakening of Qualcomm's position would leave an opening for China to expand its influence on the 5G standard-setting process. Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology."

--CFIUS lays out that Broadcom's own professed strategy for digesting the Qualcomm bid -- what CFIUS said Broadcom described as its "'private equity'-style approach" could mean reductions in investment:

"Broadcom's statements indicate that it is looking to take a 'private equity'-style direction if it acquires Qualcomm, which means reducing long-term investment, such as R&D, and focusing on short term profitability," the committee writes.

Write to Stu Woo at Stu.Woo@wsj.com


(END) Dow Jones Newswires

March 06, 2018 11:46 ET (16:46 GMT)

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