Qualcomm takeover intervention shows US security panel's expanding reach

APD NEWS

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A US national security panel’s unusual decision to review Singapore-based Broadcom’ s 117-billion-US dollar hostile bid for smartphone chipmaker Qualcomm illustrates an expanding focus on the competitiveness of the US semiconductor industry amid advances by China, regulatory experts said.

The secretive panel, called the Committee on Foreign Investment in the United States (CFIUS), has scuppered several attempts by Chinese technology companies to acquire US chipmakers in the last 12 months over concerns about the transfer of potentially sensitive technology.

Broadcom is not a Chinese company, and has pledged to move its domicile from Singapore to the United States, arguing this will makes its acquisition of Qualcomm not covered by CFIUS. However, many of Qualcomm’s rivals, including Huawei Technologies, are Chinese.

Huawei is forging closer commercial ties with big telecommunication operators across Asia, the Americas and Europe, putting the company in prime position to lead the global race for wireless 5G networks, despite US allegations it poses a security threat.

CFIUS views Qualcomm as a prized US asset in the development of 5G wireless technology, which allows for the transmission of data at very fast speeds. It wants to make sure Qualcomm does not lose its status as a dominant player in wireless chip technology, according to a source familiar with the panel’s thinking.

As a result, Broadcom’s business plan for Qualcomm, including any divestitures it plans in order to appease antitrust regulators, will be scrutinized by CFIUS, lawyers who advised companies on their CFIUS applications said.

“This shows how indirect exposure to China is a frequent, but under-noticed, source of perceived national security risk,” said Mario Mancuso, a former CFIUS member who is now a partner at law firm Kirkland & Ellis LLP.

CFIUS’ stance has toughened as US President Donald Trump seeks his political ends. Unfilled political vacancies in several government departments and agencies have also made it harder for CFIUS to approve deals.

Canyon Bridge Capital Partners LLC, a US-based private equity firm funded by the Chinese government, saw its 1.3 billion US dollar acquisition of US chipmaker Lattice Semiconductor Corp collapse last year after it was blocked by CFIUS, a rejection subsequently upheld by Trump.

Last month, US semiconductor testing company Xcerra Corp said CFIUS had blocked its 580 million US dollar sale to a Chinese state-backed semiconductor investment fund.

CFIUS has begun looking at Broadcom’s bid as pressure grew from politicians, including senior Republican US Senator John Cornyn.

“Qualcomm is a leader in 5G technology, which is going to be the new standard in the future. And, as we’ve seen, some of our international rivals, like China, have been incredibly aggressive and strategic,” Cornyn said on Monday. He has proposed legislation to tighten CFIUS’ scrutiny of deals.

Proxy contest

This file photo taken on November 2, 2017 shows US President Donald Trump joking with Broadcom CEO Hock Tan as he announces that Broadcom would be moving back to the US, in the Oval Office at the White House in Washington, DC.

CFIUS’ intervention was unusual in that the panel typically reviews signed deals. However, Qualcomm has been resisting Broadcom’s overtures, prompting the latter to nominate six directors to Qualcomm’s 11-member board at its shareholder meeting.

CFIUS on Sunday ordered Qualcomm to postpone its shareholder meeting, which was scheduled for Tuesday, for a month.

Qualcomm filed a voluntary request for CFIUS to review Broadcom’s bid on January 29. CFIUS rules allow a company facing an unsolicited takeover bid to request a CFIUS review, so that its board of directors can better assess the regulatory risk of a deal.

“The rules say that one party alone could approach CFIUS and for a review,” said McDermott Will & Emery LLP regulatory lawyer David Levine.

Such circumstances are few and far between. Miner Rio Tinto asked CFIUS for a review in 2008 after facing a hostile 150 billion US dollar bid by BHP Billiton, according to a source familiar with the matter. CFIUS allowed the bid, but BHP subsequently walked away from the deal in the aftermath of the financial crisis.

Broadcom struggled to win CFIUS approval to buy Brocade Communications Systems late last year. In the end, that approval came just weeks after Broadcom Chief Executive Officer Hock Tan announced in an Oval Office ceremony with Trump that Broadcom would bring its headquarters to the United States.

(REUTERS)