https://www.marketwatch.com/story/how-broadcom-vs-qualcomm-went-from-hostile-takeover-bid-to-a-trump-blockade-2018-03-12
How Broadcom vs. Qualcomm went from hostile takeover bid to a Trump blockade
Broadcom Ltd. and Qualcomm Corp. appeared to be in a pretty standard
hostile-takeover fight for months: Broadcom made offers, the Qualcomm board
denied them, so Broadcom tried to convince Qualcomm shareholders to reshape
Qualcomm’s board to be more friendly toward a merger.
That script was upended last week, with a surprising intervention by the U.S.
government that ratcheted quickly and culminated with President Donald Trump
saying he was blocking the record-breaking deal late Monday. Trump’s move came
after an action-packed week that included Broadcom rushing plans to move to the
U.S., Qualcomm’s executive chairman stepping down from being actively involved
in the company and chip giant Intel Corp. possibly getting involved in the fray.
Some background on the companies is helpful before diving into the details.
Qualcomm, based in San Diego, invented the first digital cellular CDMA
technology, which became an industry standard in the early days of cellphones.
The company also has developed communications chips and it licenses a vast
portfolio of wireless technology patents to other companies.
As it has gotten into serious legal battles over its licensing fees, its
business model is under attack. Apple Inc., a former customer now involved in a
messy legal dispute, said Qualcomm was “acting like a common patent troll” in
one of its legal filings late last year.
Broadcom was also a communications-chip company founded in Southern California,
before it was purchased by Avago Technologies in 2015 for $37 billion. Avago
was the chip business of the former Hewlett-Packard Co. before being spun out
as part of Agilent Technologies in the late 1990s, then into its own company
with the help of private equity in 2005. Avago put its corporate headquarters
in Singapore, which offered tax benefits, and has been very acquisitive beyond
the Broadcom acquisition, including the purchases of U.S. companies LSI Logic
and Brocade.
Broadcom’s ability to acquire U.S. companies in the past few years must have
made executives feel pretty safe in bidding for Qualcomm, especially after the
company’s deal for Brocade passed muster with the Committee for Foreign
Investment in the U.S., or CFIUS, after Broadcom agreed to move its corporate
headquarters back to the U.S. Trump even welcomed Broadcom Chief Executive Hock
Tan to the White House to celebrate the plan to ”redomicile.”
However, it was the unexpected and sudden involvement of CFIUS that set in
motion a chain of events that led to Trump’s blockade Monday evening. Here is a
blow-by-blow of the events of the past 10 days, told mostly through the
companies’ sparring statements and other filings with the Securities and
Exchange Commission.
Sunday, March 4
With less than 48 hours until a shareholders meeting that could decide the fate
of the merger, the U.S. government steps in. CFIUS suddenly asks for a 30-day
delay to look into the proposed merger, even though the regulatory body usually
examines acquisitions after the two sides have agreed on a deal.
The CFIUS order notes that Qualcomm filed a voluntary notice to the regulatory
body that seemed to launch its original inquiry. Reports suggest that two
members of Congress — Sen. John Cornyn, R-Texas, and Rep. Duncan Hunter,
R-Calif. — had also requested a review. Qualcomm’s political-action committee
has donated to both politicians in the past.
Monday, March 5
Broadcom responds to the delay by calling it “a blatant, desperate act by
Qualcomm” that “brings Qualcomm’s ‘engagement theater’ to a new low” and “is
part of an unprecedented effort by Qualcomm to disenfranchise its own
stockholders.” The company accuses its acquisition target of actively seeking
review and not disclosing that fact to Broadcom in negotiations nor to its own
shareholders.
Qualcomm responds to that statement by saying Broadcom is “deliberately seeking
to mislead shareholders and the general public by using rhetoric rather than
substance to trivialize and ignore serious regulatory and national security
issues.”
Later in the day, Bloomberg News reports that Qualcomm was losing the early
voting, with Broadcom’s board nominees building large leads and Qualcomm’s
chief executive and executive chairman headed for dismissal from the board
entirely. Qualcomm reschedules its shareholder vote for April 5; all votes can
still be changed until then, and Bloomberg reported that many of the largest
shareholders had not yet turned in their votes.
Tuesday, March 6
Broadcom files notice of movement in its attempt to redomicile in the U.S.,
which it had promised to do by May 6.
Wednesday, March 7
Qualcomm files a letter from a Treasury Department official that sums up the
decision for the delay, mentioning Qualcomm’s research and development spending
and work with the government on next-generation 5G wireless technology.
“Reduction in Qualcomm’s long-term technological competitiveness and influence
in standard setting would significantly impact U.S. national security,” wrote
Aimen Mir, deputy assistant secretary for investment 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.”
Broadcom responds by saying it is “committed to making the U.S. the global
leader in 5G,” and promises a $1.5 billion fund “to train and educate the next
generation of engineers in the U.S.”
Thursday, March 8
Broadcom starts throwing mud with infographics and tweets, pointing out
Qualcomm’s constant cooperation with the Chinese government on building out
mobile networks and other ventures in that country.
Friday, March 9
The hammer falls on the most storied name in Qualcomm’s history. Paul Jacobs,
the son of founder Irwin Jacobs, is relieved of his duties as executive
chairman, an operational role in which he had served since stepping down as CEO
in 2014. Jacobs remains on the board, at least until the shareholder vote takes
place.
Broadcom CEO Hock Tan sends a letter to every member of Congress, promising to
continue 5G efforts and calling Broadcom “in every important respect an
American company.” The letter highlights the American and Silicon Valley
history of most of its acquisitions: “We are built on the roots of several
innovative and leading U.S. technology companies including Hewlett-Packard,
AT&T, Broadcom Corporation and Brocade Communications Systems.” Broadcom is led
by a team of American citizens and a board made up of nearly all American
citizens.
Late Friday afternoon, Broadcom filed notice that its shareholders would vote
on moving the company’s legal headquarters to the U.S. on March 23, with plans
to move up its moving date by a month, to early April — just as the delayed
Qualcomm shareholder vote is expected to happen. Tan’s letter to Congress
described it as “the right move because Broadcom is an American company in all
respects but its legal domicile.”
Minutes after that filing arrived Friday afternoon, The Wall Street Journal
dropped a bomb on the proceedings, publishing a story that said Intel has its
own plans if the deal goes through. The world’s largest chip maker “is eager
for Broadcom to fail as the combined company would pose a serious competitive
threat,” but is considering making its own bid for Broadcom if the deal goes
through, anonymous sources told the Journal.
Sunday, March 11
CFIUS steps in again. The U.S. Treasury Department writes to outside counsel
for both Qualcomm and Broadcom, saying that Broadcom is violating its interim
order by taking action to redomicile to the U.S. without providing five
business days notice to CFIUS. The Treasury Department reminds Broadcom that it
asked for information by noon Eastern time on Monday. CFIUS says in absence of
more information, it would take further steps, including but not limited to
referring the deal to Trump.
Monday, March 12
Late Monday, Trump officially blocks the deal, demanding that Broadcom pull its
nominees for Qualcomm’s board and “immediately and permanently abandon the
proposed takeover.”
“There is credible evidence that leads me to believe that Broadcom…might take
action that threatens to impair the national security of the U.S.,” Trump wrote
in his order.
Qualcomm issued a statement acknowledging receipt of the order Monday evening,
and said it planned to hold its shareholder meeting March 23. Broadcom did not
hint at any future moves in its own statement.
“Broadcom is reviewing the Order,” the company said in a statement late Monday.
“Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises
any national security concerns.”
What happens next?
This type of move, especially ahead of an acquisition agreement, is quite
unusual, so there is little precedent to determine the next act in this drama.
Trump’s order prohibited “any substantially equivalent merger, acquisition, or
takeover,” so it seems that Broadcom may have to give up completely.
“If I had to guess, I’d say they’re probably done for now,” Bernstein Research
analyst Stacy Rasgon said in an email Monday evening.
“While Qualcomm still remains an M&A candidate for another chip player, this
deal dissolving is a clear positive for Intel, which is in a further position
of strength with the potential marriage of Broadcom and Qualcomm now broken up
by the Beltway before it even got to the altar,” said Daniel Ives, head of
technology research at GBH Insights, in a note to clients late Monday.
“Broadcom and Tan now have to go back to the drawing board to figure out their
next strategic move.”
In late trading after Trump’s proclamation was announced, Qualcomm shares fell
more than 4%, Broadcom shares gained less than 1%, and Intel stock increased
about 1.7%. Since Broadcom made its first bid for Qualcomm on Nov. 6, Qualcomm
shares have gained 1.6% and Broadcom shares have declined 3.9%; the Dow Jones
Industrial Average DJIA, -0.62% has gained 7% in that time period.