President Donald Trump issued an executive order this week, blocking a $117 billion hostile takeover of US chip maker Qualcomm by Singapore-based Broadcom.
Why Trump is blocking a $117 billion hostile takeover (and why it’s China’s fault)
Broadcom may be based in the island state of Singapore – but if you take a closer look, it is fears of ceding ground to China that scuppered the deal.
Why block the takeover?
Trump cited "credible evidence" that Broadcom's control of Qualcomm "might take action that threatens to impair the national security of the United States." More on that later.
In a statement, Broadcom says it "strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns."
The Committee on Foreign Investment in the United States (CFIUS) is responsible for reviewing implications for national security in major deals between overseas firms and US companies.
In late January, Qualcomm asked CFIUS to review Broadcom’s unsolicited takeover bid.
CFIUS decided that the transaction would pose “national security risks to the United States.”
It ordered a 30-day delay to Qualcomm’s next stockholder meeting: but Trump has now jumped in to put an end to the merger, with an executive order.
"Trump essentially got ahead of the situation, and he unilaterally blocked this case," said Christopher Balding, an economist at Peking University HSBC Business School.
So why is this China’s fault?
In a letter on March 5, CFIUS explained why the transaction had prompted national security concerns.
The US government described Qualcomm as a leader in the development of 5G technology and a well-known and trusted company. According to CFIUS, its success is driven by “unmatched expertise and research and development expenditure.”
The CFIS letter stated fears that the buyout would lead to Broadcom pursuing short-term profits at the expense of long-term research and development. which would “leave an opening for China to expand its influence on the 5G standard-setting process… A shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.”
5G networks are the next frontier of mobile communication, leading some analysts to believe that the Trump administration’s decision to block is economic as much as political.
“Mobile communication is a key future economic industry sector, which they see as essential to the growth of the US economy,” says Jake Saunders, vice president of ABI Research’s Asia-Pacific division. “I would say the primary concern is more about the long-term economic strategy interests.”
The letter specifically names Chinese company Huawei as a potential threat, even though it is not involved in the acquisition. The smartphone manufacturer has been investing heavily in the development of 5G networks.
Is this just a protectionist gesture from Trump?
In January, the US governement stopped the Alibaba-owned Ant Financial from a $1.2 billion acquisition of MoneyGram International (the Alibaba group also owns Inkstone). AT&T was also urged to cut ties with Huawei.
But analysts say the aborted merger of Broadcom and Qualcomm is primarily driven by protectionist sentiments within the US government, not Trump alone.
“It is important to know that this is not uniquely a Trump issue,” says Balding. “The Obama administration had actually become very concerned about China taking over various US tech companies. They even released a white paper about this issue. It’s not a shift in policies and strategic concerns.
“There’s been a number of high-profile blockages of Chinese investments recently. Beijing has made it very clear that it wants to buy high-grade technology. If you look at the investments being blocked, they have been almost exclusively in high-value, high-technology sectors. I don’t think you can apply this more broadly to China investing in the US.”
It’s not like there’s a total ban on Chinese investment in tech. In January, the Beijing-based Naura Microelectronics Equipment was given the green light to buy US semiconductor manufacturing equipment maker Akrion Systems.
Still, more bad news might be on the way. The Trump administration is reportedly considering introducing tougher trade measures against China, including tariffs and investment restrictions.