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Ten days ago, the US may have turned a corner on national policy for foreign direct investment (FDI) juxtaposed against national security considerations. The US government, under the auspices of the Committee on Foreign Investment in the United States (CFIUS), stepped in to block a proposed $117 billion takeover of Qualcomm by former US (and now Singapore-based) firm Broadcom. My AEI colleague Derek Scissors, with characteristic bluff honesty, stated flatly that Qualcomm should be considered a US “national champion” with attendant special protection.
Others — including many in Congress — argue that China would have ultimately benefited greatly from the acquisition and the potential decline of Qualcomm’s technological prowess. Indeed, the specter of China, and more specifically the Chinese telecom giant, Huawei, looms menacingly (and distractingly) over the entire episode and the ongoing debate about future US FDI policy. What follows, in this and a later blog, are my observations after a week of absorbing the facts and polemics. This is a tale that demonstrates the complexity and uncertain outcomes when the Washington influence-peddling “swamp” is entwined inextricably with assertions of national security.
The corporate and competitive situation
Briefly, chipmaker Broadcom was founded in the early 90s, and for the next two decades adopted a business model built around multiple acquisitions and rigid economizing to produce high profits. In 2016, Malaysian-born US citizen Hock Tan acquired Broadcom for $37 billion through a leveraged buyout. He then merged it with his own Singapore-based company, Avago Technologies Ltd., but kept the original name Broadcom. Tan had built Avago from a small $3.5 billion chipmaker to a formidable $107 billion operation. The combined Avago/Broadcom company benefits from market-leading products with little competition in its two biggest customer groups, handset makers and data center operators. Tan has emphasized profits and cost discipline over long-range research and development.
Qualcomm has both a different history and a different business model. Founded in the mid-1980s as an aerospace contractor, the San Diego–based company became a dominant force in wireless radio technology. Qualcomm is actually two businesses within one corporate framework. It has been most well-known for its advanced communications chips such as those that power smartphones. Chips provide a steady revenue stream, but the second prong of its business, licensing patents to smartphone makers, brings in greater profits from royalties that are based on a percentage of the wholesale prices of the phones.
Qualcomm is also the leading innovator in 5G, the next generation of wireless technology (as it has been previously in the rollout of 3G and 4G technology). 5G networks will offer data speeds of up to 100 times the speed of 4G and underpin the infrastructure for a wide range of new industries and services. Qualcomm dominated the standard setting process in 3G and 4G and now has a leading position in obtaining the patents that will form the basis for standards for 5G — followed by Huawei (strongly), Nokia, and Ericsson. It is Qualcomm’s central role in 5G development — and any corporate moves that could jeopardize that position — that attracted the attention and deep concern of the Trump administration when Broadcom made its takeover attempt.
Qualcomm remains a strong company, but it has encountered competitive and regulatory headwinds in recent years. A number of its leading customers — most particularly Apple — have mounted determined campaigns against what they allege to be an “extortionate” formula Qualcomm uses for pricing its licenses. A New York Times columnist argues that the battle has “profound implications not only for Qualcomm’s business model and Apple’s profit margins but for the future of wireless communications.” At the moment both sides are dug in, deeply committed to their positions, and lawsuits are proceeding apace. Qualcomm has also fought with other customers and is the subject of fines in South Korea, Europe, and China — and in the US by the Federal Trade Commission.
Qualcomm’s stock has dropped from above $80 in 2014 to $44 in 2016, though it has recovered to about $60 at present. Well before the Broadcom takeover bid, there had emerged agitation from key stockholders to split the company and reap benefits from the large patent licensing operations.
The point of the above recounting of the wireless corporate structure is to underscore that whatever the merits of the national security intervention, the US government has injected itself into a complex strategic sector with uncertain technological and competitive trajectories.
In the months and weeks leading up to the CFIUS veto, both sides played the Washington influence game with gusto. Famously, Tan met with President Trump at the White House and promised he would move Broadcom from Singapore back to the US. The president in turn called Broadcom one of the “really great, great companies.”
Later, when asked how he was so confident that the Qualcomm deal would go through, Tan would whip out his cell phone and show a photo of himself with the president. In any case, 24 hours after the White House meeting, word went out that Broadcom was moving to take over Qualcomm. However, showing some naivete regarding Washington inside tactics, Tan mistakenly did not spend further resources currying favor with Congress or in the court of public opinion. And of more fatal importance, he did not move to expedite Broadcom’s legal status as a US-based corporation.
Meanwhile, Qualcomm’s initial prospects for keeping the company independent seemed bleak. It was coming off a tough year of conflicts with competition regulators and key customers, accompanied by a stock decline of some 20 percent. Further, when Tan finally did take matters into his own hands and move to propose a new slate of directors in a vote by Qualcomm’s stockholders, all indications were that these new directors would win overwhelming approval.
In the face of this adversity, Qualcomm did attempt to rally support in Congress. Numerous senators and congressmen spoke out and wrote letters to the administration, raising alarm over the national security implications of the takeover and the danger that China would be the ultimate beneficiary.
But in what became a decisive move, Qualcomm turned to Covington & Burling, a storied Washington insider law firm. The firm suggested that Qualcomm go for a long-shot maneuver: attempt to persuade CFIUS to intervene. At a minimum, it was argued, this would delay final consummation of the merger for weeks, maybe months.
As it turned out, the January 29 legal appeal paved the way for scuttling the whole merger. The implications of the unprecedented CFIUS intervention and the emergence of a new “national champion” will be analyzed in a succeeding blog.
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