Broadcom-Qualcomm: Early Regulatory Scrutiny Is Warranted

(Bloomberg Gadfly) -- Broadcom Ltd. may not like it, but a national security review of its bid for Qualcomm Inc. was likely necessary to guard against copycat tactics. 

The Committee on Foreign Investment in the U.S. ordered Qualcomm to postpone its annual shareholder meeting for 30 days so that it can investigate Broadcom's $100 billion takeover bid for the chipmaker. In a statement on Monday, Broadcom said Qualcomm "secretly" filed a voluntary request with CFIUS in a "blatant, desperate act" to protect its board from the upcoming proxy fight.

I'm skeptical Qualcomm needed to request an official CFIUS review for seeds of doubt to be planted in shareholders' minds about an eventual deal's odds of regulatory approval. Multiple reports last week revealed that some members of CFIUS, which is charged with reviewing foreign takeovers for national security risks, felt obligated to intervene ahead of the shareholder vote. They're worried Broadcom, a known cost-cutter, will hobble Qualcomm's ability to compete in the race for 5G technology. Meanwhile, Broadcom has been dismissive and inflexible on meaningful antitrust issues and has declined to enhance a $8 billion breakup fee that, large as it is, isn't high enough for a deal of this magnitude. 

CFIUS has been especially critical of semiconductor deals lately. It killed Canyon Bridge Capital Partners' purchase of Lattice Semiconductor Corp. and helped drag out the closing of Broadcom's $5.9 billion takeover of Brocade Communications Systems Inc. for about a year. The latter, of course, closed a conspicuous two weeks after Broadcom CEO Hock Tan held a press conference with President Donald Trump to announce the company's plan to move its incorporation from Singapore to America. U.S. companies, you see, aren't subjected to a CFIUS review.

If there were any doubts about Broadcom's motives, the company's recent statements put those to rest. "Upon completion of the redomiciliation, Broadcom's proposed acquisition of Qualcomm will not be a CFIUS-covered transaction," Broadcom said on Monday. Ok then. Whether or not you believe in the mythical $20 billion in revenue President Trump thinks Broadcom will bring into the U.S., regulators risked setting a dangerous precedent by looking the other way. 

In a letter to Treasury Secretary Steve Mnuchin, U.S. Senator John Cornyn suggests the absence of a review could encourage other foreign suitors to pursue proxy fights as a way to take effective control of a U.S. company without having to go through all the CFIUS rigmarole a standard takeover would entail. I've also wondered whether foreign buyers might take it one step further and mimic Broadcom's plan to reincorporate in the U.S. as a way to avoid a CFIUS review.

According to tax expert Bob Willens, moving your incorporation to the U.S. is a relatively easy process and involves no tax penalties for shareholders. You don't necessarily have to do a lot of business here, nor do you need to do much to hide your true intentions, as we know from Broadcom.

If Broadcom can pull off a takeover of Qualcomm -- by far the biggest technology deal ever attempted -- it's not hard to imagine a Chinese company getting inspired to also move to America and avoid the CFIUS reviews that have thwarted so many of its compatriots. That would give President Trump something to tout on Twitter, but I am skeptical as to how much a company's allegiances and business plan are ultimately swayed by the location of its legal mailbox.

Let's not forget that when Broadcom was created through the merger of Avago Technologies Ltd. and Broadcom Corp. in 2016, executives went to a lot of trouble to base the surviving entity in Singapore. The deal was technically an inversion, Willens said. Just a few years later, with certain tax breaks from Singapore now set to expire earlier than expected in 2021, Broadcom is willing to jump ship.

Whatever CFIUS's ultimate stance on a Qualcomm takeover, Broadcom's maneuvers deserve a close look.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

1. This is a founded concern given Broadcom's allusions to a wind-down of Qualcomm's licensing business and the significant amount of cost cuts and divestitures CEO Hock Tan will have to make to preserve Broadcom's credit rating under its current $79-a-share proposal.

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.

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