Broadcom Security Probe Intensifies Trump Stand on China Deals

(Bloomberg) -- The U.S. move to suspend Broadcom Ltd.'s hostile takeover of rival Qualcomm Inc. is the most high-profile example yet of the Trump administration's national security concerns about foreign purchases of American technology firms.

Several proposed takeovers by overseas investors have fallen apart over the last year after failing to resolve the concerns. Washington has long been wary of acquisitions of sensitive technology, particularly by Chinese buyers, but scrutiny has intensified under President Donald Trump, according to lawyers who work on such deals.

Since Trump took office last year, at least half a dozen foreign acquisitions of American technology firms have been scuttled in the face of national security concerns raised by the Committee on Foreign Investment in the U.S., or CFIUS, which reviews overseas takeovers. The pile-up of deals reflects scrutiny of technology acquisitions going back to the Obama administration, which warned before it left office that China's push to develop its domestic semiconductor technology posed a risk to U.S. security.

CFIUS, led by Treasury Secretary Steven Mnuchin, has become more demanding under Trump, according to Brian Fleming, a lawyer at Miller & Chevalier Chartered in Washington, who previously worked in the Justice Department's national security division.

"The risk tolerance has been lowered significantly in the current administration," Fleming said. "Whereas it may have been the case in the previous administration that certain risks could be tolerated and perhaps addressed through mitigation those risks are not as well tolerated any more, and it is a higher bar you have to clear."

Unusual Timing

What's unique about the Qualcomm review is that the government is stepping in before there's a formal sale agreement. Qualcomm on Monday postponed a shareholder vote on Broadcom's nominees for Qualcomm's board after CFIUS ordered a delay. Broadcom is on track to win all six of the seats it's seeking, giving it a majority of the board to push ahead with its hostile $117 billion bid.

The Qualcomm inquiry comes as lawmakers in Washington are considering a bill that would toughen national security reviews of overseas deals by broadening CFIUS's authority. A top Treasury Department official told senators in January that the legislation was important for protecting national security.

On Monday, Senate Majority Whip John Cornyn told reporters that his chamber's Banking, Housing and Urban Affairs Committee may approve the bill "as early as the end of the month." He added that the Trump administration was interested in moving the legislation.

Most of the foreign deals that have come undone during Trump's term involve investors with Chinese ties. Broadcom, however, is based in Singapore and is in the process of reincorporating in the U.S. Last year, it won approval to buy Brocade Communications Systems Inc. 

Still, CFIUS has concerns about Broadcom's ties to China, Bloomberg reported last week. Broadcom earns more than half its revenue from China and its second-biggest customer is China's Huawei Technologies Co., according to data compiled by Bloomberg.

Huawei, China's largest maker of telecom equipment, was blacklisted in 2012 along with China's ZTE Corp. when the House Intelligence Committee cited security risks posed by the companies. Huawei uses Broadcom's chips in networking products such as switches that direct data traffic between connected computers. Qualcomm also sells to Huawei, according to Bloomberg.

While a CFIUS review in the middle of a takeover fight is unusual, any foreign purchase of Qualcomm would draw scrutiny from the panel because it is a key semiconductor manufacturer, said Jason Waite, an attorney at Alston & Bird in Washington.

"CFIUS is going to review any foreign acquisition of Qualcomm," Waite said. "I don't think that reflects any new political position or any new national security assessments. It's one of our major technology companies."

Qualcomm is a supplier to the Defense Department, according to data compiled by Bloomberg Government. American security officials worry that a foreign takeover of the company means the loss of a key domestic supplier and developer of semiconductor technology, said Fleming, the former Justice Department lawyer.

"The nightmare scenario is that one day down the road you wake up and the cupboard is bare here in the states, and there's nowhere for the government or for other high tech manufacturers to acquire these components domestically," he said. "So what would then happen is you're forced to open your supply chain to foreign suppliers and foreign components."

To contact the reporter on this story: David McLaughlin in Washington at dmclaughlin9@bloomberg.net.

To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net, John Harney

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