Why Broadcom’s Hostile Takeover of Qualcomm Is a Matter of National Security

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On Monday, a little known federal body, the Committee on Foreign Investment in the United States (CFIUS), ordered Qualcomm Inc. (NASDAQ: QCOM) to delay its annual shareholders’ meeting that was scheduled to begin today, Tuesday. This morning, CFIUS released the letter it sent to representatives of Qualcomm and Broadcom Ltd. (NASDAQ: AVGO) ordering the delay.

Broadcom had proposed a slate of 6 directors for Qualcomm’s 11-member board in order to improve its chances of gaining Qualcomm approval for a hostile takeover valued at some $117 billion in Broadcom cash and stock.

CFIUS, which is chaired by the U.S. Treasury Secretary and includes representatives for the U.S. Departments of Justice, Defense, Homeland Security, Energy and State, reviews the sale of assets to foreign buyers on the basis of national security implications. Normally the committee only pokes its nose into the sale once a deal is struck. In this case, CFIUS ruled on a “unilateral notice” from Qualcomm seeking the review of Broadcom’s proxy solicitation.

In the CFIUS letter, Deputy Assistant Secretary of the Treasury, Aimen N. Mir, wrote:

CFIUS has identified potential national security concerns that warrant a full investigation of the proposed transaction. Articulation of the potential national security concerns, in significant part, is classified. To the extent that some of the potential national security concerns can be described in an unclassified manner, CFIUS notes that they relate to the risks associated with Broadcom’s relationships with third party foreign entities and the national security effects of Broadcom’s business intentions with respect to Qualcomm.

There is no hint to the identity of the “third party foreign entities.”

CFIUS also noted Qualcomm’s leadership and standard setting in the industry and its position as “well-known to, and trusted by, the U.S. government.” The letter continues:

Reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national 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.

CFIUS cited a Broadcom statement that the company would adopt a private equity management style with Qualcomm. The committee infers that to mean “reducing long-term investment [in Qualcomm] and focusing on short term profitability.”

The full text of the letter is available here.