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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 13, 2018).

White House says proposed takeover of Qualcomm would pose security threat

By Kate O'Keeffe 

President Donald Trump on Monday blocked Broadcom Ltd.'s $117 billion hostile bid for Qualcomm Inc., capping a remarkable series of moves by the Trump administration reflecting officials' concerns about an intensifying arms race between the U.S. and China over advanced technologies.

While Broadcom is a Singapore-based company, the U.S. panel that vets foreign deals said that the bid could have had implications for the U.S.'s broader technological competition with China. That panel, the Committee on Foreign Investment in the U.S., known as CFIUS, said it was worried that Broadcom would stymie research and development at Qualcomm given its reputation as a cost-cutting behemoth. CFIUS said such a move could weaken Qualcomm -- and thereby the U.S. -- against foreign rivals racing to develop next-generation wireless technology known as 5G, such as China's Huawei Technologies Co.

Broadcom, which launched its hostile bid for Qualcomm in November in what could have become the technology industry's biggest-ever deal, was working to redomicile in the U.S. to evade the panel's review. But the presidential order effectively ended its acquisition hopes.

Broadcom, which has said it would invest in Qualcomm's 5G technology if a deal went through, said late Monday it was reviewing the order. "Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns," it said in a statement.

"This decision is based on the facts and national security sensitivities related to this particular transaction only," Treasury Secretary Steven Mnuchin, who chairs CFIUS, said in a statement. He added that it "is not intended to make any other statement about Broadcom or its employees, including its thousands of hard working and highly skilled U.S. employees."

CFIUS has grown increasingly wary of any deals with potential national-security ramifications linked to China -- and of any deal makers the panel perceives to be trying to evade their review.

One of the key concerns CFIUS laid out about the Qualcomm bid was Broadcom's "relationships with third party foreign entities and the national security effects of Broadcom's business intentions with respect to Qualcomm," according to a March 5 letter that a CFIUS official wrote to the companies' lawyers that was disclosed to the Securities and Exchange Commission.

"Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States," the letter says.

CFIUS was also concerned by Broadcom's efforts to expedite its redomiciliation to the U.S. following the panel's decision March 4 to investigate its bid for Qualcomm. CFIUS had told lawyers for the companies in a letter dated Sunday that Broadcom had repeatedly violated its order to provide the panel with five days' notice before taking any action on its redomiciliation plan. CFIUS also said in the letter that its investigation of the bid "so far" confirmed the national-security risks it had previously identified with the proposed merger.

The last deal Mr. Trump blocked was Chinese government-backed Canyon Bridge Capital Partners' attempt to buy Portland, Ore.-based Lattice Semiconductor Corp.

The deal had become a lightning rod in a broader battle between the U.S. and China over chip technology and foreign direct investment more generally, and lawmakers had been watching closely. A bipartisan group of 22 House members led by Rep. Robert Pittenger (R., N.C.) -- who, along with Senate Majority Whip John Cornyn of Texas has introduced a bill to expand CFIUS's jurisdiction -- wrote to the panel in December 2016 to flag the transaction. The group expressed concern that the deal could provide China with critical technology and accused Canyon Bridge of initially trying to obscure its Chinese-government backing, both of which the fund denied.

Mr. Trump blocked the deal in September after CFIUS said it raised national-security concerns.

CFIUS's decision to review Broadcom's proposed bid came just days before Qualcomm shareholders were set to vote on whether to replace six of the company's 11 directors with nominees put forward by Broadcom, a result that could have helped Broadcom achieve the takeover.

The move had little precedent. Some private-sector lawyers who specialize in CFIUS matters said the panel's decision to intervene in the proposed deal before it was even signed -- and its rationale for recommending against it, which included concerns over its ramifications for U.S. competition with China -- represented an abuse of the committee's powers as its reviews are focused purely on national security issues.

The CFIUS panel itself had also initially been divided over whether it had the right to commence its review before the deal was signed, with representatives from the Departments of Justice, Homeland Security, Defense and Energy urging CFIUS to begin its review of the deal before Qualcomm shareholders went to vote on the slate of directors that included Broadcom's nominees, according to people familiar with the matter.

Broadcom appeared to be laying the groundwork to get ahead of potential national-security concerns and to win favor with Mr. Trump even before it launched its bid for Qualcomm.

Broadcom Chief Executive Hock Tan stood with Mr. Trump at the White House in November to announce that Broadcom planned to redomicile in the U.S. Mr. Trump called Mr. Tan "a great, great executive" and said Broadcom was "one of the really great, great companies."

Now, Mr. Trump's order leaves Broadcom little choice but to move on. Broadcom's options are "not many, and not good," said Michael Gershberg, an attorney with Fried, Frank, Harris, Shriver & Jacobson LLP, who has experience with CFIUS cases. "There may be avenues for the companies to work together in other kinds of arrangements, but anything that looks like Broadcom controls Qualcomm, especially around the 5G business, CFIUS will be alert to."

Broadcom shares rose 3.6% Monday to $262.84, and Qualcomm fell 0.35% to $62.81.

--Cara Lombardo and Ted Greenwald contributed to this article

Write to Kate O'Keeffe at kathryn.okeeffe@wsj.com

(END) Dow Jones Newswires

March 13, 2018 02:47 ET (06:47 GMT)

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