Today, Qualcomm’s shareholders were supposed to vote on Broadcom’s hostile bid to take over the company. But yesterday, Qualcomm delayed the vote for at least 30 days following an order by the Committee on Foreign Investment in the United States, which indicated that it needed more time to review the proposed deal.
Qualcomm has repeatedly rebuffed Broadcom’s $117 billion bid for undervaluing the company. But CFIUS, a shadowy unit inside the Department of the Treasury, reviews the national security risks of deals that would send American businesses into foreign hands. The agency's decisions are usually enough to dissolve deals.
The proposed deal falls under the agency’s authority because Broadcom is based in Singapore – at least until the company redomiciles to the United States later in the year. Hock Tan, Broadcom’s chief executive, announced in the Oval Office last year that the company would relocate. But it has not been officially approved yet.
What national security risks could the Department of the Treasury have with the proposed deal? On Tuesday, Qualcomm disclosed in a financial filing a letter from Aimen Mir, the department’s deputy assistant secretary of investment security, explaining why the deal had raised national security concerns.
The letter calls attention to Broadcom’s history of cutting the research and development funding of companies after it acquires them. Qualcomm invests billions of dollars into wireless technology, and Broadcom's cost cutting approach could erode U.S. competitiveness in the next generation of 5G. We have reproduced the relevant section of the letter below:
Qualcomm has become well-known to, and trusted by, the U.S. government. Having a well-known and trusted company hold the dominant role that Qualcomm does in the U.S. telecommunications infrastructure provides significant confidence in the integrity of such infrastructure as it relates to national security.
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. Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology. For example, Huawei has increased its R&D expenditures and owns about 10 percent of 5G essential patents. While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover. 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.
CFIUS, during the investigation period, will continue to assess the likelihood that acquisition of Qualcomm by Broadcom could result in a weakening of Qualcomm’s position in maintaining its long-term technological competitiveness. Specifically, Broadcom’s states indicate that it is looking to take a “private-equity”-style direction if it acquires Qualcomm, which means reducing long-term investment, such as R&D, and focusing on short term profitability. Broadcom has lined up $106 billion of debt financing to support the Qualcomm acquisition, which would be the largest corporate acquisition loan on record. This debt load could increase pressure for short-term profitability, potentially to the detriment of longer term investments. The volume of recent acquisitions by Broadcom has increased the company’s profits and market capitalization, but these acquisitions have been followed by reductions in R&D investment. According to press reports, in the last dozen years, Broadcom has spent six times as much on acquisition as on R&D, and former employees allege that it underinvests in long-term product development.
Qualcomm’s current business model is based upon licensing of patented Qualcomm technologies; Qualcomm believes that Broadcom will change that licensing methodology. Broadcom’s CEO Hock Tan recently criticized Qualcomm’s licensing structure, saying he would reset the business model, which he called “broken.” However, Mr. Tan did not elaborate on how he would change the existing model, which currently relies on the licensing business to fund the company’s large R&D expenditures. Changes to Qualcomm’s business model would likely negatively impact the core R&D expenditures of national security concern.
CFIUS, during the investigation period, will continue to assess the likelihood that acquisition of Qualcomm by Broadcom could result in a weakening of Qualcomm’s technological leadership in a manner that is detrimental to U.S. national security.
The entire letter can be read here.