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Blocking Qualcomm deal adds uncertainty to foreign takeovers

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Blocking Qualcomm deal adds uncertainty to foreign takeovers

Advisers to cross-border deals are still picking up the pieces after chipmaker Broadcom Ltd.'s $117 billion bid to buy competitor QUALCOMM Inc. was blocked last week by President Donald Trump.

While the cited reason for stopping the deal — natural security — may have had some validity, in the greater context of an American administration spoiling for a trade war with China, it adds one more uncertainty to an already fraught situation, advisers said.

Qualcomm, desperate to block a Broadcom takeover, had gone to the Committee on Foreign Investment in the United States, or CFIUS, and asked for a national security review. But before the process could take its normal course, indeed, before there was an actual deal in place, Trump forbade it.

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Broadcom is not only domiciled in Singapore, historically friendly with Washington, but it had already announced plans to re-domicile to the U.S., where it has substantial operations, a move that normally would have meant CFIUS would not have gotten involved at all.

"What's unusual about this situation is that CFIUS intervened so early in the process," said Shawn Cooley, special counsel with international law firm Freshfields Bruckhaus Deringer, which did not directly advise on the deal. "Normally, [the review] doesn't start until a deal is negotiated and there's some kind of agreement in place."

Qualcomm had rejected the bid several times, and Broadcom was in the process of a proxy fight by nominating six directors to the target's board.

Unprecedented

What's more, CFIUS' stated rationale that Broadcom might cut research and development after it bought Qualcomm was likewise unprecedented in that the agency "took it upon itself to substitute its business judgment for that of Broadcom's," said Freshfields special counsel Christine Laciak.

According to CFIUS, the possibility that Broadcom would curtail R&D if it bought Qualcomm could mean Chinese smartphone maker Huawei Technologies Co. would get an upper hand in 5G chip development. Huawei uses Broadcom chips in its phones. But it also uses Qualcomm chips.

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"One can read that as industrial policy, as opposed to strictly national security as it's been historically understood," Cooley, who has worked on CFIUS reviews for the government, said.

Ironically, when Broadcom first revealed its interest in Qualcomm, some of the biggest objectors to the deal were Chinese phone companies, someone familiar with the CFIUS review said.

Even Treasury Secretary Steven Mnuchin, who chairs the inter-agency committee, told colleagues he did not think CFIUS had jurisdiction because the deal had not been announced, according to a report from The Wall Street Journal. When Trump forbade the deal by executive fiat, Mnuchin was left assuring Broadcom's U.S. employees that the decision was based on "national security sensitivities."

The tremor in the M&A world may be more widely felt. China outbound deals with a U.S. target jumped in total value in 2016 to $71.9 billion for 99 deals, though total deal value fell back in 2017 to $17.9 billion for 91 deals, according to data from S&P Global Market Intelligence. China outbound deals worldwide doubled in value in 2016 to $203.2 billion for 554 deals and likewise fell back to $124.3 billion for 468 deals in 2017, according to S&P data.

The pullback likely had to do with China's clampdown on outgoing investment, but CFIUS is now another risk, and a potentially unknowable one.

It is not as though the committee had been dormant before Trump took power. According to statistics published by the agency, there were 172 notices for review in 2016, a substantial increase from 143 in 2015 and 147 in 2014. Full investigations were also on the rise: 2016 saw 79, up from 66 in 2015 and 51 in 2014.

The Broadcom-Qualcomm story is a cautionary tale that, when it comes to China, everything may be on the table. Trump has already ordered up to $60 billion in tariffs on an array of goods deemed to have violated intellectual property rights, as well as myriad other trade penalties.

Nobody wants a trade war — except perhaps Trump, who has tweeted that trade wars can be a good thing.

"Maybe Trump thinks this is a bargaining position," Paul Mortimer-Lee, chief market economist at BNP Paribas said at a recent presentation. "China is vulnerable because a lot of their products can be substituted from elsewhere, which isn't so true of the U.S."

But with the potential that Trump might walk away from the World Trade Organization when the expected reactions materialize, Mortimer-Lee said, "then global trade falls apart and would probably mean a global recession."

Though the Broadcom-Qualcomm deal is seemingly dead, Broadcom is still going forward with moving its domicile to the U.S. by early next month.

And the ultimate results for Qualcomm are not entire clear. Proxy advisor ISS, which recommended in favor of Broadcom's dissident slate, has told Qualcomm shareholders that, though the deal is off, they can still vote for the dissidents, or withhold their votes at the rescheduled meeting May 23.

"By continuing to vote on the dissident card, the meeting's vote results may also better reflect shareholders' views regarding the board's handling of the proxy contest, which should inform future engagement efforts," ISS said in an alert obtained by S&P Global Market Intelligence.