This weekend, I published a comprehensive overview of the epic hundred-billion-dollar Qualcomm versus Broadcom merger battle that has taken place over the past few weeks. In that post, I concluded that “… the Trump administration is going to attempt to maintain jurisdiction over the merger regardless of Broadcom’s redomicile process [back to the US], and will likely end up negative on the deal although it may not outright block it.”
Not only did the Trump administration move faster than expected to make a decision on the merger through CFIUS — the Committee on Foreign Investment in the United States (TechCrunch’s overview of the committee here) — but it decided to unilaterally block the transaction from taking place. While not unprecedented in the history of CFIUS, this is an incredible decision on a U.S. tech merger, and has massive ramifications for tech company valuations and strategy going forward.
While there are many issues at stake in the merger, the one that drove interest in Washington has been Qualcomm’s leadership role in 5G, a technology that the Trump administration considers to be a national security priority. Only two companies in the world have the technological prowess today in this emerging standard: U.S.-based Qualcomm and China-based Huawei.
The Pentagon and national security beltway types have been deeply concerned about Huawei technology encroaching on U.S. telecom infrastructure, even going so far as to block the introduction of Huawei’s new mobile phone from being introduced on AT&T’s network.
Broadcom is Singapore-domiciled, but has the majority of its workers and office space in North America. However, it has a reputation — whether earned or not — of playing a classic private equity game of massively cutting R&D to boost short-term profits. Washington’s concern has been that a Broadcom takeover of Qualcomm would mean that America’s only player in the 5G race would be eliminated through budget cutting, leaving China to monopolize a key technology standard for a generation.
There are a lot of unique properties here: the size of the transaction, the complicated background of Qualcomm and Broadcom, the recent timing of Trump’s tariffs and other protectionist measures and the focus on telecom, which has traditionally been very sensitive in DC security circles.
That said, it is now clear that the Trump administration intends to empower CFIUS to review more technology deals, particularly when companies are potentially transacting with China and other declared strategic competitors. If such a pattern continues, we can expect to see potential declines in valuations for technology companies, which will no longer have deep-pocketed Chinese buyers as potential acquirers.
That’s not all, though. A reform measure currently in Congress would extend CFIUS’ authority to potentially include minority investments as well — such as rounds of venture capital. While that bill is not yet firmed up, it could massively chill Chinese venture investment in Silicon Valley, which has been robust and expanding over the past few years.
It’s important to note that whatever the rhetoric, this was not about jobs or the economy directly. Qualcomm was expected to stay in the United States along with most of its workers, and Broadcom has already announced its decision to redomicile back to the United States following the passage of the tax cuts at the end of 2017.
This is about security, and which country is going to hold power in the 21st century. The Trump administration has declared that its foreign policy will be “America First,” and this decision lives up to that slogan.
China is the second largest economic market in the world, and almost certainly the second most important technology market after the United States. A disruption in the flow of talent and capital between these markets — as we witnessed today — will force company CEOs to resist foreign capital and potentially accept lower valuations as a result. It will also limit the strategic opportunities for global expansion, requiring companies to adapt their strategies not just in China, but elsewhere in the world. In short, today’s decision is the pen stroke heard around the world.