News > Capital Markets

3 Key Takeaways From Trump's 'Extraordinary' Block of Broadcom's Takeover Bid

By NexChange
Capital Markets

President Trump blocked Broadcom’s takeover bid for rival chipmaker Qualcomm on Tuesday, tossing aside the Republican free-market orthodoxy and citing “national security” concerns that necessitated government intervention.

In his presidential order, Trump said that there was “credible evidence” that Broadcom “might take action that threatens to impair the national security of the United States.” The takeover bid would have been the largest technology deal in history.

Here are three key takeaways from coverage of Trump’s order, which John P. Kabealo, an attorney who specializes in foreign investment deals, told the New York Times was an “extraordinary” action that “aligns with the administration’s willingness to be more active in trade and implementing protectionist policies.”
The race for 5G wireless supremacy was at stake

To be sure, while Trump has an (arguably) well-earned reputation for listening only to himself and making seemingly unilateral actions that catch even his aides off guard, this is not one of those action. As TechCrunch reports, Qualcomm and China-based Huawei are the only “two companies in the world have the technological prowess today” in the emerging ultrafast 5G wireless market.

And because Broadcom “has a reputation — whether earned or not — of playing a classic private equity game of massively cutting R&D to boost short-term profits,” the concern from the White House is 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.”

It ‘could shake tech to its core’

Trump’s order may on the surface be about national security, but there’s little doubt that his protectionist, “America First” platform was part of the equation in blocking this deal, especially coming so soon after imposing steep tariffs on aluminum and steel imports. But by sending a message to China – the second largest economy in the world and the second most important tech market behind the U.S. – Trump is creating broad challenges for the American tech market as a whole, according to TechCrunch.

“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,” writes TechCrunch‘s Katie Roof and Ingrid Lunden. “In short, today’s decision is the pen stroke heard around the world.”

Be careful what you wish for

While Trump saved Qualcomm from Broadcom’s takeover bid, the U.S. chipmaker still faces significant challenges. The Wall Street Journal‘s Dan Gallagher notes that despite having a 20% smaller annual revenue base, Broadcom’s market value is 16% higher than Qualcomm’s. Roughly 96% of analysts rate Broadcomm a buy, compared to 44% for Qualcomm. And then there’s the fierce legal battle Qualcomm is currently engaged in with Apple, after the latter sued the chipmaker in January, accusing Qualcomm of “onerous, unreasonable and costly” patent terms.

The problem for Qualcomm is that it may still need to eventually need find a partner to merge with, but that road just got trickier to navigate, per Gallagher.

Mr. Trump’s intervention may have thus saved Qualcomm from getting picked off in a time of weakness. But it may also limit options for the future, as the order appears to make it harder for any company to buy or merge with Qualcomm.

That means Qualcomm is on its own, and it will need to make a credible case to investors why it’s better to stay that way. Closing its pending acquisition of chipmaker NXP is vital, as well as eventually reaching a settlement with Apple and Huawei – which is also withholding licensing payments.

Photo: Qualcomm

Subscribe to our Newsletter

Be one of the first to experience the future of financial services