The Broadcom-Qualcomm deal and Trump’s decision to block it, explained

President Donald Trump on Monday evening intervened to quash an attempt from Broadcom, an Asian chipmaker, to take over Qualcomm, its American competitor, on the grounds that it would threaten US national security. Trump’s move was unprecedented, given that the companies hadn’t agreed to a deal yet. Broadcom is trying to reincorporate as an American company, but Trump appears to be effectively taking Qualcomm off the market, even if Broadcom does come to the US.

It’s a big deal. This is the second time Trump has blocked a major international merger on national security concerns — and only the fifth time a US president has done so ever. It demonstrates that he and the authorities that oversee international deals are becoming increasingly aggressive, especially when it comes to the tech space and China, and highlights fears over the race to develop 5G networks.

The takeover saga that began in November when Broadcom began aggressively pursuing a takeover of Qualcomm. Because Broadcom is incorporated in Singapore, the potential deal was subject to the scrutiny of a Treasury Department panel, the Committee on Foreign Investment in the US (CFIUS), which vets foreign deals.

Now Trump appears to have taken the deal off the table altogether. In a statement announcing the decision, he said there is “credible evidence” that Broadcom’s potential Qualcomm takeover “threatens to impair the national security of the United States.”

“This is a pretty big deal,” Brian Fleming, an attorney at Miller & Chevalier who worked in the Justice Department’s national security division, told me. “To have it unfold the way it did so rapidly, the mechanics of it are unprecedented, the timing of it is unprecedented.”

It is only the fifth time in three decades — but the second time in a year — that a president has ended a foreign takeover of an American firm on national security concerns. (Trump in September blocked another semiconductor deal between Lattice Semiconductor and Chinese-backed Canyon Bridge Capital Partners.)

The language in Trump’s statement indicates that he’s signaling to Broadcom the deal is a no-go even if Broadcom becomes a US-based company, which it has said it plans to do. “What the president has done here, and it’s really bizarre, is say they can’t do anything to circumvent this prohibition of acquiring Qualcomm,” said Clif Burns, an attorney at Bryan Cave.

The Broadcom-Qualcomm mashup has been testy from the get-go

Qualcomm is a San Diego-based company that makes the chips that go in smartphones and is considered a leading American voice in developing 5G technology. It is most widely known for cellular connectivity, but it’s also involved in other areas, such as artificial intelligence.

In November, Broadcom made an unsolicited offer to buy Qualcomm for $103 billion. If approved, it would have been the largest tech acquisition ever. Broadcom initially approached Qualcomm privately about the offer but was rebuffed, and even when the proposal went public, Qualcomm wasn’t having it.

So in December, Broadcom announced it would try to nominate 11 people to Qualcomm’s board of directors before a shareholder election, presumably an attempt to stack the board with people sympathetic to its takeover objective. (It eventually sought the election of six.) Qualcomm requested the federal government review Broadcom’s bid, and in March, the CFIUS Treasury panel ordered Qualcomm to delay its shareholder meeting for 30 days.

There was some debate over whether it could even do that — according to the Wall Street Journal, Treasury Secretary Steven Mnuchin told colleagues he wasn’t sure the panel had jurisdiction since the deal hadn’t already happened. But the panel went ahead anyway, likely emboldened by the fact that Broadcom was accelerating plans to reincorporate in the United States and said it would do so by April, which would have tied the government’s hands in shutting down the deal as a national security threat under CFIUS.

“With the vote coming up, there was the expectation that that would essentially be something that couldn’t be undone, and it would be too late,” Fleming said.

The committee was responsive to Qualcomm’s concerns. In a March 5 letter, CFIUS said it had identified concerns that warranted a full investigation, including whether Broadcom would focus the company on short-term profitability and therefore stymie long-term research and development. It also cited the risk of Broadcom’s relationship with “third party foreign entities,” a nod to 5G technology developments out of China.

Trump apparently bought into the case against the tie-up — and went ahead and blocked it, giving Broadcom little space for recourse.

The president’s statement signals to Broadcom, which has said it is reviewing the order, that any attempt to acquire Qualcomm even if it incorporates in the US, is a no-go, said Burns.

Is the merger really a national security threat?

At the heart of the matter is whether a Broadcom-Qualcomm merger might pose a national security threat to the United States. The backdrop here is the race between the United States and China to build the next generation of wireless networks, known as 5G, which will offer faster speeds and greater capacity than previous generations to accommodate new technologies — such as self-driving cars, virtual reality, and the Internet of Things.

Broadcom would be taking on a lot of debt to finance the merger, and Qualcomm argues that will lead to a focus on profitability rather than the long-term research and development necessary to build these networks.

And if Qualcomm pulls back, the company is arguing, China, which is investing heavily in 5G, could benefit. “The case that has been constructed is that, given Broadcom’s business practices, the worry is that they will cut investment significantly, particularly in the 5G roadmap, weaken Qualcomm, as well as the U.S. position and allow Huawei, a Chinese company to take the lead,” Stacy Rasgon, an analyst at the research firm Bernstein, told CNBC.

Concerns about threats from Chinese investment in US companies posing a national security threat, specifically in technology and, even more specifically, the semiconductor industry, are nothing new. President Barack Obama blocked a Chinese company from buying the German technology company Aixtron’s US assets in 2016, and the Lattice deal Trump blocked last year is in the semiconductor arena.

The Trump administration has taken a keen interest in 5G technology. National security officials in January were reportedly weighing a plan to nationalize the United States’ next-generation 5G wireless network in an effort to stave off competition from China.

Broadcom said it wouldn’t leave 5G research and development efforts by the wayside and would maintain Qualcomm’s efforts. It also pledged to create a new $1.5 billion fund to train and educate the next generation of engineers in the US. The government also could have made Broadcom commit to not interfering with Qualcomm’s development of 5G technology if it approved the deal.

Trump’s block underscores the lengths he’s willing to go to in his protectionist instincts

That Broadcom would be blocked from buying Qualcomm isn’t necessarily a surprise in itself. But the way it happened is.

Most deals don’t wind up getting to the president’s desk in the first place. Parties in cross-border deals generally submit them to the Treasury committee for review when they happen, and the panel can either okay them, require specific remedies, or block them. In September, the foreign investment panel withheld approval for Chinese investors to buy a stake in the digital map provider HERE Technologies, and in January, it blocked a plan from the Chinese company Ant Financials to acquire the US money transfer company MoneyGram.

But it’s unusual for the panel to start an investigation before there’s even any firm transaction, and the investigation was conducted and wrapped up uniquely fast. The Committee on Foreign Investment in the US generally does not disclose the information it’s provided or ever acknowledge a matter is under review.

Under Trump, the panel seems to be picking up the pace — and be more open to high-profile fights. At least according to public information, the number of Chinese-related transactions that have been scuttled one or way seems to be increasing.

John Kabealo, an attorney who specializes in foreign investment matters, told the New York Times it was “extraordinary” that Trump would intervene the way he did. “It certainly aligns with the administration’s willingness to be more active in trade and implementing protectionist policies,” he said. “It is definitely a much more activist policy than the previous administration.”

Broadcom also apparently tried to win Trump over — to no avail. In November, Broadcom CEO Hock Tan announced the company’s plans to move its headquarters to the United States from Singapore at the White House. Trump tweeted about it. But he’s still not letting the company buy Qualcomm, whether it comes back to the US or not.