Saturday, March 10, 2018

Qualcomm's Cavalry

I’ve been consumed by the latest twist in Broadcom’s attempt at a hostile takeover of Qualcomm: the dramatic entrance of CFIUS.

For those who haven’t been following the saga, Broadcom, a Singaporean technology company, has been attempting to acquire San Diego-based Qualcomm for months.  After its attempts at a friendly merger were rebuffed, it launched a proxy contest, proposing its own nominees to replace Qualcomm’s existing directors. 

Qualcomm responded with what is apparently becoming de rigueur in contested proxy solicitations: in addition to setting up a website devoted to making its case to shareholders, it also promoted various tweets on the subject.

One intriguing aspect of Qualcomm’s argument has been that – as a leader in research and development – the merger would be bad for innovation and consumers.  This point is reiterated on its website, which fascinates me because it assumes that investors as investors would be persuaded by an argument directed toward consumer wellbeing. 

That may not have been the right tack; according to news reports, at least some large shareholders were poised to vote for Broadcom, giving Broadcom a fighting chance at a hostile takeover.

But the day before the crucial shareholder meeting, Qualcomm won a reprieve: the Committee on Foreign Investment in the United States (CFIUS) asked that the vote be delayed so that it could review whether the transaction posed a threat to national security.

CFIUS, Chaired by the Secretary of the Treasury and staffed with representatives of most major federal departments, is charged with reviewing proposed mergers and acquisitions in which a foreign entity proposes to gain control of a domestic one, to ensure that the transaction will not pose national security risks.  It can intervene on its own accord when a transaction raises red flags or – more commonly – the parties can ask for pre-acquisition review to ensure that problems will not arise later.  In this case, Qualcomm asked for the review, in an elegant example of the use of the regulatory system as a takeover defense mechanism that is sure to serve as a classroom example for decades.  (Check out the wording of CFIUS’s letter: “Qualcomm is a global leader in the development and commercialization of foundational technologies… Qualcomm led the mobile revolution in digital communications technologies…” – did Treasury write this or Qualcomm’s PR department?)

CFIUS’s eleventh-hour appearance is quite the eyebrow-raiser.  For one thing, it tests the outer boundaries of what counts as foreign control.  And that’s not just because of the technical definition of what it means to be foreign – as the New York Times points out, Broadcom’s employees and properties are mostly located in the US, and the company has plans to relocate its headquarters to US this year – but because it’s unclear that Broadcom is, at this time, seeking “control.”

As its proxy filings indicate, Broadcom’s nominees for Qualcomm’s board have no prior relationship to Broadcom and mostly appear to be American.  Broadcom is not a controlling shareholder, and its nominees will only gain board positions with the support of Qualcomm’s remaining (American) shareholders.  Though of course Broadcom expects that eventually these directors will agree to allow Broadcom to acquire Qualcomm’s stock, that is by no means certain (remember Airgas??) and Broadcom has no legal power to compel them to do so.  It is therefore a stretch to categorize the proxy fight itself as a “merger, acquisition, or takeover that is proposed or pending … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States,” which is the only matter over which CFIUS has jurisdiction.  Indeed, this precise point apparently troubled Sec. Mnuchin.

The other stunner is the national security risk that CFIUS identifies, namely, the fact that Broadcom’s investment strategy involves cutting R&D spending, which might hobble Qualcomm’s efforts to develop 5G technology.  As CFIUS itself concedes, this is the investment strategy of many – American – private equity firms, and is unrelated to Broadcom’s (nominally) foreign status; it is simply the fact that Broadcom happens to be foreign that gives CFIUS jurisdiction to insert itself into the dispute.  Steven Davidoff Solomon calls this an example of “realpolitik,” namely, an acknowledgement that China – our main competitor in the 5G space – has a government policy of assisting private development of technology.

Broadcom has responded to all of this with pledges to continue spending on R&D and even to sponsor a new initiative dedicated to training American engineers, but my bottom line reaction is that if the US is so concerned about keeping American tech companies competitive, it might reconsider all those new immigration policies that are scaring talent away to other countries.

Edit: Jinx, buy me a Coke - after I typed this post up, a Qualcomm shareholder filed a lawsuit in Delaware arguing that by inviting CFIUS to review the deal using spurious arguments of foreign control, Qualcomm directors violated their fiduciary duties.  I can't say I have high hopes for the suit's chances, at least to the extent it rests on CFIUS's actions, but I did find one detail interesting: the original CFIUS order apparently required that the shareholder meeting be postponed and proxies cease being accepted or counted; CFIUS then modified the order to call for an adjournment of the meeting and to permit proxies to be solicited.  The plaintiff contends this was done at Qualcomm's urging, to permit it to continue to try to lobby shareholders to change their votes.

Ann Lipton | Permalink


Thanks for this great post, Ann. We have been posting on this in my M&A class. I am adding your post to the conversation. It makes a number of super points and adds some nuance to the existing posts.

Posted by: joanheminway | Mar 10, 2018 4:15:18 PM

Glad it was helpful! We just started talking about CFIUS this week in my M&A class, so it was great to have this case ongoing to talk about.

Posted by: Ann | Mar 10, 2018 4:17:36 PM

Great post, Ann. As I write this, Trump has just signed an executive order blocking the transaction. The drama continues . . .

Posted by: Jim Hayes | Mar 12, 2018 4:21:45 PM

Jim - I know, right? I keep giving updates to my M&A class.

Posted by: Ann | Mar 12, 2018 4:23:45 PM

Very good post Ann. Until recently I worked as a sell side analyst covering both companies, and I have been baffled by the coverage of this saga in the press. I think your post may be the only place I have seen anyone acknowledge the fact that Broadcom is by any reasonable measure an American company, that happens to (for now) be registered in Singapore to get a lower tax rate. Media coverage and the CFIUS contention that this deal would somehow give China control of an American company is mystifying. Similarly, given that most knowledgeable analysts (and apparently QCOM shareholders given early voting) think the company has been wasting R&D dollars for years, I am rather confused to see the government decide that misappropriation of shareholder money now counts as a national security issue. All around strange and frankly surprised this hasn’t roiled markets more given it appears to be a radical and somewhat capricious shift in US M&A policy. Interested to read your continued thoughts!

Posted by: Chris | Mar 12, 2018 6:17:55 PM

Thanks, Chris! It's interesting - the government's been trying to figure out what to do about tax inversions for years ... it would certainly be ironic if it turns out CFIUS review becomes a de facto penalty.

Posted by: Ann | Mar 12, 2018 11:07:26 PM

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