Broadcom Says It's Victim of Fraudulent Memo on CA Deal Risk

(Bloomberg) -- Broadcom Inc., which is closing in on a purchase of CA Technologies Inc., said it is the victim of a fraudulent effort to raise national security concerns about the deal.

The company said a memo has been circulating among U.S. lawmakers that purports to be a Defense Department assessment, prepared for a U.S. national security panel, outlining the need for a review of the deal. The company said it was told by Defense Department officials that the memo is a forgery.

The Defense Department, in a statement, said: "Our initial assessment is that this is likely a fraudulent document."

It’s unclear whether parties may have been trying to derail the deal or plant the memo in an effort to profit from share price moves. A memo matching the one described by Broadcom was supplied anonymously to Bloomberg News earlier this week.

Broadcom and the Defense Department issued their statements about the memo hours after Senator Rand Paul of Kentucky cited concerns about the tie-up. Paul asked whether the deal would undergo a national security review, saying he would request one later in a letter.

Broadcom shares, which had dropped more than 4 percent after the report of Paul’s comments, pared losses after the company’s statement about the memo. The stock fell 2.8 percent to $237.81 at 1:59 p.m. in New York. CA shares declined 2.2 percent after earlier sliding as much as 5 percent.

Security Review

Broadcom is aiming to close its $19 billion acquisition of software maker CA by the end of the year, the latest in a string of mergers that has transformed the company into one of the world’s largest chipmakers. By adding CA, Broadcom would gain a large business in network software used in the energy, financial and defense spheres, among others.

But the company is also coming off a stinging loss. In March, President Donald Trump blocked Broadcom’s hostile $117 billion bid to buy Qualcomm Inc., citing risks to U.S. national security and the nation’s development of next-generation wireless technology.

That decision followed a security review by the Committee on Foreign Investment in the U.S., known as CFIUS, which includes representatives from the Treasury, Defense, State and Homeland Security departments. CFIUS does its work in secret and doesn’t comment on its decisions, even after the fact.

Headquarters Moved

Following Trump’s rejection, Broadcom moved its headquarters from Singapore to the U.S. Some national security proponents saw the change in domicile as an effort to work around the review process.

That, essentially, is the view taken in the disputed memo provided anonymously by Bloomberg. Attributed to an arm of the U.S. Defense Department, it makes the case that Broadcom’s latest proposed union should be also be reviewed by CFIUS. Elements of the memo are verifiable facts: It points to CA’s use by the financial and energy sectors and the U.S. government. It argues that while Broadcom has moved its domicile to the U.S., its main manufacturing and sales remain in China.

According to Bloomberg data, China accounts for 54% of Broadcom’s revenue, while the U.S. accounts for about 7%, and has several manufacturing facilities in China. As for CA, many of the largest companies in the world, “including most of the Fortune 500 and many government agencies,” use its software to help manage and secure their hybrid cloud environments, according to its filings. It has multi-year contracts with U.S. federal, state and local governments, CA said in the filings.

‘Clear Path’

Senator Paul, speaking early Wednesday at a Senate Homeland Security Committee hearing, said that just because the company had been redomiciled doesn’t mean the deal shouldn’t be reviewed.

“Now Broadcom is about to complete the acquisition of CA Technologies, whose network systems are deeply embedded in many of our critical infrastructure facilities and national security agencies,” Paul said, addressing Homeland Security Secretary Kirstjen Nielsen. “For example, 60 percent of U.S. electric customers are serviced by companies using CA systems. Similarly their systems are used in 29 US nuclear reactors."

Paul asked if a CFIUS review was under way. Nielsen said she couldn’t answer in a public forum.

"Broadcom and CA Technologies are both American companies, and there is no basis in fact or law for CFIUS review of our pending transaction," Broadcom said in its statement. "We have a clear path to completing the transaction in the fourth calendar quarter of 2018."

Following the announcement by Broadcom, a representative from Paul’s office said no one there "has seen a memo” and that the office was basing its assessment solely on “the obvious national security implications of this merger."

"Broadcom had national security issues in a CFIUS review just earlier this year and this review should be undertaken immediately,” the spokesman for Paul said.

The Kentucky senator’s comments also come on a day when U.S. Treasury officials issued new rules requiring foreign investors in certain deals involving U.S. technology to undergo national security reviews.

Senate Intelligence Committee top Democrat Mark Warner of Virginia had no comment through a spokeswoman.

--With assistance from Tony Capaccio.

To contact the reporters on this story: Neil Weinberg in New York at nweinberg2@bloomberg.net;David McLaughlin in Washington at dmclaughlin9@bloomberg.net;Erik Wasson in Washington at ewasson@bloomberg.net

To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net, ;Jeffrey D Grocott at jgrocott2@bloomberg.net, Jillian Ward

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