Broadcom Trips Up in a Political Minefield on Qualcomm
Broadcom Trips Up in a Political Minefield on Qualcomm
(Bloomberg Gadfly) -- When the U.S. government waves the flag of patriotism and national interest, Broadcom Ltd. tries to wave it even harder.
The company that wants to buy computer-chip maker Qualcomm Inc. got a dose of unwanted news earlier this week. The committee that reviews foreign corporations' acquisitions of American companies wrote an extraordinary letter to Broadcom that said, essentially, that the U.S. government is not inclined to look kindly on a combination of Singapore-based Broadcom and Qualcomm.
Reading between the lines of the Committee on Foreign Investment in the U.S., at least some U.S. government officials are worried about the potential for China -- and particularly China's telecom equipment powerhouse Huawei -- to dictate the next generation of mobile internet technology, known as 5G. And the committee is concerned that Broadcom and its cost-cutting reputation won't be a good steward of great American hope Qualcomm, which is expected to play a critical role in the development of 5G and has strong ties to the U.S. government.
The merits of CFIUS's argument are debatable, but it's clear that Broadcom has walked into a political minefield in which the U.S. government's fear of China dominating technology standards is working against it. The company's rebuttal to CFIUS takes all those complicated political ingredients and turns them into clumsy Broadcom Jell-O.
Broadcom pledged in a statement released on Wednesday to "make the U.S. a global leader in 5G," but it was vague about how it would go about it. The company said it would maintain the research-and-development resources that Qualcomm has devoted to 5G and "focus" the investment to technologies that "are essential to the U.S." Again, there are few specifics. That fits with Broadcom's inflexibility and vagueness in other aspects of its Qualcomm deal talks, including the uncertainty of antitrust scrutiny.
Broadcom tried to tackle one of the committee's main points by saying the company has a "proven track record of managing R&D for maximum impact." But that's a euphemism for reduced spending, and CFIUS is worried that Broadcom's playbook of slashing spending at companies it acquires would weaken Qualcomm's ability to be on the vanguard of 5G technology. Broadcom most likely couldn't address this point more aggressively because the company is stretching its financial limits in the attempted $100 billion acquisition of Qualcomm and knows it must cut costs to make the deal work.
Broadcom in its letter also pledged to create a $1.5 billion fund to train engineers that would hone America's edge in wireless technology. This has all the hallmarks of companies' typical pledges when they're trying to score political points and perhaps have no plans to follow through.
IBM, also with political goals in mind, announced in late 2016 a $1 billion fund to train American workers in technology areas. If all these announcements come through, America will have the best and most expensive workforce in the world. But they won't. At least Broadcom didn't mention the mysterious $20 billion that President Trump said the company's incorporation in the U.S. would somehow deliver to American cities and workers.
Broadcom also waved its U.S. flag vigorously by saying it's part of the lineage of iconic American technology companies that also includes Hewlett-Packard ... and Brocade (acquired by Broadcom)? Yes, I'm sure every child in Silicon Valley knows the founding history of Broadcom and Brocade. Allow me to suggest substitutions for actually iconic American technology companies: IBM, Apple, Microsoft, Intel, Oracle, Google and Facebook.
Maybe Broadcom thinks it can afford to be inept in its dealings with CFIUS because the committee won't matter. In the worst kind of political theater, Broadcom said last year that it planned to shift its official home country from Singapore to the U.S. That pending shift has the advantage of possibly removing CFIUS from the picture because Broadcom won't be a "foreign" acquirer anymore.
Broadcom reiterated in its statement on Wednesday that it expects that home country swap to be completed no later than May 6. A Qualcomm shareholder election that is a proxy vote on the Broadcom takeover was delayed until early April because of CFIUS's interest. It's possible Broadcom can string this all this along and hope the apparent antipathy of Qualcomm stockholders toward company management and the board can carry Broadcom to acquisition victory.
Whether this acquisition happens or not, both Qualcomm and Broadcom have been damaged. For Qualcomm, the takeover tussle fueled shareholders who were worried and angry about the company's fights with customers and regulators. Broadcom's acquisition play has exposed the limits of the company's acquire-at-all-costs blueprint and showed the company's tendency to be ham-handed politically when it needs to be adroit.
-- with assistance from Gadfly's Brooke Sutherland
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.
To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.
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