Broadcom's Glorious Return to U.S. is Trumped Up
(Bloomberg Gadfly) -- Broadcom Ltd.'s glorious "return" to the U.S. is, well, trumped up.
The $106 billion chipmaker announced on Thursday that it would move its legal incorporation to the U.S. from Singapore. Broadcom already operates a corporate headquarters in California and has a number of facilities and employees around the states. The announcement -- which Broadcom CEO Hock Tan made with President Donald Trump in the Oval Office -- was timed to coincide with the reveal of a tax bill House Republicans say will help boost economic growth and deter companies from defecting to lower-tax nations.
In a press release that reads like it was written by Treasury Secretary Steve Mnuchin, Broadcom CEO Tan says the company expects the tax plan to "level the playing field for large multinational corporations headquartered in the United States and to allow us to go all in on U.S. redomiciliation." The caveat is that Broadcom will make the move even if tax reform doesn't happen. It has other reasons to move its mailbox to America, after all.
The company, formerly known as Avago Technologies Ltd., has been among the most acquisitive chipmakers over the past few years. It gained its current name through the $30 billion-plus takeover of U.S. semiconductor company Broadcom in 2016. The combined entity then agreed to acquire Brocade Communications Systems Inc. for $5.9 billion. The latter deal has dragged on for a year and is still awaiting signoff from the Committee on Foreign Investment in the U.S., the regulatory body charged with reviewing whether deals pose a threat to national security. The handy thing about becoming a U.S. company is that you no longer have to subject yourself to CFIUS reviews.
CFIUS has taken a particular interest in semiconductor deals of late, especially those that involve Chinese suitors, amid concerns about the threat to American competitors and the transfer of valuable technology used in military operations. Broadcom isn't a Chinese company, but it did get 54 percent of its revenue from the country in fiscal 2016. And Brocade's fiber channel switches are located in federal data centers.
It's not clear whether the regulatory body will factor Broadcom's pledge to relocate to the U.S. into its decision on the deal, or whether Trump would use it as justification to override a negative recommendation. But traders who bet on deals took the news as a sign the takeover is more likely to close: shares of Brocade jumped 7 percent to within 20 cents of the $12.75 offer price by the close of trading on Thursday in New York. Regardless, Brocade is unlikely to be the last U.S. chipmaker Broadcom tries to acquire. It might be nice to have a smoother path next time around.
Also, Broadcom disclosed in September that certain tax benefits granted by Singapore are scheduled to expire in 2021, earlier than expected. Why not test out what the U.S. government is willing to offer? The Trump administration has been quite generous when it comes to companies that help bolster its priorities. The question is whether these corporations will be as generous with U.S. workers.
According to President Trump, Broadcom's relocation will bring more than $20 billion in annual revenue back to "our cities, towns and the American workers." Putting aside that's not how revenue works, just 8.5 percent of Broadcom's sales -- or $1.1 billion -- came from the U.S. in fiscal 2016. If you add in all of Brocade's $1.2 billion in North American revenue, you are still nowhere close to $20 billion.
Perhaps President Trump meant to refer to the higher taxes that the U.S. could levy on Broadcom as an American company. But somehow I don't see Broadcom paying Uncle Sam 100 percent of the $20 billion in revenue analysts expect it to reap in 2019 -- not least because companies are taxed on their income. I realize the difference between revenue and profit might be hard for the president to distinguish.
Broadcom's new legal U.S. headquarters will be a (smaller than $20 billion) boon to tax coffers, but it's hardly the ideal poster child for renewed corporate optimism in America.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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