Broadcom Can’t Shake Scrutiny With Senator Seeking Probe of CA Deal

(Bloomberg) -- Broadcom Inc.’s $19 billion bid to acquire software maker CA Technologies Inc. has come under a torrent of scrutiny. Some of the objections being raised are trumped up, the company says. Yet a bona fide challenger to a deal that once seemed on the way to approval has also emerged.

Senator Rand Paul, a Kentucky Republican, said Wednesday he is asking a secretive U.S. national security body to review the semiconductor giant’s planned acquisition of CA, a manufacturer of network software, a deal that the companies expect to close by the end of the year.

Paul said in a letter published by Axios that a U.S. review of the takeover is needed because of Broadcom’s ties to China. Broadcom moved its headquarters to California from Singapore this year.

That raises the question of whether the security review panel that looks into foreign acquisitions of American firms has standing to examine the Broadcom deal.

President Donald Trump blocked Broadcom’s proposed hostile takeover of chipmaker Qualcomm Inc. earlier this year on national security grounds. Officials had said the acquisition could reduce research and development by Qualcomm and allow China to expand its influence in key wireless technology.

Authority Questioned

Now that Broadcom is an American company, the Committee on Foreign Investment in the U.S., or Cfius, which reviewed the Qualcomm deal, doesn’t have the authority to examine the CA acquisition, according to several lawyers who advise companies on cross-border transactions. That’s true even under a new law passed by Congress this year that expands the panel’s authority to review foreign takeovers.

One exception is if the redomiciling was an attempt to evade Cfius jurisdiction, they said. But Broadcom says it agreed to the move as part of Cfius’s clearance of its 2017 acquisition of Brocade Communications Systems. Broadcom said Wednesday there is no basis for a Cfius review of the deal for CA, which is based in New York.

“Broadcom and CA Technologies are both American companies, and there is no basis in fact or law for CFIUS review of our pending transaction,” it said.

Paul says that doesn’t matter.

“Simply because Broadcom moves its domicile to United States does not mean it is no longer a Chinese-controlled company or that national security concerns previously expressed by CFIUS no longer persist,” the senator said in the letter.

Paul’s request put a coda on an intrigue-filled day.

Earlier Wednesday, Broadcom announced it was the victim of a fraudulent effort to raise red flags about the deal for CA. At issue was a memo the company said was circulating among U.S. lawmakers. The memo purported to be a Defense Department assessment of the deal’s risks, Broadcom said, adding that the department told it the letter was likely a fake.

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

A memo matching the one described by Broadcom was provided to Bloomberg anonymously. Concerns that are similar to those raised in the purported Defense Department memo were later raised by Paul, whose office says it never saw the memo.

Cfius is a powerful but secretive body. Led by the Treasury Department, with members from the Pentagon, Justice Department and Department of Homeland Security, among others, the panel reviews the foreign acquisition of U.S. businesses for national security risks. It can impose changes to deals or recommend that the president block them. It rarely gets to that point. When the committee has insurmountable concerns about a deal, companies typically abandon their transactions.

Memo Mystery

The committee has stymied at least a dozen takeovers, mostly involving Chinese buyers, during the Trump administration. Armed with new powers, it is expected to get even tougher on sales of American businesses to foreigners, especially Chinese buyers.

The panel’s deliberations are confidential, so if it takes up Paul’s request, the review wouldn’t be publicly known unless the companies disclose it.

Broadcom shares dropped more than 4 percent after the report of Paul’s comments and then pared losses after the company’s statement about the memo. The stock closed down 5.3 percent to $231.83. CA shares declined 2.7 percent after earlier sliding as much as 5 percent.

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.

According to Bloomberg data, China accounts for 54 percent of Broadcom’s revenue, while the U.S. accounts for about 7 percent.

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.

©2018 Bloomberg L.P.