President Donald Trump blocked Broadcom’s proposed $105 billion acquisition of fellow wireless chip giant Qualcomm on Monday amidst mounting fears that US could fall behind China on technology innovation.
That’s a little odd, because on its face, the deal itself has nothing to do with China. Broadcom’s key units are US-based; the company is headquartered in Singapore, which is generally considered friendly to the US. And in November, Broadcom CEO Hock Tan announced that the company would move its main office back to the US—while standing next to Donald Trump during a press conference at the White House no less.
Yet the Committee on Foreign Investment in the United States, or CFIUS, tasked with evaluating foreign investments in the US, advised Trump to block the acquisition. In a letter to Broadcom last week, the agency cited concerns that if the deal went through, Huawei and other Chinese telecommunications companies could displace Qualcomm as leaders in developing the forthcoming 5G standard for faster, higher-capacity wireless networks.
The government’s real concern was probably less that Qualcomm would be controlled by a foreign power, but that Qualcomm would be less innovative under Broadcom’s control. Patrick Moorhead, an analyst with Moor Insights & Strategy, says Qualcomm is one of the few wireless chip companies that invests for the long term. One of the others, he says, is Huawei. If the Trump administration is worried that the US wireless and semiconductor industries could fall behind China’s, then it hardly matters whether Broadcom is a US company or not.
Broadcom is known for buying up companies and holding onto their most profitable units and then selling off the riskier parts. Analyst Ben Thompson points out in a blog post that Qualcomm’s most profitable assets are its patents, which it licenses out to other companies, not its more expensive business of designing and selling chips. Slashing Qualcomm’s research budget in favor and focusing on its patent business would fit Broadcom’s modus operandi.
“Since Hock Tan took over Broadcom, they’ve invested less in R&D overall,” says semiconductor industry analyst Linley Gwennap. “It’s a great strategy for keeping investors happy, but it leaves the cupboard bare if you want technology innovation overtime.”
The numbers bear him out. Broadcom’s spending on R&D amounted to about 19 percent of its revenue in its most recent fiscal year. Qualcomm, by contrast, spent about 25 percent of its revenue on R&D.
That could leave the US at a disadvantage in the long term. China imports about half of its semiconductors from US companies, according to a report from the US Department of Commerce. But China is investing $20 billion in the semiconductor industry through its government-controlled Integrated Circuit Industry Investment Fund in hopes of becoming a real player in the global market for computer chips.
Broadcom tried to address some of these concerns in statement last week pledging to keep investing in 5G wireless technology. But the promise evidently wasn’t enough for CFIUS, or Trump.
In a statement, Broadcom says the company “is reviewing the order. Broadcom strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns.” Qualcomm did not immediately respond to a request for comment.
CFIUS also recently blocked the sale of semiconductor company Lattice Semiconductor to an investment firm with reported ties to the Chinese government, and the sale of money transfer service MoneyGram to an affiliate of China’s Alibaba.
Broadcom’s bid for Qualcomm was always a longshot. Broadcom’s wireless chips can be found in every current iPhone model and most Android phones, and Qualcomm’s Snapdragon platform powers most Android phones while its cellular modems are found in roughly half of all iPhones. Merging the two would have created significant antitrust concerns for regulators in the US and elsewhere. But despite the long odds, few expected the proposed merger to end this way.
In the Chips
This article was syndicated from wired.com