It’s true that Singapore-based Broadcom’s purchase of Qualcomm after an aggressive, months-long pursuit would have been the biggest deal in tech history, even at a reduced price of $117 billion.
But the deal’s demise at the hands of a president who’s increasingly protective of U.S. industry isn’t a portent of doom for dealmaking in the sector. Quite the reverse, in fact, said Angelo Zino, an analyst with CFRA Research in New York.
Not only was President Trump’s decision to block the deal reflective of a unique situation, which is that of a U.S. manufacturer poised to play a pivotal role with cutting-edge wireless networks that might lose its industry dominance in a takeover. It also frees up cash for an acquisitive Broadcom to make other deals.
“This is actually a great thing for the M&A space,” Zino said, using Wall Street’s shorthand for mergers and acquisitions. “You would have had Broadcom sitting on the sidelines for a couple of years digesting this transformative deal with Qualcomm.”
Instead, the company that traces its roots to a Hewlett-Packard subsidiary can use its strong cash-generation abilities to “focus on making more nimble acquisitions that are instantly accretive to businesses,” Zino said. Broadcom had $11.2 billion in cash and highly liquid securities on its books at the end of last year, according to a regulatory filing.
That scenario would support CFRA’s earlier assessment that dealmaking in the U.S. semiconductor industry would probably increase this year after dropping to a paltry $4.3 billion in 2017.
The number was a significant fall from $74.6 billion in 2015, a period that included Avago Technologies’ $29.8 billion takeover of Broadcom, after which it adopted the target’s name.
CFRA isn’t alone in its optimistic outlook. Transactions in the world’s largest economy are likely to increase across industries this year as companies benefit from a sweeping tax overhaul that cut their top U.S. rate to 21 percent from 35 percent and lets them move assets back to the country without penalty following a one-time levy, Swiss bank UBS and deal-tracking firm Mergermarket predicted this year.
Potential obstacles have arisen since, of course, which include economic-growth signals that may spur the Federal Reserve to raise interest rates more quickly than expected, along with Trump’s decision to impose tariffs of 25 percent on steel imports and 10 percent on aluminum.
The president has hinted, to Wall Street’s chagrin, that the widely unpopular duties may be followed by others, which risks rattling corporate confidence in the economic stability required for significant investments.
His decision to block the Qualcomm merger may only exacerbate that risk, though Zino says it shouldn’t: The deal involved a unique set of circumstances unlikely to recur frequently.
After rebuffing a string of overtures, prompting Broadcom to take early steps toward a proxy fight, San Diego-based Qualcomm asked the Treasury Department’s Committee on Foreign Investment in the U.S. to review the hostile offer on national security grounds.
The panel agreed, quickly ordering Qualcomm to postpone the board meeting at which Broadcom’s proxy fight would have taken place for at least a month.
In a letter to both firms, the committee outlined concerns including Qualcomm’s defense contracts, its work with the U.S. government on developing cybersecurity for the Internet of Things, and its dominant role in mobile technology, fueled by investment in research.
Broadcom’s history of acquiring businesses, then employing a private-equity style approach of selling pieces of them to extract cash, gave the government reason to worry that a conquered Qualcomm might become less influential in developing fifth-generation, or 5G, networks, which will bring the power of WiFi signals to cellular connections, Zino said.
That would place the U.S. at a disadvantage compared to China, warned the committee, often referred to by its acronym CFIUS.
Such documented concerns show Trump wasn’t acting on mere instinct, said Nicholas Gravante Jr., a New York partner with the law firm Boies Schiller Flexner.
The president had previously barred the takeover of Portland, Ore.-based Lattice Semiconductor on similar grounds, and his predecessor, Barack Obama, used the same technique to intervene in a Chinese proposal to buy semiconductor operations in the U.S.
“The president is on very firm legal ground,” Gravante said. “It’s very hard to criticize his decision, which was based on a committee recommendation to him. The precedent certainly exists for this kind of action, and the law permits it.”
The fact that Qualcomm has “some of the most valuable intellectual property on the planet” differentiated Broadcom’s proposed takeover from typical deals, Zino added, prompting the government to approach the matter delicately.
That was necessary given a backdrop of heightened sensitivities over America’s relationship with China, the world’s second-biggest economy.
Trump has repeatedly railed against the imbalance in trade between the two countries. The U.S. imports $375 billion more goods from China than it exported last year.
His chief trade adviser, Robert Lighthizer, is investigating whether the Asian nation violated U.S. intellectual property rights. If he determines that it has, Trump might impose retaliatory tariffs on the country.
“The size of this transaction is also very important,” Zino said. “When you look at the type of intellectual property they have on their hands and you actually look at the size of this deal, I think that plays a role.”
Investors shouldn’t use what happened as a basis for assuming there won’t be as many deals in the semiconductor industry, he added. “I think the opposite. I actually think you’re going to see more deals.”
