Protectionism or national security? Trump intervenes to stop Qualcomm takeover

Answer: It’s both. Consider this a shot across the bow to China, who may have stood to gain the most from a hostile takeover of Qualcomm. Donald Trump acted last night to block the acquisition from Broadcom, even though Trump had once hosted the latter’s CEO at the White House after the takeover attempt had been announced:

President Trump Monday ordered Singapore-based Broadcom to abandon its $117 billion hostile bid for Qualcomm, blocking what would have been one of the biggest technology deals in history.

In his presidential order, Trump cited “credible evidence” that the takeover “threatens to impair the national security of the United States.” The merger would have put one of America’s largest mobile chipmakers in the hands of a company based in Asia, a region that has been racing against American companies to develop the next generation of mobile technology.

The administration moved with unusual speed in the matter that caught many involved in the negotiations off guard. The Committee on Foreign Investment in the United States, or CFIUS, an interagency panel led by the Treasury Department, had several more weeks to render a recommendation to the president. Trump’s order cannot be appealed, legal experts said.

Actually, CFIUS had already weighed in on the deal last week, preliminarily at least. In a letter to principals, the Treasury Department’s deputy in charge of investment security revealed that CFIUS had determined that the deal “could pose a risk to the national security of the United States.” Aimen Mir further explained that CFIUS had determined that “Broadcom’s relationships with third party foreign entities” played a role in this finding.

Furthermore, the Trump administration saw this as potentially allowing the Chinese government too much of an entrée to American communications:

In other words, Trump saw this as a threat to American innovation, perhaps a deliberate strategy to weaken our ability to develop commercial high-speed communications networks like 5G and other future technologies. The upcoming development of a 5G network has been such a high-profile nat-sec issue that the White House floated a trial balloon on nationalizing it a few weeks ago. They’re still reportedly considering a plan to build it as a public project and lease it out to the providers, but without FCC chair Ajit Pai on board, that’s probably not going anywhere.

Trump may not get to build the network himself, but he’s sure not going to leave it to China to build it for us. Right now, CNet reports, the US has a distinct competitive advantage that Trump wants to protect:

5G, or the fifth generation of cellular technology, is seen as a potential game-changer because of its heightened speed, responsiveness and ability to handle a myriad of connected devices. Beyond giving you a much faster connection on your phone, 5G could serve as the communications foundation for emerging technologies like self-driving cars, streaming virtual reality experiences and advanced telemedicine options like remote surgery.

But multiple companies want to influence how 5G technology works, and they’re jockeying for position. Unlike older wireless tech such as 3G, where a Verizon Wireless phone wouldn’t work on AT&T’s network, 5G is formed via a global standard that every country and company agrees to. While many of the standards are in place, there are still plenty of details to be worked out.

That’s where Qualcomm comes in. The San Diego, California-based company, the world’s largest maker of chips for phones (if you own a high-end Android phone, it’s likely using a Qualcomm processor), owns a number of the technologies that served as the foundation for 3G and 4G technology, and it’s been pouring R&D dollars into 5G.

“Details of the security risk are likely around 5G cellular technology [where] Qualcomm, in our view, is well ahead of foreign and domestic competitors,” said Stifel analyst Kevin E. Cassidy in a report late Monday.

In that sense, the action by Trump should come as no surprise — but Broadcom gave it the ol’ college try anyway:

In an attempt to ease those worries, Broadcom last week pledged to make the U.S. a leader in the race to build 5G networks, saying it would create a $1.5 billion fund to support the effort if took control of Qualcomm.

Broadcom also tried to curry favor by moving its legal headquarters from Singapore to the U.S within the next few weeks. Singapore became Broadcom’s legal home two years ago after it was sold to Avago, a company that once was part of Silicon Valley pioneer Hewlett-Packard. Broadcom’s company’s physical headquarters is already in San Jose, California — about 450 miles from Qualcomm’s headquarters in San Diego.

Trump hosted Broadcom’s Tan in the White House last year when the executive announced the proposed move.

This move fits right within Trump’s wheelhouse. It provides an opportunity to block Chinese penetration into American markets (at least indirectly), and keeps an important American industry from foreign ownership. However, it puts pressure on Qualcomm to keep delivering. Its shares will likely drop for a while, an impact that could reduce R&D flexibility for the short run. ABC notes that they’re bidding for an acquisition themselves of NXP Semiconductors, which will swallow up $43 billion of capital. NXP is headquartered in the Netherlands, which might also have some issues with an acquisition of a domestic producer of high-speed communications components. On the other hand, they allowed NXP to sell off one of its units, Nexperia, to China-based investors last year.