March 14, 2018

National Security: Broadcom & “The Pentagon Ploy”

Earlier this week, President Trump issued an unprecedented executive order blocking Broadcom’s hostile bid for Qualcomm due to national security concerns. This excerpt from a recent WSJ article explains what prompted the President’s actions:

While Broadcom is a Singapore-based company, the U.S. panel that vets foreign deals said that the bid could have had implications for the U.S.’s broader technological competition with China. That panel, the Committee on Foreign Investment in the U.S., known as CFIUS, said it was worried that Broadcom would stymie research and development at Qualcomm given its reputation as a cost-cutting behemoth. CFIUS said such a move could weaken Qualcomm—and thereby the U.S.—against foreign rivals racing to develop next-generation wireless technology known as 5G, such as China’s Huawei Technologies Co.

The president’s order marks the first time that a bid has been blocked in advance of a signed deal due to national security concerns. His action appears to have been precipitated by allegations that Broadcom violated an interim order issued by CFIUS last week prohibiting it from taking actions to redomesticate in the United States without giving CFIUS 5 business days advance notice. Broadcom’s move to the U.S. may have created jurisdictional issues that would have precluded CFIUS from reviewing the deal.

In a letter written to counsel for the two companies last week, CFIUS said that its national security concerns arose out of “risks associated with Broadcom’s relationships with third party foreign entities.” As this Bloomberg article explains, it was Broadcom’s ties to China’s Huawei Technologies that appear to have set off alarms at CFIUS.

The president’s unprecedented action is a reminder of CFIUS review’s potential use as a takeover defense.  In that regard, the role that CFIUS review played in the Broadcom/Qualcomm fight is reminiscent of the early ’90s heyday of “The Pentagon Ploy.”

John Jenkins