The US government is investigating the possible acquisition of Qualcomm by Broadcom, figuring that a possible weakening of Qualcomm would give China more room to make its mark on the 5G standardization process.
The US Treasury Department said in a revealed letter that the potential acquisition of Qualcomm by Broadcom poses potential national security risks, warranting a thorough investigation into the potential stock transaction.
The letter explains how much Qualcomm’s success and innovation is due to a large R&D budget and that the company has been a key player in the standardization processes of 3G and 4G as a result. This also makes Qualcomm the leading company for the development of 5G technology, according to the ministry. In addition, the ministry reports that Qualcomm is a reliable company, which gives a considerable degree of confidence in the ‘integrity of the US telecom infrastructure’.
Against this background, the ministry fears that if the acquisition is completed, Qualcomm’s position will be weakened. This would be related to statements by Broadcom, which indicate that the R&D budget and long-term investments are being limited. This would in turn be partly caused by the large debt burden that Broadcom must build up to be able to finance the acquisition, which will put short-term profit interests more in the foreground. The ministry also believes that Qualcomm’s business model of technology licensing will be changed by Broadcom, which could also lead to reduced R&D spending.
Reduced R&D spending could weaken Qualcomm’s position, the ministry said, leaving more room for Chinese companies to make their mark in the 5G standardization process. According to the ministry, companies like Huawei will jump into this potential gap, which could arise if Qualcomm becomes less dominant. Qualcomm is already working with Huawei on the development of 5G.
In the eyes of the US government, if Chinese companies such as Huawei become dominant in the telecom infrastructure and specifically the 5G development, this poses risks to national security, because the risk of espionage would increase through the use of Chinese equipment. In that context, American intelligence services recently advised Americans not to buy phones from Huawei and ZTE. The ministry also states in the letter that Broadcom’s relations with a foreign organization are worrying, although this is not explained in more detail.
The letter comes from the Ministry of Finance, which includes the agency called CFIUS. This is a body that assesses takeovers in the field of national security. CFIUS recently interfered with the acquisition plans on behalf of the ministry by demanding that the Qualcomm shareholders’ meeting scheduled for March 6 be postponed by at least 30 days.
This delay was remarkable, because CFIUS normally makes its judgment about a takeover at a later date, when it has in fact already been finalized. Broadcom was not happy with this delay and believes Qualcomm has moved the agency to launch an investigation. Broadcom was likely planning to replace Qualcomm’s board members during the meeting in order to expedite the acquisition. Qualcomm still believes Broadcom is undervaluing the chip designer with its current bid of $117 billion.