On March 12, 2018, President Trump blocked Broadcom, a Singapore-based semiconductor manufacturer, from pursuing the purchase of U.S.-based Qualcomm, a rival chip maker.  Broadcom’s offer, reportedly for $117 billion or perhaps even more, would have been one of the largest technology deals in history.

The president’s decision followed a determination by the Committee on Foreign Investment in the United States (CFIUS) that the transaction was likely to pose unacceptable national security risks to the United States.  The president apparently made his decision shortly after Broadcom met with Pentagon officials in a final effort to salvage the deal.

CFIUS Took Action before Proposed Deal Could even be Approved by Qualcomm

Broadcom was seeking to gain control of Qualcomm through a hostile takeover.  In recent weeks, Broadcom had been attempting to obtain approval from Qualcomm shareholders to move forward with its offer.

In a highly unusual move, before deal terms had even been reached, CFIUS commenced an investigation into the proposed transaction.  (CFIUS review typically occurs after the terms of a transaction have been agreed, or in some cases after a transaction has closed.)  CFIUS reportedly took action in response to a submission to CFIUS from Qualcomm in the fall of 2017.

In a letter to the parties dated March 5, 2018, CFIUS stated that the potential transaction “could pose a risk to the national security of the United States.”  The March 5 letter also implied that CFIUS intended to conduct a careful review of the proposed transaction – even though the transaction was still technically inchoate at that time.

It did not take long for CFIUS to reach its conclusion.  In a letter to the parties dated March 11, CFIUS stated that its investigation had “confirmed the national security concerns that CFIUS identified [in the March 5 letter].”  CFIUS also stated that it was considering “referring the transaction to the President,” i.e., recommending to the president that the transaction be blocked.

Administration Continues to Demonstrate Concern about Protecting National Security

In blocking the deal, the president implied that it would not be possible for the parties to mitigate the national security issues identified in the March 5 letter, which explicitly identified the following:

• Qualcomm’s importance in the development of next-generation digital technology and standard-setting
• The U.S. government’s trusted relationship with Qualcomm
• Concerns about weakening Qualcomm’s supply relationship with the U.S. Defense Department

But perhaps the most important statement in the March 5 letter was this one: “Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.”

Broadcom had argued that these national security fears were unwarranted because the company intends to re-domicile itself in the United States in April.  This argument was obviously not persuasive.

CFIUS Will Scrutinize China, Information Technology Deals

This matter has been unusual.  CFIUS reviews hundreds of transactions, the vast majority involving smaller companies, smaller dollar values, and/or smaller perceived national security issues.  Virtually all of those transactions are approved.

The high-profile nature of the proposed Qualcomm transaction, and the fact that Broadcom made a hostile bid, ensured that this deal would receive extra attention.  We nonetheless view the manner in which the Qualcomm transaction unfolded to be consistent with how CFIUS has reviewed transactions over the past several months.

For one thing, as we discussed in an October 2017 blog post relating to the blocked acquisition of Lattice Semiconductor, CFIUS is wary of China deals.  It is therefore not surprising that CFIUS viewed Broadcom’s proposed acquisition critically given the perception that the deal could provide technological and national security advantages to China.

More generally, as we discussed in a January 2018 blog post, CFIUS is taking particular interest in any transaction in which a non-U.S. company obtains substantial technology and access to U.S. citizens’ personal information.  (Proposed legislation announced in November 2017 would authorize CFIUS to review certain transactions that expose “personally identifiable information, genetic information, or other sensitive data of US citizens to access by a foreign government or foreign person …”)  This has implications across industries, from financial services to IT, to healthcare.