Treasury Secretary Steve Mnuchin on Friday suggested that the U.S. government is "fully prepared" to use its powers to protect national security when it comes to Broadcom Ltd. (AVGO) - Get Report hostile $79 a share bid to buy Qualcomm Inc. (QCOM) - Get Report .
"We're fully prepared to use our powers to protect national security," Mnuchin said, according to CNBC TV.
Mnuchin's comments come after Broadcom on Friday issued a letter to Congress once again publicizing its U.S. lineage and commitment to 5G wireless investment in its latest missive intended to convince the Mnuchin-led Committee on Foreign Investment in the United States to leave its hostile bid for Qualcomm alone.
"The bottom line is that a combined American Broadcom-Qualcomm will be a more focused and stronger champion for sustained United States leadership in 5G than a standalone Qualcomm, an outcome that strongly supports America's national security interests," Broadcom CEO Hock Tan said in a letter to fifteen lawmakers.
In the letter, Broadcom reiterated promises it had made on Wednesday to be a leader in 5G development as well as its pledge to create a new $1.5 billion fund with a focus on innovation to train and educate engineers in the U.S.
The letter comes after Cfius, which traditionally has reviewed cross-border deals for national security concerns, earlier this month took the unusual if not unprecedented step of ordering Qualcomm to postpone its annual meeting by 30 days so it could review the deal. Broadcom has six dissident directors up for election and is seeking to take control of Qualcomm's board at the meeting, now set for April 5, so it could close its acquisition.
On March 5, the Treasury Department, which heads Cfius, outlined its concerns about the potential hookup, including a critical worry that the transaction could jeopardize Qualcomm's spending on research and development and U.S. leadership in the bodies that set mobile standards amid the launch to 5G wireless.
Barry Naughton, professor at the University of California, San Diego, said he was skeptical about whether Broadcom would ever fulfill many of the things it offered up as part of its pledges, in particular, its offer to create a $1.5 billion fund to train and educate U.S. engineers.
"This is part of a pattern of Broadcom saying anything they can to get their deal approved," Naughton said.
Naughton said that the Cfius letter made clear that there were substantial differences between Qualcomm and Broadcom that could severely impact national security. In particular, he pointed to the Cfius assertion that Qualcomm is a source of technology, knowledge, and R&D that is fundamentally important to the U.S. Alternatively, Naughton argued that Broadcom doesn't invest as much in R&D on cutting-edge technology vital to national security, such as 5G.
"Those business strategy differences have nothing to do with whether Broadcom is a foreign company or not," he said. "It's all about whether Broadcom would maintain Qualcomm's R&D model."
Naughton's comments zero in on a fundamental Broadcom assertion on why it and many Cfius-specializing lawyers believe that the national security review panel won't have any authority to review a Broadcom-Qualcomm deal - the fact that Broadcom is in the process of reincorporating from Singapore to the U.S., a process that it expects to complete by May 6.
Cfius experts contend that should the reincorporation be completed that there would be no statutorily-mandated basis for Cfius to review the deal because the interagency review panel's mandate is to consider foreign acquisitions of U.S. assets on national security grounds, not mergers among U.S. companies. Broadcom pointed in its letter to many qualities that suggest that it is indeed a U.S. company, including its headquarters in San Jose, Calif. and the fact that its board is made up nearly of all U.S. citizens while more than half its workforce is in the U.S. across 25 states.
Clif Burns, attorney at Bryan Cave in D.C., said it was possible that CFIUS could say it wouldn't approve the deal after the 30 days but that it was much more likely that if it still had concerns that it would push back the annual meeting and proxy fight vote by 45 days as it launched a formal investigation. A 45-day investigation would push the review past May 6, which is when it appears Broadcom officially will become a U.S. company.
Once that happens, Burns suggests that CFIUS would no longer have any purview. "When Broadcom is a U.S. company and given that it is not controlled by any foreign citizen, it will not be a 'foreign person.'" Burns said. "And therefore the purchase of Qualcomm stock after that date will not be a covered transaction subject to CFIUS review."
Bernstein analyst Stacy Rasgon concurs: "The rationale for CFIUS jurisdiction, already tenuous in our opinion, will become quite a bit more so in about 60 days once the redomiciling is complete."
Nevertheless, the Trump administration has an unconventional approach in many areas, so it is a distinct possibility that it could ask Qualcomm to postpone its annual meeting again to review the deal further, or even ultimately issue a note after its review saying it would reject the deal if it were ever consummated. In response to a question about whether the deal was dead, Mnuchin said: "I'm not going to comment on that."
For now, the Cfius review and Mnuchin's comments appear to make it less likely that Broadcom would get the votes it needs to secure control of Qualcomm's board, or even obtain a minority-slate of directors.
Qualcomm, for its part, on Friday announced that ex-CEO Paul Jacobs would no longer serve as executive chairman of the chipmaker's board. Jacobs is being replaced in the role by an independent director, Jeffrey Henderson. Interestingly, Henderson was installed on Qualcomm's board in 2016 as part of a settlement with activist investor Jana Partners, though the insurgent fund no longer owns shares in the chipmaker.
Many institutional investors argue that CEOs should be overseen by entirely independent chairman and the replacement of Jacobs, who was CEO between 2005 and 2014, is likely to be applauded by some significant shareholders. It is possible that the chairman position shake-up followed conversations between Qualcomm and its shareholders as the chipmaker seeks to fend off Broadcom's director candidates.
Bernstein's Rasgon suggested that the chairmanship shakeup wasn't "terribly surprising" given "the low confidence in management apparently shown by early vote returns reported this week."
But don't expect Broadcom to relent any time soon. For its part, the hostile chipmaker may want to offer up a sort-of mitigation agreement to Cfius in advance of the vote in an attempt to assure regulators - and the Qualcomm voting shareholders -- that the deal wouldn't impact national security interests.