As Broadcom (AVGO - Get Report) succeeded in convincing many Qualcomm (QCOM - Get Report) shareholders that its hostile bid for Qualcomm was in their interests, Qualcomm won the backing of a more important set of allies.
Following a recommendation from the Committee on Foreign Investment in the United States (Cfius) that he do so on national security grounds, President Trump has barred Action Alerts Plus holding Broadcom from attempting to acquire Qualcomm, as well as from obtaining any seats on Qualcomm's board at the company's upcoming annual meeting. On Wednesday morning, Broadcom announced that it's withdrawing its offer for Qualcomm.
Qualcomm's shares fell 5% on Tuesday following Trump's order. Broadcom's shares, hurt by a wider tech selloff, fell 0.6%.
The order was a pretty remarkable one. Both because Broadcom, currently based out of Singapore, will soon become a U.S.-incorporated company, and because no deal between Broadcom and Qualcomm had yet been signed. It looks as if Cfius and the Trump Administration chose to break with regulatory precedent out of a fear that it would be harder to stop Broadcom's bid on national security grounds once the company is U.S.-incorporated.
Cfius had argued that Broadcom's cost-cutting tendencies could impact Qualcomm's R&D investments, and that this in turn would give China's Huawei a leg up in 5G standards development. A source talking to Reuters said that the U.S. military was worried that if Broadcom acquired Qualcomm, there would "essentially be a dominant player in all of these technologies and that's essentially Huawei, and then the American carriers would have no choice" but to buy Huawei's network equipment.
This line of thinking is pretty questionable. First, because Broadcom had in response to Cfius' probe of its bid promised to "maintain the R&D resources Qualcomm devotes to 5G and innovation in future wireless standards," as well as make fresh investments in technologies deemed "essential to the U.S.." And second, because Qualcomm and Huawei are hardly the only firms to be making large R&D investments in 5G. Huawei's non-Chinese mobile infrastructure rivals, such as Nokia (NOK - Get Report) , Ericsson (ERIC - Get Report) and Samsung (SSNLF) , have also been investing heavily in 5G, and so has Qualcomm modem/processor rival Intel (INTC - Get Report) .
Cfius had also voiced concerns about Broadcom's relationship with "third-party foreign entities," without specifying who they were. If one or more of those entities is Chinese, as many speculate, it's worth noting that Qualcomm's Chinese business relationships arguably run deeper than Broadcom's, whose mobile chip sales depend heavily on Apple (AAPL - Get Report) and Samsung. Qualcomm is a major chip supplier to, and his inked patent-licensing deals with, Huawei, Lenovo, Xiaomi and a slew of other major Chinese phone makers. The company is also less than a month removed from announcing 5G interoperability testing work it had conducted with Huawei.
In addition, Broadcom is just four months removed from closing its $5.5 billion purchase of Brocade Communications following a Cfius review. Brocade's Fibre Channel storage switches handle mission-critical data for many U.S. enterprises and government agencies. If Broadcom's ties with "third-party foreign entities" merit prohibiting the company from acquiring Qualcomm, shouldn't they have also kept Broadcom from acquiring Brocade?
All of this makes it look as if Qualcomm's longtime government ties and lobbying efforts played a role in scuttling the deal. That's particularly true since Qualcomm had requested a Cfius review of Broadcom's bid on Jan. 29, and some of the objections publicly voiced by the committee sound like Qualcomm talking points.
Qualcomm has been an equipment supplier and R&D partner for the Department of Defense since the 1980s, and also has decades of experience lobbying U.S. politicians and regulators -- including, notably, on its attempts to grow its Chinese sales. The Qualcomm Equation, a 2005 book detailing the company's rise, provides some interesting reading on this subject.
In addition, Qualcomm's strong relationships with -- and more favorable image among -- many tech reporters and analysts may have worked to its advantage. The company has historically been much more proactive than Broadcom in areas such as communicating with writers and analysts, making execs available for interviews and hosting major press events to show off new products and R&D efforts.
And whereas Qualcomm sets up giant exhibits at major trade shows such as CES and the Mobile World Congress to showcase its offerings, Broadcom's presence at the events is often limited to a private office where it meets with select customers and partners.
All of this may have contributed to the many impassioned defenses of Qualcomm's independence that have been made by tech reporters and industry analysts since Broadcom made its bid (sell-side financial analysts, it should be noted, have generally been more positive about Broadcom's overtures). Those defenses largely argued that a Broadcom purchase would be disastrous for mobile innovation, given Broadcom's history of aggressive cost-cutting.
The truth is likely more complicated. Broadcom is less keen than Qualcomm on making giant investments in brand-new product lines and technologies that are unlikely to pay off for a while. But as its investments in areas such as RF chips, Ethernet switching chips and storage controllers drives home, Broadcom is quite willing to invest in large franchises possessing blue-chip customers.
Qualcomm's mobile processor and modem business certainly fits that description. Regardless, however, it looks as if some important people in Washington agreed with the aforementioned media and analyst critiques of Broadcom's bid.
With all this said, one can make a nationalist argument of sorts for shooting down Broadcom's bid. Namely, that while Broadcom may not gut Qualcomm's mobile R&D spend or hand off sensitive technology to China following an acquisition, the combined company would likely invest less in R&D -- particularly for new and emerging product lines -- than Broadcom and Qualcomm would as independent firms. And thus it's in the national interest to keep Broadcom and Qualcomm's combined R&D spend at a higher level.
But it's much tougher for the White House or Cfius to justify rejecting Broadcom's bid on such narrow grounds, especially when a deal hasn't been signed. Dire claims about massive R&D cuts, a lost technology lead and troubling relationships with foreign actors make a rejection far easier to defend.
Qualcomm's leadership must be thankful that such arguments were made on its behalf at the highest levels of the U.S. government. Some Qualcomm shareholders probably feel differently.
Editor's note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.