NEW YORK -- The decision by President Donald Trump to scuttle a hostile takeover of U.S. chipmaker Qualcomm by Singapore's Broadcom signals a shift toward stronger sector oversight, industry analysts suggest.
The deal raised red flags for government officials worried about ceding control of telecom or wireless infrastructure to foreign entities in the long run, and Trump's action marked just the fifth time in nearly 30 years that a U.S. president halted the potential takeover of an American company on national-security grounds.
"These transitions come along almost every decade or so, moving to a new iteration of technology," said Jon Erensen, research director for semiconductors at research firm Gartner. "The government is being very careful to ensure the U.S. keeps its leadership role developing these standards."
Shares of Qualcomm slid almost 5 percent Tuesday. The stock fell 3.11 points to 59.70.
Trump said late Monday that a takeover of Qualcomm would imperil national security, ending Broadcom's $117 billion buyout bid.
Although its name isn't widely known outside the technology industry, San Diego-based Qualcomm is one of the world's leading makers of the processors that power many smartphones and other mobile devices. Qualcomm also owns patents on key pieces of mobile technology that Apple and other manufacturers use in their products.
Qualcomm has long been a leader in previous iterations of broadband cellular network technologies like 3G and 4G and poured research and development money into developing 5G technology and related standards and practices.
More so than previous iterations of wireless technology like 3G or 4G, as 5G technology is developed, "We're seeing China emerge and start to play a bigger role in the standards developing process," Erensen said. At the same time, there has been a wave of consolidation in the industry, so "the direction for the technology and standards has been [putting them in] fewer hands at this point and the stakes are bigger."
Industry analysts speculated that Qualcomm's advanced work on 5G technology was the reason for the government's move to block the deal.
Also, the Committee on Foreign Investment in the United States, which reviews the national security implications of foreign investments in U.S. companies, had cited concern that Broadcom has a penchant for cutting costs, which might lead to Qualcomm being less of an industry leader.
If that should happen, a Chinese company like Huawei, which the committee has previously expressed concerns about, could step in and become dominant as 5G technology and standards and practices are developed and implemented.
"Over time that would mean the U.S. government and U.S. technology companies could lose a trusted U.S. supplier that does not present the same national-security counterintelligence risk that a Chinese supplier does," said Brian Fleming, an attorney at Miller & Chevalier and former counsel at the Justice Department's national security division.
While blocking the deal doesn't mean that China won't become a dominant player in 5G anyway, it's one way they can slow that down.
"They honestly believe they are helping to protect national security by doing this," Fleming said.
The four previous times presidents rejected a deal all involved companies in China.
In 1990, President George H.W. Bush ordered China National Aero-Technology Import and Export Corp. to divest its stake in Mamco Manufacturing Co., an aerospace parts supplier based in the U.S.
President Barack Obama in 2012 blocked a Delaware-based but Chinese-owned company named Ralls Corp. from owning four wind farms in Oregon near a Navy base in 2012.
In 2016, Obama rejected a $723 million takeover bid of the American arm of a German microchip company by Fujian Grand Chip Investment Fund LP.
In September, Trump rejected a $1.3 billion offer from a Chinese private equity firm to buy Lattice Semiconductor Corp. after regulators objected that the firm had ties to China's national space program.
Broadcom's unsolicited takeover bid was just the most immediate in a long list of challenges for Qualcomm, which also include legal disputes with customer Apple Inc., a decline in profit and a regulatory assault on its licensing business.
As Broadcom sought to elect its own slate of directors to Qualcomm's board, the run-up to an aborted shareholder meeting made clear how dissatisfied investors have become with Chief Executive Officer Steve Mollenkopf.
The final tally on Broadcom's nominees was postponed by U.S. government order, but an initial count of more than half the votes cast showed Mollenkopf getting the second-lowest number of votes among the nominees for the board. That would have seen him losing his director seat. The initial voting also showed Broadcom on course to win all six board slots it was seeking. While Trump's order bars Broadcom's nominees from remaining on the slate, Qualcomm can't ignore the signal investors sent when the voting was open to alternatives.
"We'll have to see if management change is in the offing -- it looks like investor confidence in management is low," said Stacy Rasgon, an analyst at Sanford C. Bernstein.
Qualcomm's management and board will face shareholders at a reconvened meeting on March 23, the company said late Monday.
Even if Mollenkopf keeps his job, he now must turn back to the task of jump-starting sales and rebuilding strength in the company's licensing business.
Information for this article was contributed by The Associated Press; by Rob Nikolewski of The San Diego Union-Tribune; and by Dina Bass of Bloomberg News.
Business on 03/14/2018
Print Headline: Merger veto a signal to tech sector