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Broadcom's attempt to buy Qualcomm is in jeopardy after the U.S. Treasury's Committee on Foreign Investment in the United States outlined concerns it had about the transaction in a March 5 letter addressed to Broadcom and Qualcomm lawyers.
CFIUS listed several issues, including Broadcom's reputation for cutting research spending, a concern Microsoft and Google shared, and potential national security risks that could arise from exploiting or compromising Qualcomm's assets through arrangements with "third party foreign entities," according to the letter.
The CFIUS review is an unprecedented move for a transaction that hasn't been announced or agreed to, and will likely kill Broadcom's chances to acquire Qualcomm, said Guillermo Christensen, a partner at the law firm Brown Rudnick and a former CIA intelligence officer who specializes in CFIUS-related transactions.
"For this deal to go through now, Broadcom would have to change a lot of the business rationale for it," Christensen said. "That undermines the point of the deal. I see no way they can make this one work."
Broadcom is not expected to walk away from the deal this month, according to people familiar with the matter. Instead, it will attempt to answer any questions the government has about the deal in hopes it can assuage regulators about their concerns.
Broadcom is still optimistic a theoretical deal can get CFIUS approval in the next 28 days, in time for a Qualcomm shareholder vote, the people said. (The CFIUS told Qualcomm Sunday to delay its shareholder vote by 30 days; it had been scheduled for Tuesday.)
"We are fully cooperating with CFIUS, and are absolutely committed to making the combined company a global leader in critical 5G and other technologies," Broadcom said in an e-mailed statement. "There can be no question that an American Broadcom-Qualcomm combination will provide far more resources for investments and development to that end. Entrusting this effort to a failing Qualcomm management who lacks the support of its owners, and that pays out much of its excess cash flow in fines as a result of serial lawbreaking, would not be in America's long-term interests."
Qualcomm declined to comment.
Broadcom's lawyers have also been looking into speeding up efforts to "redomicile," or move its legal business location, to Delaware before the Qualcomm investor vote, said two of the people. That would make Broadcom a U.S. company before Qualcomm shareholders could vote on the deal.
CFIUS reviews don't apply to domestic transactions -- when one U.S.-based company acquires another. Broadcom, currently based in Singapore, filed on Nov. 2 to redomicile.
But the CFIUS letter and interim order probably make Broadcom's redomiciling efforts moot, said Christensen. The U.S. Treasury's reason for involving CFIUS prior to redomiciling is specifically to get ahead of it, he said. The government would have to approve Broadcom's change of headquarters.
Instead, Broadcom may have to shelve this deal and become a U.S. company. Then it would need to make a new offer to shareholders to potentially avoid CFIUS review, Christensen said.
"They could come in with a brand new offer, say 'we're not a foreign buyer,' and go to war with CFIUS on it," Christensen said.
There is a potential silver lining for Broadcom if it walks away from a deal. CFIUS's pre-emptive move to rule on the deal would allow Broadcom to avoid paying an $8 billion break fee it promised to Qualcomm as a sweetener in case regulators blocked an accepted deal. Knowing CFIUS's objections before agreeing to a deal may allow Broadcom to move on if it can't reach an agreement with the government.
CFIUS investigated 79 transactions in 2016. Five of those transactions were abandoned in light of National Security concerns and seven more were withdrawn for other reasons, including failure to satisfy the regulator's process requirements, according to a U.S. Treasury website. Semiconductor deals have drawn particular CFIUS scrutiny because chips can store sensitive data that could be used by foreign governments against the U.S.
Sen. Tom Cotton (R-Arkansas) released a statement on Monday applauding CFIUS's decision to delay Qualcomm's investor vote, originally scheduled for today, that would have given shareholders the option to choose a slate of four or six directors nominated by Broadcom.
"Qualcomm's work is too important to our national security to let it fall into the hands of a foreign company -- and in a hostile takeover no less," Cotton said in a statement. "It's hard to see a good reason why we should hand over one of our leading computer-chip makers, and thereby give Chinese companies a leg-up in the race to develop 5G and the next generation of technology. Better to keep it in American hands and protect American national security."
A Cotton spokeswoman said a Broadcom redomiciling is "certainly something we're keeping an eye on," but that it was "too premature in the process to weigh in now."
Broadcom's efforts to redomicile are also tied to its $6.1 billion acquisition of Brocade last year. Broadcom has to redomicile by Nov. 17 to avoid initiating "a process to separate and divest" the Brocade SAN business it acquired, according to a company filing.