Trump killing Qualcomm's huge deal could prompt a trade war in global M&A

Key Points
  • President Trump's decision to block Broadcom's bid for Qualcomm positions the U.S. like other protectionist countries around M&A.
  • The decision could lead to a "trade war" scenario where countries block U.S. deals in response.
  • The move is another surprising example of a Trump administration less open to large, transformational deals than previously expected.
AEI scholar: Correct that Qualcomm is a national champion

President Donald Trump's unprecedented decision to block Broadcom's attempt to acquire Qualcomm — even before a deal had been reached — will deter companies from looking for growth beyond national borders, experts say.

Broadcom officially withdrew its bid Wednesday.

Trump said he had "credible evidence" that the deal had the potential to threaten the national security of the United States. Broadcom is based in Singapore and in California and has ties with China. Qualcomm is based in San Diego.

Trump's decision to block Broadcom's $117 billion bid could change how all companies, in all sectors, view cross-border deals, said Frank Aquila, M&A partner at Sullivan & Cromwell.

"This is going to make cross-border transactions much less likely to happen in certain sensitive sectors," said Aquila.

"But beyond that, it could very well have a chilling effect on a range of transactions in any number of sectors. We know that certain countries have staked out claims to certain companies that have no national security risks, just because they're national champions or culture carriers. The United States has always considered this to be antithetical to free trade and open markets. We've never thought of blocking those sort of deals. Now that is not entirely clear."

Pre-emptively stopping a deal of this magnitude before a deal agreement marks a turning point — at least while Trump is president — in how the U.S. views foreign deals, Aquila said.

Other countries have been more openly political in their reactions toward recent acquisitions.

U.S. President Donald Trump jokes with Broadcom CEO Hock Tan as he announces that Broadcom would be moving back to the U.S. in the Oval Office at the White House in Washington on Nov. 2, 2017.
Nicholas Kamm | AFP | Getty Images

Members of the French government opposed General Electric's 2014 bid for Alstom before revisions to the $17 billion deal. U.S. paints and coatings maker PPG Industries walked away from its unsolicited attempt to acquire rival Amsterdam-based Akzo Nobel for $30 billion last year after hostility from Dutch politicians. Toshiba's 2017 sale process of its memory chip business was heavily influenced by Japanese government forces that didn't want to lose control of a national jewel — particularly not to a Chinese-based company such as Foxconn.

But the Committee on Foreign Investment in the United States and other U.S. antitrust bodies have previously attempted to make rulings based on legal precedent instead of politics.

"To have a pre-emptive decision of this sort is inconsistent with how transactions have always been evaluated in the U.S.," said Aquila. "That is very disconcerting. It is a populist approach to what should be an economic and regulatory determination."

It is a populist approach to what should be an economic and regulatory determination.
Frank Aquila
M&A partner, Sullivan & Cromwell

AT&T and others have also accused the Trump administration of using politics as part of its rationale to block another megadeal, AT&T's $85 billion acquisition of Time Warner. AT&T said last week it no longer plans to accuse the government of political bias, tied to Trump's contempt for CNN, as a motivation for blocking the deal.

AT&T plans to argue that its takeover should be allowed in a trial versus the U.S. government that begins March 19.

More companies could approach CFIUS

In a break with precedent, Qualcomm asked for CFIUS review on its own. Previously, both companies in a transaction would approach the regulatory board together.

That means more CEOs and boards will be prepared to deal with the regulatory body if they want to attempt cross-border deals, said Bill Curtin, global head of M&A at Hogan Lovells.

Whereas companies may have shied away from "poking the bear" of CFIUS before, they may come to the conclusion that CFIUS could be a sticking point in their deal no matter what, he said.

"Broadcom didn't have a voice in this process," Curtin added.

"They're not a Chinese company, but CFIUS felt like Qualcomm's role in the development of 5G wireless was so important that it wasn't comfortable with Broadcom affecting its R&D, and having it filled by the Chinese. That is such a multifaceted mandate of what CFIUS can look at. There's too much here to pigeonhole this deal in the convenient confines of saying this is an isolated hostile transaction."

Analyst: What could be next for Broadcom

The U.S. government may also search for methods to encourage investment in areas including 5G as future CFIUS mitigations, said John Carlin, a Morrison & Foerster national security lawyer.

"It's hard to force a company to innovate," Carlin said. "It's particularly tricky because a company can argue that blocking a deal is preventing that company from innovating."

China could hit back

Cross-border software, communications and semiconductor deals will immediately come under heavier scrutiny, Aquila said.

Other chip deals in progress, such as Marvell's bid for Cavium, could also draw CFIUS questions, notes Benchmark analyst Gary Mobley. Marvell is domiciled in Hamilton, Bermuda.

But even industries like entertainment, which harbor no national security issues, could become untouchable to foreign buyers if M&A becomes trade war territory, Aquila said.

U.S. companies may also have a harder time finding targets in other countries if the Trump administration is seen as promoting and protecting American interests.

A telling response will be whether China's Ministry of Commerce agrees to allow Qualcomm's pending deal for Dutch chipmaker NXP.

In an ironic twist, after the U.S. blocked Broadcom's attempt to buy Qualcomm for national security risks tied to China, China's regulatory agency MOFCOM could scupper Qualcomm's attempt to consolidate NXP — a deal Qualcomm used to fend off Broadcom's advances. Qualcomm is still awaiting MOFCOM's decision after obtaining approval from all other international regulatory agencies.

"The question now is what happens with NXP?" Curtin said. "If MOFCOM does block it, it probably won't be so courteous as to explain the reasons why they're nixing it."

If China hits back, the White House could respond in turn, Curtin said.

There is so much momentum for M&A that the overall pace should continue to be strong, even if some cross-border deals are abandoned, Curtin said.

The next big focal point should be the court's ruling on AT&T-Time Warner, which may help clear up what's become a confusing regulatory picture.