Feds Object To Broadcom's Hostile Takeover Of Qualcomm

Broadcom’s (NASDAQ:AVGO) $117 billion hostile bid for Qualcomm (read: Qualcomm Raises NXP Bid, Broadcom Responds) has raised a few red flags over at the White House. According to news reports, the government has asked and Qualcomm (NASDAQ:QCOM) has agreed to postpone for 30 days its shareholders’ meeting (supposed to be held yesterday) where shareholders were expected to vote in favor of replacing its current board with Broadcom-selected directors.

The deal is now up for national security review even before it has been signed in an unprecedented move by the Committee on Foreign Investment in the United States (CFIUS). While Broadcom has said that it was engineered by Qualcomm, it’s worth noting that it has reportedly been working with CFIUS for the past year. The company now says that since it is bringing its headquarters back from Singapore to the U.S., it soon won’t be subject to CFIUS directions anyway.

Why Is CFIUS Objecting?

It appears that members of the Congress and the Federal Communications Commission (FCC) are concerned that the emergence of Huawei as a major supplier of communications equipment and Broadcom’s chances of selling parts of Qualcomm to Huawei or another Chinese firm to bring down costs could see important communications technology get transferred to the Chinese.

The treasury department under which CFIUS is organized has issued a letter pointing to the importance of having a well-known and trusted company “hold the dominant role that Qualcomm does in the U.S. telecommunications infrastructure.” Huawei already owns 10% of the patents for the 5G standard and if it could gain access to Qualcomm’s patents, this would significantly increase its share. “A shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States,” the letter read.

Republican Senator John Cornyn also indicated in a letter to theTreasury Secretary Steve Mnuchin last week that in this context, Broadcom’s determination to take over Qualcomm in a hostile bid appeared significant.

Conclusion

Qualcomm is set to maintain dominance in the 5G standard, as it recently brought a large number of carriers and handset makers to adopt its technologies. It has also made peace with Samsung (KS:005930), a major customer that played a big role in its legal troubles with the Korean FTC.

The company’s need for Broadcom isn’t clear because cost cutting isn’t going to help it stay at the leading edge. Senator Cornyn’s concerns seem justified under the circumstances.

However, that doesn’t mean a deal won’t take place. As Broadcom pointed out, it may soon be outside CFIUS’s jurisdiction. It’s not exactly anti-competitive because the companies operate in adjacent but different segments of the semiconductor market.

Moreover, customer losses, if they occur, will not be a problem for Qualcomm investors who are cashing out. While Qualcomm customers are concerned about the takeover, they may not be in a position to sway investor opinion if the deal is sweet enough for investors.

The board has a big task ahead to convince the owners that the company is worth more than what Broadcom is willing to pay.

Both Qualcomm and Broadcom shares carry a Zacks Rank #3 (Hold). Semiconductor stocks worth buying instead are Mellanox Technologies (NASDAQ:MLNX) with a Zacks Rank #1 (Strong Buy), or Diodes (NASDAQ:DIOD) , or Ichor Holdings (NASDAQ:ICHR) , which have a Zacks Rank #2 (Buy). Or, take a look at:

the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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