Broadcom bid for Qualcomm is likely to face longer U.S. review

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(Bloomberg) -- Broadcom Ltd., whose hostile bid to acquire rival Qualcomm Inc. has been stalled by management opposition and U.S. national-security concerns, is in for a long wait.

The deal is likely to be held up even beyond a rescheduled shareholder vote next month as government regulators undertake an extended review of the proposed transaction’s risks.

Qualcomm investors are set to vote April 5 on Broadcom’s nominations to its board, a tally that will serve as a referendum on the $117 billion offer. The San Diego-based chipmaker moved that meeting from March 6 after the U.S. Treasury Department this week ordered a 30-day postponement to allow a full evaluation of potential national-security threats raised by the combination. Getting such a review done in 30 days is unlikely, according to experts on the process, and could take as long as 75 days.

"It’s just big, and there’s a lot to work through, and a lot of questions," said Jason Waite, a partner at law firm Alston & Bird in Washington, who has represented clients facing national-security reviews. He said he wouldn’t count on it getting done in 30 days.

Qualcomm has opposed the idea of a merger since Broadcom’s bid was unveiled in November, and an acrimonious fight has ensued over the two sides’ competing visions for the company. Treasury’s initial request to delay the vote came as Qualcomm was on course to lose majority control of its board to Broadcom nominees, according to information obtained by Bloomberg, and a further postponement would give Qualcomm even more time to turn the tide in its attempt to fend off the acquisition.

Meanwhile, Singapore-based Broadcom is pressing ahead, vowing to cooperate with the U.S. review and pledging to boost investment in U.S. wireless technology to offset concerns that it would slash spending and allow Chinese companies to steal the lead in the next generation of mobile technology.

The deal is under review by the Committee on Foreign Investment in the U.S., which investigates risks to national security from foreign takeovers. CFIUS typically takes 30 days to do an initial analysis, then adds another 45-day period to cases that it deems are worth further consideration. It’s also not uncommon for companies to have to refile for approval after the 75-day period expires if they’ve been unable to address all of the panel’s concerns.

CFIUS typically puts the most intense scrutiny on investments in U.S. technology by parties with connections to China. At the end of the review period, it can come back with more requests for information, impose conditions on a transaction or recommend that the president block it. At least a half-dozen technology deals during the Trump administration have fallen apart under the scrutiny of a CFIUS review.

In a letter earlier this week from Treasury, made public by Qualcomm, the committee also cited the target chipmaker’s contracts with U.S. government agencies with national-security responsibilities. Qualcomm has "active sole source classified prime contracts" with the Pentagon, according to the letter. The letter made public a rare intervention by the CFIUS panel in a deal even before it has been signed.

"The national security concerns as presented are substantial and in any other case would likely lead to a 45-day investigation, and would also likely be the subject of some pretty serious discussions about mitigation," said Mike Zolandz, chair of the federal regulatory and compliance practice at law firm Dentons, who advises companies on CFIUS reviews. "And it’s made more unique by the fact you don’t have two parties walking down the aisle to wed."

Qualcomm’s management and board have argued that shareholders should reject the approach because getting regulatory sign-off around the world for a deal this size will take an exorbitant amount of time. Executives have also said it would be far from certain that the biggest deal in the history of technology could even win antitrust approval. These concerns are a part of Qualcomm’s broader defense against Broadcom’s $79-a-share offer, which Qualcomm also believes far undervalues the company. The stock is trading at about $62, far below the proposed price, signaling that many investors think the deal may fall apart.

For its part, Broadcom dismissed the interest in the transaction by CFIUS as a desperate attempt by Qualcomm to remain independent and head off a likely shareholder vote in Broadcom’s favor. Broadcom also accused Qualcomm of provoking the investigation with a unilateral approach to the committee. Seeking to address concerns about foreign ownership of American technology, Broadcom points out that it’s planning to redomicile to the U.S. from Singapore in May and its executives are U.S. nationals.

Still, officially moving the company won’t automatically negate the committee’s jurisdiction, according to Kirkland & Ellis LLP partner Mario Mancuso, a former U.S. Department of Commerce undersecretary who once served on the secretive CFIUS panel. CFIUS has a broad scope for defining what foreign control of a company is, he said.

“For a transaction of this size, of this complexity, of this visibility, it’s hard to believe that within 30 days that CFIUS could either reach a conclusion that there are national security issues or that there aren’t,” Mancuso said.

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