U.S. regulators will often stop mergers and acquisitions because they are bad for the public in some way. Too much market control could inflate prices wildly, etc. When deals are killed it isn’t always obvious why. Sometimes they are disallowed because of national security implications.
China-based Huaweii was blocked from purchasing 3Com for such reasons as 3Com owned networking technology deemed crucial and was likely was embedded in numerous military systems.
We learned last night that the Trump administration stopped Singapore-based Broadcom from purchasing Qualcomm in a hostile takeover. The reasoning is not what you might think and it is a bit of a stretch.
The deal was blocked for national security reasons but as Stuart Carlaw, Chief Research Officer at ABI Research says:
This should be viewed as a very positive event not only for Qualcomm but also for the market as a whole. The combined entity would have had dangerously dominant positions in some core markets such as location technologies, Wi-Fi, Bluetooth, RF hardware and automotive semiconductors. A diverse supplier ecosystem will be key to supporting the IoT as well as vertical market developments such as smart mobility and smart manufacturing.
The idea here is the resulting company would exercise excessive market control. Very good points. Is this the primary reason this deal was blocked though? No. It’s just a side benefit.
Ken Roberts at Forbes explains, Qualcomm, in a somewhat unusual step, appealed to a secretive government agency, Committee on Foreign Investment in the United States, to block Broadcom from making the acquisition.
Roberts believes we are in a new cold war with China and Russia. We agree. The reasoning to kill the deal is fascinating however.
Broadcom said it would buy Qualcomm and run it like private equity. This in turn likely means less R&D investment. This would mean that Huaweii who is on a global tear could leapfrog the U.S. in this crucial area of 5G technology.
We waited patiently during Trump’s state of the union for him to mention tech and we were disappointed. His personal involvement in killing this deal shows however he does understand tech and its importance to the U.S. economy and our global leadership. We also know he realizes 5G is strategic based on past leaks.
While this decision does seem speculative – not approving a deal based on what might happen, it was done with the best of intentions. Are these free markets at work? No. But let’s consider that free markets enabled Chinese manufacturing companies to decimate the American competition. Now, the supply chain in China is so sophisticated that bringing manufacturing jobs back to the U.S. is near impossible according to none other than Apple.
The same thing happens in tech and innovation. Local ecosystems often develop around dominant players. This move may impact not just Qualcomm by the growing 5G ecosystem as well.