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Frenemies at the gate: Why Trump blocked Broadcom's takeover

Singapore Business Review logo Singapore Business Review 3 days ago Staff Reporter
Frenemies at the gate: Why Trump blocked Broadcomm’s takeover © Provided by Singapore Business Review Frenemies at the gate: Why Trump blocked Broadcomm’s takeover

Analysts warn that Singaporean companies linked to China will bear the brunt of an ongoing 'economic war' with the US.

US President Donald Trump blocked Singaporean microchip maker Broadcom Ltd's proposed takeover of Qualcomm Inc, and said in a presidential order that there is "credible evidence" that the deal threatens national security. This ends what would have been the technology industry's biggest deal ever amidst concerns that it would give China the upper hand in mobile communications.

Even if Broadcom is a Singaporean company, BMI Research ICT analyst Kenny Liew noted that its impact on US-Singapore relations is little to none. "Trump's 'America First' rhetoric has been dictating domestic policy, and a significant amount of his protectionist moves have been in the tech industry. We do not see any possible repercussions to US-Singapore relations – whilst Broadcom is incorporated in Singapore and is Singaporean-led, most of its manufacturing and R&D base is still centred in the US," he said.

Moreover, Broadcom CEO Tan Hock Eng has also promised to re-domicile Broadcom in the US again. "Trump's intervention is largely to protect the American IT sector and manufacturing, and has little to do with political relations," Liew added.

Natixis Asia Pacific chief economist Alicia Garcia Herrero disagreed with Liew and said Singapore's ties with the US are getting worse. She said, "It is getting worse as any other US' bilateral relation, same with Europe, Korea, etc if not worse. It means the long-time US allies need to understand that the US is terrified by the speed it is losing power (especially versus China) and it is going to overreact to any perceived attacks."

Herrero warns Singaporean companies linked to China may feel the tension with the US and even be hurt by it. "This is just the beginning," she said. "US economic war is not going to stop at trade but it is going to move to investment (even the currency, which such a weak USD if one considers that we are the peak of the cycle and with FED tightening looks suspicious)."

Jefferies Singapore analyst Edison Lee concurred with Herrero and said Broadcom's hostile takeover of Qualcomm has become hostage to politics. "The US government brought the proposed acquisition under the investigation of the Committee on Foreign Investments in the US (CFIUS) a few days before QCOM's board meeting, which has now been delayed. It is reported that the US believes the deal could present a national security risk as QCOM possesses strategic technology and is an important contractor for the US Department of Defense," he said.

The US$117b deal was previously probed by the US Committee on Foreign Investment in the United States (CFIUS). In a letter dated 5 March 2018, the CFIUS declared that the deal "could pose a risk to the national security of the United States."

CFIUS investigated whether "the likelihood that acquisition of Qualcomm by Broadcom could result in changes that affect the security and integrity of supply of goods and services to the US government in a manner that is detrimental to US national security." It revealed that Qualcomm is a supplier to the Department of Defense (DOD) and performs on a range of contracts for the US government customers with national security responsibilities. It also holds active sole source classified prime contracts with DOD.

Lee said, "We believe the US is worried that China may control the majority of 5G, and potentially future cellular tech if Broadcom gains control of QCOM. Then the US would have no choice but to use Chinese equipment/technology in communications."

Aside from taking defence, the US is also likely gearing itself up to lead in tech. Liew noted that US technology companies are also hoping to become leaders in new generation technologies such as 5G and IoT technology, applications and solutions. "Qualcomm products are likely to underpin 5G and IoT in the long-term. The US government are likely unwilling to take the risk that valuable 5G and IoT patents – intellectual property having an inherently longer value lifespan than physical or digital product – could fall outside its jurisdiction, so this is also very much a case of industry ensuring it has a long-term stake in the new connected age."

Also read: Singapore beats US in luring Chinese investments

However, Liew shifted the focus to the emergence of China as a global technology leader, which could be the root of why Trump blocked the deal. "If Broadcom acquires Qualcomm, the latter would likely exit several businesses or consolidate its operations with Broadcom – allowing Chinese companies to quickly fill in any void. The block is not surprising and is in-line with the trend of protectionism that has characterised Trump's presidency – the US is fearing Chinese dominance in an industry that has long been led by the Silicon Valley, and would move to protect its domestic IT industry from any external influence, be it China or any country."

Chinese M&A activity is also growing especially within the tech space. "The Chinese government has been removing restrictions on Chinese companies involving foreign acquisitions, in a bid to increase Chinese dominance in the technology industry. The US government has responded – the CFIUS blocked Ant Financial's acquisition of MoneyGram (also amidst national security concerns), the government moved to block use of Huawei and ZTE telecoms equipment – all have largely been done to benefit of American equipment makers, to champion American-made products, and to protect America's primacy in sectors where it is the world leader," Liew said.

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