Broadcom andQualcomm

The ordinary test

Antitrust review asks whether a combined company would raise prices or reduce choice for customers. A bidder can estimate that. It knows its own products and its rival's, it can compare their market shares, and it can propose divestitures. Most large technology transactions are priced on the assumption that this is the test.

Broadcom and Qualcomm were largely complementary. Broadcom's strengths were in connectivity and networking chips, and Qualcomm's were in mobile processors and in the patents covering how handsets communicate with networks. Under the ordinary test the overlap was modest.

What the committee examined instead

The Committee on Foreign Investment in the United States reviewed the bid because Broadcom was domiciled in Singapore, which gave it jurisdiction. Its concern, as reported from its March 2018 letter to the companies, was that Broadcom would reduce Qualcomm's research spending, that this would weaken American participation in the committees that write the 5G standards, and that Huawei and other Chinese companies would fill the gap (eWeek). Standards are negotiated over years, and the companies that contribute the most engineers tend to hold the patents that become essential to the result.

Hock Tan, Broadcom's chief executive, told Congress that any notion that the combined company would cut 5G funding or cede leadership was “completely unfounded.” Broadcom also offered commitments on research spending. The president's order, issued on 12 March 2018, rested on a different kind of finding: “There is credible evidence that leads me to believe that Broadcom Limited” might “take action that threatens to impair the national security of the United States.” It added that Broadcom and Qualcomm “shall immediately and permanently abandon the proposed takeover” (presidential order).

The word that matters is “might.” The order does not find that Broadcom would harm the United States. It finds credible evidence that it could. That is a lower standard than the evidence a competition case would require, and it turns on a prediction of industrial capability several years out, which Broadcom disputed and which no market share table can answer.

What changed for bidders

Before the order, a bidder's regulatory risk was mostly a competition analysis it could price. After it, the risk for a semiconductor deal included a national interest assessment that could stop a transaction on a forecast. That is hard to price, and it explains features that are now routine in large chip agreements: long outside dates for completion and termination fees large enough to compensate a seller for waiting.

Subsequent export controls, restrictions on named companies and manufacturing subsidies follow similar reasoning. The 2018 order did not cause them. It was an early public application of that reasoning to a transaction this large.

The strongest objection

The order may reflect unusual facts and not a general rule. Broadcom was a foreign acquirer of a company at the center of a standards fight with a named competitor, and it had a publicly known practice of cutting research spending at companies it bought. A different buyer with a different record might have been cleared.

That is a reasonable reading, and later transactions test it. If large semiconductor deals involving US-domiciled buyers continue to face reviews that turn on capability and not on market share, the 2018 order was an early instance of a general change. If they clear on competition analysis alone, it was an exception.

What a reader should take from it

When a semiconductor deal is announced, read the domicile of the buyer and the seller's position in standards and supply chains alongside the market shares. The termination fee and the outside date show how much approval risk the parties believe they carry.