A few thoughts on the collapse of the Qualcomm-NXP deal

China just torpedoed a major global deal between two non-Chinese chipmakers. By refusing to grant regulatory approval to the deal, the Chinese commerce department effectively blocked it. This could be direct retaliation for Trump’s denial of a Broadcom-Qualcomm linkup on national security grounds. It is also a signal of China’s market power. Some thoughts below

Revisiting the proposed Broadcom takeover of Qualcomm

Broadcom made an extraordinary $117 billion bid for US chip giant Qualcomm, the company whose semiconductors are at the core of wireless handsets, with a deep portfolio of patented technology. So powerful is Qualcomm in the mobile space that the European Commission opened two separate antitrust investigations in 2015 into whether it was abusing its market position in baseband chipsets for consumer devices. In January, the EC ended up fining Qualcomm €997 million.

On Broadcom, though, the company’s operating headquarters are in California, since 2015, it has been incorporated in Singapore since the merger of Avago and Broadcom in that year. The Chinese connection comes via US President Trump’s decision to block the takeover of Qualcomm in March. Here’s how the New York Times covered the story:

President Trump on Monday blocked Broadcom’s $117 billion bid for the chip maker Qualcomm, citing national security concerns and sending a clear signal that he was willing to take extraordinary measures to promote his administration’s increasingly protectionist stance.

In a presidential order, Mr. Trump said “credible evidence” had led him to believe that if Singapore-based Broadcom were to acquire control of Qualcomm, it “might take action that threatens to impair the national security of the United States.” The acquisition, if it had gone through, would have been the largest technology deal in history.

Mr. Trump’s decision to prohibit the blockbuster deal underscored the lengths that he is willing to go to shelter American companies from foreign competition. In recent weeks, the president has turned to an arsenal of tools — including tariffs and an obscure government review panel — to ward off foreign control in American industries and, in particular, thwart the rise of China.

The crux here is not that Broadcom has any direct ties to the Chinese government. Rather, it’s that the US under Trump will go to great lengths to thwart China’s ability to access advanced technology developed in the United States.

The regulatory power of the EU and China

There was a time when the US reigned supreme from a regulatory perspective. But increasingly now, the US has taken a hands-off regulatory approach. And the desire to let American technology companies prosper abroad has also meant that the US is no longer at the global regulatory center.

The EU has become the de facto standard setter for regulatory controls. We saw that with the EU’s recently introduced General Data Protection Regulation standards. We saw it with the fine against Qualcomm. And we are seeing it now with the recent fine against Google for abusing its market position. The EU’s role as regulator-in-chief puts it in direct conflict with the ‘America First’ strategy of US President Trump. And though Trump has directed his ire at steel, aluminum and autos, the EU’s regulatory power is a major underlying cause of animosity between Trump and the EU.

China has that power too now. We see that with its decision to block the Qualcomm-NXP deal. This is a deal that has been in the works for almost two years. And it had garnered regulatory approval in eight other jurisdictions, including the European Union and South Korea, since it was first announced in October 2016. So the fact that the deal is off tells you that China has regulatory market power too.

The question now is: how will China use that power in the future? In a world in which the US and China are rivals and the transfer of technology is a key issue underlying that rivalry, both China and the US are likely to use their regulatory might to scupper global deals by effectively denying access to their respective markets.

The US has also shown it can bankrupt Chinese firms by cutting them off from US technology. We saw that in the ZTE saga. And the US Congress is still threatening to cut ZTE off by overriding Trump with legislation. China could also play this game though. And this is a legitimate threat to the growth of US technology companies.

What’s more, Beijing could take it one step further and impose regulatory burdens on incumbent businesses operating within its domain. For example, in 2017 Apple announced that it was opening a data center in China to comply with Chinese strict new cybersecurity laws. And Apple is not the only US company putting huge capital into Chinese data centers: Microsoft, Facebook, and Amazon are doing as well. Forget about privacy, cybersecurity and espionage for a second and think about the threat that China just shuts these centers down. That is the concern.

Final thoughts

I think the end of the Qualcomm-NXP deal is a shot across the bow for the Trump Administration and for US technology companies. China is a real player economically and its market is very attractive to global companies. In a world in which the US and China are hostile to one another, the threat of retaliation against American businesses by China increases. And that would have a major impact on valuations.