Broadcom Ltd (NASDAQ:AVGO) was all ready to buy Qualcomm, Inc. (NASDAQ:QCOM) in a $117 billion deal, but President Trump has issued an order to unilaterally kill that merger. What exactly is going on here, and what does it mean for AVGO stock and others?
AVGO is a foreign company, and even though it planned to re-domicile here in the United States, the merger was subject to review by the Committee on Foreign Investment in the United States. The committee is run by the Secretary of the Treasury, and the committee includes senior cabinet members, including the secretaries from Justice, Homeland Security, Defense, State, Energy and Commerce.
The committee’s primary purpose is to determine whether a foreign company making any kind of investment or acquisition in the United States may pose a national security threat.
These national security concerns can be just about anything. The whole point is that it is not necessarily in American interests to have a foreign company own significant assets here in the United States. This is particularly true of China. It is even more true when it comes to technology acquisitions.
The President did not give specific reasons for blocking this merger, but claimed that “there was credible evidence” to suggest that Broadcom “through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States.”
The Cause of Trouble for AVGO Stock
Most pundits seem to agree that this has to do with 5G infrastructure and technology associated with it. AVGO stock has a significant advantage in this area. QCOM supplies a lot of products for the Pentagon, and thus the merger raises concerns about security clearances at AVGO.
While these are legitimate reasons to block the merger, there are probably geopolitical issues going on here that investors will never hear about.
There is an economic struggle going on now between the United States and China, and the assessment of tariffs on steel and aluminum imports is partially directed at China.
Remember, geopolitical wrangling is very complex. The President is happy to work with China on certain issues, but sees it as a threat regarding other issues, particularly how China is impacting the American economy.
Cheap imports are just one piece of it. Cheap labor is another element. Trump wants to keep fulfilling his promise about putting America back to work. People who were out of work the past few years, and blue-collar workers, are very much supportive of the President and his policies.
In addition, by devaluing its currency, China makes importing U.S. goods even more expensive.
It seems likely that the President and the committee are concerned that this merger might somehow make the race to 5G less competitive with China.
This is not the only merger that has been blocked, but in the past few years, the only ones that have been blocked are those in which a Chinese company was looking to acquire, merge with, or make a strategic investment in one of the U.S. firms.
What does this mean for other mergers? It means that countries in the Far East seem less likely to be able to push through any kind of acquisition, whereas European countries are more likely to be successful.
As for QCOM, all hope is not lost and it’s quite possible that another suitor could step up to the plate.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
