By Ted Greenwald
Broadcom Ltd.'s $105 billion gambit to acquire Qualcomm Inc.
faces challenges not only in winning over shareholders but in
navigating a host of potential roadblocks from regulators over
market dominance, innovation and national security.
For now, any marriage is in limbo after Qualcomm rejected the
bid last week, leaving Broadcom to decide whether to raise its
offer or seek board seats.
Combined, they would form the No. 3 chip maker by revenue behind
Intel Corp. and Samsung Electronics Co. -- a colossus spanning
markets from consumer devices to phone-service providers to data
centers.
That alone may give antitrust enforcers pause. Add in,
authorities in the U.S. and other countries already have Qualcomm's
patent-licensing business in their crosshairs, and regulatory
reviews have held up other multibillion-dollar deals initiated by
both companies.
Regulators would have to consider the merged entity's dominant
position in parts critical to smartphones. Broadcom and Qualcomm
are the top suppliers in Wi-Fi and Bluetooth chips for wireless
devices with a combined market share of roughly 60%, and together
they would dominate in GPS chips with a 52% share, according to the
market-research firm Gartner Inc. They also compete in components
that amplify, filter and route cellular radio signals. Qualcomm
leads the market for cellular communications chips with a nearly
59% share.
The Justice Department's lawsuit on Monday to block AT&T
Inc.'s proposed $85 billion takeover of Time Warner Inc. sent a
signal that even Republican enforcers, who generally have been
friendly toward mergers, could take an interventionist attitude
toward large tie-ups.
Broadcom Chief Executive Hock Tan has expressed confidence that
the deal would pass muster. "There's nothing we can't work through
in our review in terms of regulators, which is why we believe
there's a very clear path to completion," he told the Wall Street
Journal shortly after he submitted his bid.
Qualcomm declined to comment. The proposed merger "comes with
significant regulatory uncertainty," the company said in a
statement when it rejected Broadcom's bid.
The combination could undermine consumers, device makers,
software coders and service providers by creating an entity capable
of dictating what wireless devices can and can't do, said Sascha
Meinrath, a professor of telecommunications at Pennsylvania State
University.
U.S. regulators have paid particular attention to deals that
allow a single company to package complementary technologies in
ways that could thwart smaller competitors, said Harry First, a
professor at New York University who specializes in antitrust law.
In the early 2000s, for example, regulators ruled Microsoft Corp.
unfairly blocked Netscape Communications Corp. by bundling its
Internet Explorer browser with its Windows operating system.
In Europe and China, a Broadcom-Qualcomm merger likely would
entail "a lot of required divestitures and behavior requirements"
such as selling or sharing intellectual property, said Eleanor Fox,
a specialist in international antitrust law at New York
University.
European regulators lately have been eager to ensure continued
spending on innovation, Ms. Fox said. Earlier this year, they
conditioned approval of the $130 billion merger between Dow
Chemical Co. and DuPont Co. on the latter's sale of a
research-and-development center.
Mr. Tan isn't averse to divestitures. After merging Avago Ltd.
and Broadcom in 2016, he sold Broadcom's wireless
internet-of-things unit to Cypress Semiconductor Corp. because it
didn't fit his yardstick for market dominance or predictable
revenue, among other criteria, Bernstein Research analyst Stacy
Rasgon said.
China, meanwhile, hasn't shied from using antitrust decisions to
help local industry. In settling a complaint against Qualcomm, for
instance, Chinese authorities in 2015 demanded the chip maker cut
its royalty-rate basis in that country, a requirement some
observers interpreted as an effort to give Chinese device makers an
advantage.
Mr. Tan already has suggested he might revamp Qualcomm's
patent-licensing business, despite its pretax profit margin far
outstripping that of the company's chip sales. In an interview with
Mr. Rasgon, he said he "sees an opportunity to rationalize and
restructure the licensing business." That could hearten competition
watchdogs world-wide as well as Apple Inc., which is waging a
bitter war against Qualcomm over royalty rates.
Broadcom has said it expects the transaction to clear regulatory
reviews within 12 months of striking a deal. That is not
unrealistic, according to antitrust experts. However, both Broadcom
and Qualcomm have encountered obstacles in getting other deals past
regulators.
Qualcomm's $39 billion deal for automotive chip leader NXP
Semiconductors NV has been delayed by the European Commission.
Broadcom's proposed acquisition of Brocade Communications Systems
Inc. for $5.5 billion was held up in a U.S. national security
review before closing last week.
The Committee on Foreign Investment in the U.S., which vets
foreign acquisitions of U.S. companies on national security
grounds, lately has combed chip deals for involvement from China,
which been trying to extend its semiconductor capabilities. Late
last year, for instance, the committee quashed the sale of Aixtron
SE, a German maker of chip-fabrication equipment that has U.S.
operations, to Chinese investor Fujian Grand Chip Investment Fund
LP.
Broadcom's Mr. Tan recently took what appeared to be a step
toward easing such scrutiny. Shortly before presenting his bid to
Qualcomm, he stood beside President Donald Trump to announce a plan
to relocate Broadcom's headquarters from Singapore to the U.S.
The committee is likely to investigate anyway if it suspects
Chinese backing, said James Lewis, a senior fellow at the Center
for Strategic and International Studies in Washington. However, he
believes that is unlikely. The tie-up would cause "a little
discomfort," he said, but probably not enough to trigger a national
security investigation.
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
November 22, 2017 07:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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