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Qualcomm: Thank You, CFIUS

Mar. 06, 2018 4:26 PM ETQUALCOMM Incorporated (QCOM)AAPL, AVGO, NXPI284 Comments


  • Qualcomm security concerns are real, not "theater."
  • The CFIUS letter's unintended irony.
  • Why I voted the White Card.

Rethink Technology business briefs for March 6, 2018.

The CFIUS letter makes clear that security concerns are not "theater"

Broadcom CEO Hock Tan, source: Broadcom.

Broadcom (AVGO) has characterized the delay in the Qualcomm (NASDAQ:QCOM) shareholder meeting as

...a blatant, desperate act by Qualcomm to entrench its incumbent board of directors and prevent its own stockholders from voting for Broadcom's independent director nominees.

Broadcom also has criticized the secrecy surrounding Qualcomm's request for a Committee on Foreign Investment in the U.S. (CFIUS) review:

Broadcom reiterates that Qualcomm failed to disclose to its own stockholders and to Broadcom that it secretly filed a voluntary unilateral request for CFIUS review on January 29, 2018. Broadcom's only correspondence with CFIUS was in response to CFIUS inquiries about Broadcom's nomination of directors to the Qualcomm board of directors, and such requests did not reveal that Qualcomm filed to initiate the CFIUS review on January 29, 2018.

Although Broadcom clearly wants to portray Qualcomm's management as going behind the backs of its shareholders, I doubt that the secrecy can be considered a failing.

The Wall Street Journal has published a letter by the Treasury Department's Deputy Assistant Secretary Aimen N. Mir explaining the investigation that was sent to both parties on March 5. Mir divulges some information about Qualcomm that, while not classified, is probably not generally known:

U.S. national security also benefits from Qualcomm's capabilities as a supplier of products. For example, Department of Defense national security programs rely on continued access to Qualcomm products. Qualcomm holds a facility security clearance and performs on a range of contracts for the United States government customers with national security responsibilities. Qualcomm currently holds active sole source classified prime contracts with DOD.

In my past life in the defense industry, I probably worked for many of those same

The above Tech Briefs contain excerpts from a report published exclusively for Rethink Technology subscribers. Qualcomm is part of the Rethink Technology Portfolio and is rated a buy. Overall, the Portfolio provided a 39.2% total return in its first year.

Consider subscribing to the Rethink Technology service before March 12, when the price will increase 20%. Subscribing before March 12 permanently locks in the lowest price regardless of future price increases, which will probably happen on an annual basis.

This article was written by

Mark Hibben profile picture

Mark Hibben has a masters in Electrical Engineering from USC and is an independent iOS developer utilizing his experience working in the technology sector to inform his investing decisions. He is the leader of the investing group Rethink Technology.

Members of Mark’s investing group Rethink Technology gain access to a portfolio full of tech stocks that have high growth potential over a long 5-10 year timeline along with associated articles. Learn More.

Analyst’s Disclosure: I am/we are long QCOM, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (284)

ROcketroj, what you describe is the so-called Free Market, no? Corporate raiders, big money, buyout firms and banks sensing money to be made, nothing new here. Only thing new was Trump, a supposedly GOP free market big businessman, deciding rules and processes are meant to be broken on a whim before all the normal process has taken place.

I happen to think this was good for Qualcomm and U.S., for security and IP reasons, but Trump's disregard for convention and rules and regulations may not always work in your favor, so be careful what you wish for. If we get the trade war he thinks is easy to win, a different tune might be in order (a Prussian March, perhaps?).

Also, you are quite wrong when you say: "Prior to the new administration our Government seldom stood up for our industry, technology and IP. " A key facet of the TPP was protecting US intellectual property and technology. Now that Trump has dumped that, we have nada there. If you are willing to go beyond ideology, the facts are there.
rocketroj profile picture
We agree that blocking the buyout was good for QCOM and USA. Apple influencing Obama's FTC to file suit against QCOM 3 days before Trump took office was not the free market in action. Apple lost their battle with QCOM in the free market so they have reverted to political influence and legal action which are the antithesis of the free market.

Exactly when did the Obama administration stand up for our industry, technology and IP? What effective actions did Obama take commensurate with our $700B/year trade deficit?

So far Trump has taken a couple small actions, that will hopefully be followed by huge and sweeping reforms. Trump is our first President that understands we have been in a trade war for over 30 years and it is time to call some defensive and offensive plays.
looking like we needed trump in the 90s after the chineese rocket with us gear on it exploded ,
the republican pres of the company then helped the chineese make their rockets better , trump would not have alloewed that and/or would have dismantled that company for natiomal security issues !!

so an american republican of a private company to me has committed treason , and helped china become more serious problem for us now

trump is more for america then any president in the last half century
rocketroj profile picture
Sounds like Trump took an even larger trade action specifically singling out China. $50B in tariffs is far more than the shot across China's & ROW's bow on aluminum and steel a couple weeks ago.

He is delivering on a campaign promise since unfair trade is one of the main reasons he was elected. Like his replacement of free trade with reciprocity and statement that this is first of many. He is talking up IP theft by China, cannot wait for action to fix that problem.
rocketroj profile picture
Good article. Should be thank-you Trump. Prior to the new administration our Government seldom stood up for our industry, technology and IP. That needs to change in a big way for USA to maintain leadership. The Rest Of World clearly sees the value of QCOM and is determined to take it and associated IP away. Just look at the World Wide attack that has be mounted on QCOM over these past 4 years. Apple was even able to get Obama's FTC to put it's heavy boot on our beautiful QCOM's neck 3 days before Trump took power. Every attack was one more step toward the goal of eliminating QCOM so Rest of World can divvy up the spoils.
It looks like game over for the hostile takeover. Trump's order apparently cannot be appealed. WD
the907man profile picture
One thing that is favorable for QCOM is IP concerns being front and center politically right now. In the past, I often asked why US leaders never said publicly that “we have been getting ripped off for years”. It’s good to hear it said out loud and directly to the thieves. When a country steals IP from an American company, they’re stealing from all of us. If China wants to receive equal respect, they’re gonna have to reciprocate. In the end, this will benefit QCOM. Now, if we can just get the American companies (AAPL) to stop stealing from QCOM!

long both qcom and aapl..
QCOM is down 5%. Market spoke. Its not IP, its execution.

US patents law may or may not hold/agree in the rest of world. QCOM revenue is mostly China based. US market is much smaller. Less than 5%.
shadeswright3 profile picture
Seems like most of the comments are from QCOM investors. I’d be pissed to the way their board ignores them and has for three years or longer. I wonder how things will be different when the deed is gone and they are out of the news like before the first offer was made.
4paisa profile picture
Thanks indeed to CFIUS.
All Hock cares for is the liquid cash that QCOM has on its balance sheet. He will break and sell QCOM in pieces to whoever will pay.
Wildbiftek profile picture
If you read between the lines of what Mnuchin said this morning on CNBC, he was saying that this deal is dead (see around 7:00):


He went into some detail about what happens when a company was denied a bid, and generally they pull the bid without publicly revealing CFIUS involvement. I think Mnuchin would have preferred this as the Trump administration doesn't want to appear as if it were getting in the way of business, but what likely happened was that Tan wouldn't take an unofficial "no" as an answer and is continuing to publicly pursue Qualcomm. He's not making any friends in government by forcing Mnuchin's hand here in postponing the shareholder meeting and making the whole affair very public.

The next step sounds like a more official document that makes its way to the office of the president where he will likely officially deny the bid. I doubt Trump is too happy that Tan exploited a redomicile photo op to make an opportunistic bid for a besieged and important American tech giant.

What's also interesting is that Mnuchin kept saying that it was a "unique" situation. I have no doubt that Qualcomm's involvement in standards development is critical to American intelligence gathering, but who knows what dirt they have on Broadcom as well. Tan's extremely aggressive move of ignoring the more diplomatic "no" makes him either very tenacious or very desperate; I think it's the end of the road for Broadcom's meteoric share price rise and Tan knows it.
Downtown10 profile picture
Great observations Wildbiftek.
Steve Rasher profile picture
Wildbiftek: Thanks for sharing the link. Yes, it was a very revealing interview on a number of fronts, including the QCOM/AVGO situation. I believe your comment and analysis is spot on. Yes, Mnuchin refused to answer the direct question of whether the deal is dead, but in so doing I agree he left little doubt. This was unique because of its hostile nature and the fact that there was proxy contest where a majority of the BoD could be from the AVGO slate. As you say, this forced CFIUS's hand, but it also gave them an opportunity to signal to all these institutional holders that this is not your usual M&A deal and they need to rethink their votes.

What is also important to note from Mnuchin's comments is that in general technology and IP are high on the radar of CFIUS. This says volumes about potential, or actually the lack thereof, for foreign companies seeking to acquire U.S. technology related companies.

By the way, Mark Hibben, excellent article and I couldn't agree with you more. Thanks for writing the article. Steve
Wildbiftek profile picture
I'm pretty sure the Broadcom slate which is under NDA regarding their intentions for Qualcomm and on the payroll of Tan is unelectable at this point. However, the most deft handling of this situation by Qualcomm would be to offer some amount of voluntary turnover of the board at the next election as a concession to unhappy shareholders and cutting some of their costs; but they should generally hold their course in litigation with Apple. I think it will break in favor of Qualcomm sometime this year.
HardCovenant profile picture
I'm surprised no one has mentioned that

i) CFIUS is basically run by Mnuchin, and

ii) Mnuchin Sr. who ran private equity at GS made some very shrewd investments going back 30 years in a wireless pioneer named Qualcomm, and

iii) Goldman is Qualcomm's defense banker

just sayin....
Its interesting to see 11 nations signed deals to free trade without intellectual property protection. Possibility remains asian and other south american countries will follow it. Number of smartphones sold in those countries are much higher than US and Europe.

Trade war is a bad news for QCOM.

Protectionism is ultimately bad for US. All the key things in 5G or 4G are not rocket science. Non-US countries can definitely come up with their own standard. Even if it is a bit less optimum than 5G, it would hardly matter. Only reason QCOM dominates in standard is because of continuity not superiority of technologies (which they may or may not have).

If other countries get together and sign trade agreement to go develop their own standard and abandon 5G in favor of their own standard, QCOM will be doomed. If China and South Korea agrees with something, asian and South American countries will follow along.

But US and European market are smaller and not growing.
Wildbiftek profile picture
Like it or not, intellectual property is what will drive the world economy in the 21st century. Ask yourself this: what is truly scarce in this world, the fundamental know-how to advance human mastery of nature or vulgar business acumen that doesn't care if it's running a toilet paper mill or a the world's leading communications semiconductor company? You do a disservice to everyone by supporting what's short sighted and common vs what's scarce and valuable.
Sorry to post an unrelated question - Was just going through 1099 and noticed that QCOM 2017 dividends were characterized as return of capital. Checked with broker and after some research they confirmed that all but December dividend were RoC and they would be reissuing 1099's for all QCOM shareholders. Was everyone aware of this? I must have been asleep at the switch. Did the company notify shareholders?
yes I received the notice.
zoeshamu profile picture
All multinational companies do things for tax purposes. QCOM does different things to avoid paying US taxes as well. It ain't no US darling when it avoids paying taxes to the US.
-> http://bit.ly/2IeniNS
Whatever Qualcomm did was within the laws of USA. What Broadcom did was run away since they did not want to follow the laws of USA.
zoeshamu profile picture
It's sh*t packaged and tied with a different ribbon, that's all it is. You're just too slow to understand there is a difference. Singapore is like a hub to both East and West. It's in their historical location. That's why it's called global and companies can be based virtually anywhere. Even in your garage.
You are just skirting around to say whatever you want. Facts are facts. Broadcom ran away from USA. Let us leave it at that.
As of now where is Broadcom incorporated? Going by where they are currently incorporated, is it a foreign company or not? If they were so patriotic, why did they not incorporate themselves in USA in the first place. With regards to their future redomiciliation, what is the guarantee they won't jump ship again at a later date. They have already shown their true color based on their past actions.
JunkBondage profile picture
With the focus on CFIUS and keeping American technology out of the hands of those damned foreigners, I invite you to read this NY Times article entitled: How Foreign Is Broadcom? I always prefer facts to hysterical rhetoric, distortion and spin.

This article is useful as it looks at QCOM and AVGO side by side to present a concise snapshot.

NYT, as a well-known fake news hub, is twisting, not surprised. US companies, not only QCOM, have cross license agreement with foreign entities. This is well monitored under gov agents. What NYT finger point to is not a secret. QCOM investment in Chinese hi-tech start-up is on implementation mostly. As the investor, Q also largely owns them. Ownership wise, those start-up are US companies in China, just like current Broadcom is a foreign company in US. I don't believe you would think Toyota is a US company either

The national security risks lies into Hock private equity style that cuts innovation investment to bone for quick short term return. Well he has no choice b/c of the hefty debt to pay. This is a timing bomb to our future as we will hand our communication/information infrastructure to foreign eventually. The other concern is Hock would be selling IPs in a big one time package for debt payment. That's has the same damage as above.
Wildbiftek profile picture
The difference is that Qualcomm's political allegiances are well vetted and they own the IP standards used by the implementations sold to the Chinese and have better working knowledge of both than the Chinese. Broadcom's business tactics may change that.

The most important point made by the CFIUS panel wasn't necessarily related to the political allegiances of Broadcom but more related to the highly levered short term profit focus of Tan. The need to pay down the debt from an Qualcomm acquisition would force Tan to eliminate any longer term initiatives at Qualcomm, most notably standards development which may last 5 to 10 years rather than most of Tan's initiatives which span a few quarters. Many state sponsored corporations abroad would be more than happy to take Qualcomm's place in this vacuum and the US would lose its domestic working knowledge of future standards and equipment. The impact on their ability to gather intelligence would be enormous.
"highly levered short term profit focus of Tan" This the complete BS. The total value AVGO is offering to the shareholders is 79 dollars/share. The value QCOM management is offering is 50 dollars (where the QCOM stock was before the deal and where it will be if the deal does not go through).

QCOM is here to serve shareholder interest of maximizing their values not to serve the US government interest in dominating 5G (That would be communism not capitalism). There is nothing that will be changed after AVGO acquisition except for fat stock options for top QCOM management.
07 Mar. 2018
I see the angle CFIUS is coming in at for reason to block this takeover. It's not that they think he will do bad things, it's that the possibility for bad things to happen increases. With a new group of leaders, some may have other investments in other countries that they would like to share QCOM technology with, therefore opening it up and letting control slip. Basically, everything that's already been said in the article and in the comments already I agree with.

My personal take is that QCOM needs to wake up. They have a frustrating management team, in my opinion, that would rather be right and lose money than be flexible and make money. These countless patent trials, losing big customers, etc... it just seems like they are a company in it for the near term and not the long term. Take a step back, does it make sense to get into a fight with Apple which generates a lot of money for QCOM? Instead, Apple is now working with other suppliers and heck they went one step further and accelerated their own component R&D to help avoid having to use QCOM again. In other words, QCOM made it such that it's a cheaper alternative (long term) for Apple to R&D their own hardware from scratch, than to rely on suppliers. Now that they have done it... what's the tipping point for Samsung... LG...Sony... and all the other customers that rely on QCOM technology?

I had a long QCOM position, but exited the position after AVGO offer was turned down. I hate to say it, but this was a HUGE blessing in disguise for Tan. There's no point in winning a treasure box of toys, if you are the only one that will play with them.
With regards to Apple, QCOM was backed into a corner and had no choice but to take the legal re-course. Apple was wanting to upend QCOM's royalty model which was upheld by all the market participants including the Chinese manufacturers.

I am really disappointed in Tim Cook, he talks a big game about being a patriot and protecting IP for Apple , but is unwilling to honor the IP of his suppliers . Use the media- it was not just co-incidence that a rumor surfaced in the tech rags that Apple was planning on sole sourcing their modem with Intel for next generation phones just before Broadcom agreed to bid up their offer to purchase QCOM), a scare tactics to depress the stock so to make the Broadcomm offer all that more attractive.
AAPL announcement of Intel modem did not suppress QCOM price. QCOM was priced at 50 before the AVGO offer.

If US government has an interest in dominating/controlling 5G or 4G they cannot do it at the expense of shareholders. CFIUS cannot say that they would not let a specific director to take over because an US interest would be hurt. US companies do not serve US government interests.

AVGO has no plans to lowering control/dominance over the cell phone core communications/applica... technology. As a whole QCOM is not seen to be run efficiently enough give shareholder values. AVGO is just promising more values.

Thats all business as usual.
Mark - excellent analysis.

I would posit that in the long term for shareholders (as well as US technology leadership) we are better off QCOM being a standalone company.

I would agree that Broadcomm would do a better job in the short term in improving the operational efficiency but it is akin to killing the goose that lays the golden egg. By assuming a huge debt load, BRCM would have no option but to cut back on R&D and make a quick return on their investment (just ask former BRCM employees). I had in a previous article commented that Apple is using a back door to stifle competition, and has vested interest in the disappearance of QCOm.

The Chinese are in a conundrum- do they want to help VIVO, Xiaomi and OPPO by having access to the best of breed QCOM SOC solution or help Huwawei gain 5G tech leadership ).

Also after listening to the BRCM 4Q earnings call, skeptical of Hoc Tan's style of pumping the stock. Broadcomm management is not very transparent -just look at the gap between GAAP vs NonGAAP earnings. Their acquisition strategy reminds me somewhat of Valeant (and we all know what happened )

I am hoping this near death expereince is a wake up call for QCOM managment, for way too long (because of their licensing mode)l they have been fat, dumb and happy. There is clearly opportuity to improve ROI, by streamline their operations and provide better return to their shareholders.

However the biggest risk IMHO is allowing China (indirectly) to gain a leadership role in next generation communication technology.

Disclosure: LONG QCOM, but still willing to endure the short term price retraction for longer term gains (till then happy to collect the dividends).
Landlord Investor profile picture
It seems odd to me that the committee on *foreign* investment (CFIUS) would take an interest in this merger. Broadcom is not a foreign company. CFIUS review is usually for takeover of an American company by a foreign company. Right now, CFIUS has been active in denying Chinese takeovers of US companies due to security and privacy concerns. I can't see any reason why this merger would draw the scrutiny of CFIUS when its entirely domestic.
Wildbiftek profile picture
The thrust of the CFIUS letter centers around a separate point that's much more substantive: the likely focus on leveraged short term profit of Qualcomm under Tan over long term investments that secure long term American ownership of future cellular standards, equipment, and working knowledge of both. Tan would give up any R&D that doesn't show profitability within a few quarters and standards development are definitely a marathon rather than a sprint. Keeping working knowledge of standards and equipment domestically is essential for American intelligence gathering and security. This is also a tacit admission that Qualcomm's model of assessing licensing fees for its standards IP is legitimate and must be protected by the US for security reasons.
Retired Securities Attorney profile picture
Broadcom may now be incorporated domestically but that, by itself, does not make it domestic. Consider, for example, whether a corporation incorporated in Delaware and 90% owned by China would be "domestic".
zoeshamu profile picture
@Retired ... Attorney

And how does this apply to Broadcom? There is no parallel. AVGO is mostly Americans and the CEO is an American citizen. Broadcom chips are in Google cloud servers and many optical switches which carry the Internet.
Mark, just read this piece and you'' ll know how wrong are you.
The divergent opinions here reflect my uncertainty about QCOM. It has so many complex issues to resolve, from lawsuits over its patent fees and from foreign countries to whether the NXP merger will produce results to whether all this 5G hoopla will really pay off. Not sure anyone can really assess its future at this point, which is why a lot of people (but not me) like the idea of an $80 bird in the hand versus the $?? birds in the bush.

The arguments set out by QCOM in proxy statements for not selling to Broadcom sound good. I hope they are right and can execute them. Let's also not forget QCOM was languishing in the $40s before Broadcom made its bid. If the federal review keeps QCOM independent, I for one am not at all sure where the market is going to price QCOM.
the907man profile picture
White card for me as well. Great article!
Contrarian724 profile picture
I was fooled at first and voted for the merger. I was very disappointed in QCOM. I also own NXPi and wanted that acquisition to take place but at a higher price. I would rather have QCOM shares with no tax consequence in the transaction. So I initially voted for the blue card but most recently changed my vote to the white card after I looked at the broader picture. This article even broaden my view of the situation further. Thanks for writing it all down and sharing. It has verified my vote is correct voting with the White card.
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