Thursday, December 26

Bargaining Chip? China Seen Closely Scrutinising Qualcomm, Broadcom Deal

A potential mega-merger between chipmaker Broadcom Ltd and U.S. rival Qualcomm Inc is likely to face stern scrutiny in China, antitrust lawyers say, amid a strategic push by Beijing into semiconductors.

Broadcom made an unsolicited $103 billion bid for Qualcomm on Monday, aimed at creating a $200-billion-plus behemoth that could reshape the industry at the heart of mobile phone hardware.

But Chinese regulatory approval could be a hold-up. Beijing and Washington have sparred over technology deals, including in chips, with the Committee on Foreign Investment in the United States (CFIUS) knocking back a number of takeovers involving Chinese firms this year.

The thorny topic is likely to come up when U.S. President Donald Trump visits China this week – with Qualcomm executives in tow.

The merger would face a lengthy review from the anti-monopoly unit of China’s commerce ministry, due to strategic concerns, the huge size of the deal and because Qualcomm has come under fire before in the country over competition concerns.

“This is a critical industry for China and Qualcomm has been fined by the Ministry of Commerce (Mofcom) before so it’s on its radar,” said Wendy Yan, Shanghai-based partner at law firm Faegre Baker Daniels.

Qualcomm agreed to pay a record fine of $975 million in China in 2015 to end a probe into anti-competitive practices related to so-called “double dipping” by billing Chinese customers patent royalty fees in addition to charging for the chips.

China is making a major push to develop its own semiconductor industry under local champions such as Tsinghua Unigroup and Fujian Grand Chip Investment to help cut reliance on global operators including Qualcomm, Samsung Electronics Co Ltd and Intel Corp.

Beijing’s push adds a political edge to the case.

“(Mofcom) will consider industry security for the whole country, as the semi-conductor industry has strategic importance to China,” a second Shanghai-based antitrust lawyer said, asking not to be named because Qualcomm was a client of his firm.

China chipmaker rivals could also raise concerns about the deal, he added, putting pressure on Mofcom’s Anti-Monopoly Bureau to act. The most likely outcome would be restrictions on the deal rather than it being blocked, he said.

Firms pursuing major takeovers must notify China before closing a deal if the merging companies’ combined global turnover in the previous year exceeded 10 billion yuan ($1.5 billion) or their combined China income exceeds 2 billion yuan – both easily hit in this case.

Mofcom did not immediately respond to a faxed request for comment.

INDUSTRIAL POLICY

The Shanghai-based antitrust lawyer said the size and complexity of the deal – and potential sensitivities – meant it would likely have to go through all three phases of Mofcom’s merger approval, on paper a 180-day process.

While Broadcom and Qualcomm have little overlap, the firms are looking to complete a $5.5 billion purchase of Brocade Communications Systems Inc and a $38 billion acquisition of NXP Semiconductors NV respectively.

Mofcom approved the Brocade acquisition with conditions earlier this year with after a five-month investigation.

Qualcomm declined to comment.

“We expect China, as with other countries, will welcome this deal as a solution to the double-dipping issue, and will find there are no significant issues beyond this,” a Broadcom spokeswoman said, referring to the patent charging issue.

Last week, Broadcom CEO Hock Tan said the company would move its headquarters to the United States from Singapore, citing Trump’s efforts to improve business conditions and reforming tax. Trump praised the move, calling Broadcom “one of the really great, great companies.”

“Mofcom will be motivated by the government to look very closely not just from a competition perspective but also from a broader industrial policy perspective,” said another Beijing-based antitrust lawyer involved in similar transactions.

The lawyer, who asked not to be named due to the sensitivity of the matter, said Beijing had been making a big push in the area including with deals to buy international firms – some successfully and some which had hit obstruction.

“You should expect Mofcom will take a very, very close look at this transaction,” he said.

Mofcom has been flexing its muscle more on global deals over the last few years, lawyers say, including putting restrictions on a deal between Dow Chemical and DuPont earlier this year.

However, blocking deals outright was a rare step for Mofcom, especially when Chinese companies were not directly involved, several Chinese lawyers said. Instead, the firms may be asked to sell certain business units or make pledges to Chinese partners as conditions for it going ahead.

“This case will be subject to more scrutiny from the Chinese authorities (than normal),” said Faegre Baker Daniels’ Yan. “I think it’s quite likely the deal will be subject to some restrictions from Mofcom.”