It is January 28, 2018. In two days, the annual shareholder meeting of Qualcomm, one of the most important tech companies of today, will take place. Qualcomm patents are found in pretty much every smartphone. However, this year, shareholders are less interested in the revenue from patent licenses, as there is a hostile takeover bid on the table: Broadcom from Singapore is offering $117 billion – which would be the largest tech acquisition in history. Qualcomm’s management is not thrilled and is searching feverishly for a defense strategy. The options on the table are stock buybacks; issuing new shares; or a ‘white knight’ investor? None of them seem particularly promising.
In the end, the lifeline comes from an unexpected source – namely politics. Since taking office in 2017, the Trump administration loudly advocated for both, a more robust economic policy as well as a more national security and less ‘free trade’ ideology. Qualcomm grasps at the straw. Just 48 hours before the shareholder meeting, company leadership asked the relevant investment control authority, CFIUS, to review the proposed acquisition with regard to U.S. security interests. The timing could not have been better, as the Trump administration was waging a campaign against the Chinese telecommunications company Huawei. Qualcomm’s patents in the 5G area seemed quite relevant from a geostrategic perspective. And indeed, as soon as the news of the CFIUS review became public, Broadcom’s plans got thrown into disarray. Even before CFIUS came to a final report, President Trump prohibited the acquisition.
End of story? Not quite, because the Qualcomm case is likely to establish a precedent. To understand this argument, it is helpful to take a closer look at the policy of investment controls. These have moved to the center of geopolitically motivated regulation and great power competition. Investments from Chinese companies, especially in the tech sector but also in medicine and even real estate, are increasingly seen as a geopolitical risk in the United States—as a consequence, direct investments from China have declined significantly since 2018, with a complete halt in the tech sector. A similar debate has also been simmering in Germany since the acquisition of the industrial robotics company Kuka by the Chinese firm Midea in 2016. The traffic light coalition at the time introduced a significant tightening with the amendment to the Foreign Trade and Payments Act—now, investment control mechanisms are already possible, if foreign direct investments are deemed to ‘affect security or public order’ (previously, a clear ‘threat to public order or security’ was the threshold for intervention). Washington didn’t seem entirely satisfied. During the final years of the Biden Administration, pressure was increasing to further tighten such controls and to apply them against China specifically.
However, the Americans would be wise to exercise caution. Not least because investment controls might soon also target US direct investments. Given the current political situation, the mood in Berlin is certainly poor and various options are on the table to retaliate in a potential trade war. Neither the uncoordinated approach of the Biden administration’s subsidy program (Inflation Reduction Act) nor the tariffs against European companies from the first – and now second – Trump administration have been forgotten—so why should American companies be allowed to acquire more ‘assets’ in Europe now? The chances of a veto from the German government in the event of such an acquisition attempt would be relatively high. From the perspective of companies, such increasing geopolitization of investment controls poses a significant process risk. The scope of “national security” has been considerably broadened over the last years – so who can predict, if an investment would be scrutinized by regulators?
However, there is another viewpoint on the matter. And this is where the Qualcomm case becomes relevant. From the perspective of a subject of a hostile take-over approach, the geopolitical protection umbrella might actually be a good thing. Compared to other tools in the corporate ‘defense manual’ for hostile takeovers—such as stock dilution, transferring shares to trusts (‘poison pills’), or hoping for a ‘white knight’—there are indeed some significant advantages: the direct costs are low, and the existing shareholder structure remains unchanged. Qualcomm’s strategy of a ‘geopolitical poison pill’ could therefore set a precedent.
If a large U.S. acquisition were to be rejected in Europe, a transatlantic crisis would be almost inevitable. The newly reelected Trump administration would see such a veto as further evidence of Europe’s alleged anti-American stance and would likely retaliate. How ironic: what began as a tightening of investment controls aimed at China could quickly become a real test for transatlantic relations. Geopolitics is complicated.
Dr. Michael Weiß is a Partner at A&O Shearman. He has more than fifteen years of experience in advising companies on M&A transactions with a focus on listed companies and public takeover law as well as on all issues related to corporate and capital markets law.
Investment Controls: The Invention of the “Geopolitical Poison Pill”
By Ansgar Baums Author • Dr. Michael Weiß Co-Author
Grand Strategy
Investment control screenings are becoming more prevalent and unpredictable, as the recent US Steel / Nippon Steel case has shown. While the USA would like to see stricter rules from their European partners regarding China, too, such actions might soon affect American investment plans themselves. Especially, since national security concerns have become a welcomed strategy for companies to fend off unfriendly take-overs.
It is January 28, 2018. In two days, the annual shareholder meeting of Qualcomm, one of the most important tech companies of today, will take place. Qualcomm patents are found in pretty much every smartphone. However, this year, shareholders are less interested in the revenue from patent licenses, as there is a hostile takeover bid on the table: Broadcom from Singapore is offering $117 billion – which would be the largest tech acquisition in history. Qualcomm’s management is not thrilled and is searching feverishly for a defense strategy. The options on the table are stock buybacks; issuing new shares; or a ‘white knight’ investor? None of them seem particularly promising.
In the end, the lifeline comes from an unexpected source – namely politics. Since taking office in 2017, the Trump administration loudly advocated for both, a more robust economic policy as well as a more national security and less ‘free trade’ ideology. Qualcomm grasps at the straw. Just 48 hours before the shareholder meeting, company leadership asked the relevant investment control authority, CFIUS, to review the proposed acquisition with regard to U.S. security interests. The timing could not have been better, as the Trump administration was waging a campaign against the Chinese telecommunications company Huawei. Qualcomm’s patents in the 5G area seemed quite relevant from a geostrategic perspective. And indeed, as soon as the news of the CFIUS review became public, Broadcom’s plans got thrown into disarray. Even before CFIUS came to a final report, President Trump prohibited the acquisition.
End of story? Not quite, because the Qualcomm case is likely to establish a precedent. To understand this argument, it is helpful to take a closer look at the policy of investment controls. These have moved to the center of geopolitically motivated regulation and great power competition. Investments from Chinese companies, especially in the tech sector but also in medicine and even real estate, are increasingly seen as a geopolitical risk in the United States—as a consequence, direct investments from China have declined significantly since 2018, with a complete halt in the tech sector. A similar debate has also been simmering in Germany since the acquisition of the industrial robotics company Kuka by the Chinese firm Midea in 2016. The traffic light coalition at the time introduced a significant tightening with the amendment to the Foreign Trade and Payments Act—now, investment control mechanisms are already possible, if foreign direct investments are deemed to ‘affect security or public order’ (previously, a clear ‘threat to public order or security’ was the threshold for intervention). Washington didn’t seem entirely satisfied. During the final years of the Biden Administration, pressure was increasing to further tighten such controls and to apply them against China specifically.
However, the Americans would be wise to exercise caution. Not least because investment controls might soon also target US direct investments. Given the current political situation, the mood in Berlin is certainly poor and various options are on the table to retaliate in a potential trade war. Neither the uncoordinated approach of the Biden administration’s subsidy program (Inflation Reduction Act) nor the tariffs against European companies from the first – and now second – Trump administration have been forgotten—so why should American companies be allowed to acquire more ‘assets’ in Europe now? The chances of a veto from the German government in the event of such an acquisition attempt would be relatively high. From the perspective of companies, such increasing geopolitization of investment controls poses a significant process risk. The scope of “national security” has been considerably broadened over the last years – so who can predict, if an investment would be scrutinized by regulators?
However, there is another viewpoint on the matter. And this is where the Qualcomm case becomes relevant. From the perspective of a subject of a hostile take-over approach, the geopolitical protection umbrella might actually be a good thing. Compared to other tools in the corporate ‘defense manual’ for hostile takeovers—such as stock dilution, transferring shares to trusts (‘poison pills’), or hoping for a ‘white knight’—there are indeed some significant advantages: the direct costs are low, and the existing shareholder structure remains unchanged. Qualcomm’s strategy of a ‘geopolitical poison pill’ could therefore set a precedent.
If a large U.S. acquisition were to be rejected in Europe, a transatlantic crisis would be almost inevitable. The newly reelected Trump administration would see such a veto as further evidence of Europe’s alleged anti-American stance and would likely retaliate. How ironic: what began as a tightening of investment controls aimed at China could quickly become a real test for transatlantic relations. Geopolitics is complicated.
Dr. Michael Weiß is a Partner at A&O Shearman. He has more than fifteen years of experience in advising companies on M&A transactions with a focus on listed companies and public takeover law as well as on all issues related to corporate and capital markets law.
Recent & Related