The dust is still settling after the Committee on Foreign Investment in the United States (CFIUS) -- which is part of the U.S. Treasury Department -- issued a letter saying that Broadcom's (NASDAQ:AVGO) $117 billion takeover bid of Qualcomm (NASDAQ:QCOM) could be a potential national security risk.
Qualcomm filed a form with the Securities and Exchange Commission (SEC) this week, which included the official letter from the committee, and in it the group said, "CFIUS has come to believe that Broadcom's successful hostile takeover attempt of Qualcomm ... could pose a risk to the national security of the United States."
The letter goes on to note that Qualcomm is currently a leader in setting wireless standards for the U.S. and the world, which includes developing 5G wireless technology. If Qualcomm weren't the company setting the standard for wireless innovation going forward, it could impact national security, the letter goes on to say.
"[A] weakening of Qualcomm's position would leave an opening for China to expand its influence on the 5G standard-setting process," the letter said. The concern comes mainly from the fact that China-based Huawei has been spending money on 5G development and currently holds about 10% of essential 5G patents.
Chinese tech companies have been aggressively pursuing 5G technology at the urging of their government. China Mobile, the country's largest telecom, is conducting the world's largest five-city 5G test this year. The tests and proposed 2020 commercial 5G rollout comes after Chinese government officially made 5G a priority several years ago.
What this means for Broadcom's takeover bid
This letter from CFIUS is a big speed bump in the road to Broadcom buying Qualcomm -- and it's likely more like a roadblock. The recent move by the U.S. government means that Qualcomm will have to wait until next month to hold a key shareholders' meeting. That meeting was supposed to happen this week and could have resulted in six new board members, which were suggested by Broadcom, being elected to Qualcomm's board. That would have opened the door further to Broadcom taking over Qualcomm.
It's still unclear how exactly all of this will shake out, but needless to say, it's not looking good for Broadcom right now. The Treasury Department isn't likely to take issues of national security lightly and CFIUS can recommend to President Trump that the deal be blocked.
Qualcomm investors can likely expect some more volatility from the company before all of this is resolved and, unfortunately, it's yet another dramatic turn as shares continue to underperform the market.
If I had to put money on how this all goes down, I doubt Broadcom will be able to convince the government to let this deal to go through. That could be a big disappointment to investors that were hoping to see the takeover happen, but I think it offers an opportunity for Qualcomm to work at righting its ship and becoming the 5G powerhouse the U.S government already believes the company is.