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    Qualcomm’s Spending Buys the Right Friends

    CFIUS letter backs company’s arguments against Broadcom’s takeover attempt

    In its letter, CFIUS lauded Qualcomm’s ‘unmatched expertise and R&D expenditure’—particularly as it relates to the coming wireless technology standard known as 5G.
    In its letter, CFIUS lauded Qualcomm’s ‘unmatched expertise and R&D expenditure’—particularly as it relates to the coming wireless technology standard known as 5G. Photo: alberto estevez/epa-efe/rex/shut/EPA/Shutterstock
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    Qualcomm QCOM -2.92% just provided the recipe for companies trying to thwart foreign takeovers: Spend big, first on research and development, then on lawyers.

    That seems the main takeaway from a letter the Committee on Foreign Investment in the U.S. sent to lawyers for Broadcom AVGO 1.61% and Qualcomm on Monday. That letter, made public by Qualcomm on Tuesday, explains the rationale for a relatively unprecedented move by CFIUS to examine Broadcom’s proposed hostile takeover of Qualcomm ahead of a shareholder vote on the matter. That vote, originally scheduled for Tuesday, has been pushed back by a month on order from CFIUS while it examines the $117 billion deal.

    But the letter strongly suggests that the committee would reject what would be the largest technology deal in history. In language that closely mimics Qualcomm’s talking points against the deal, the committee describes the company as “well-known” and “trusted” by the U.S. government. The letter also lauded the company’s “unmatched expertise and R&D expenditure”—particularly as it relates to the coming wireless technology standard known as 5G.

    The government then contrasts that with Broadcom’s “private equity-style” approach to companies it owns where it cuts spending to boost profits. CFIUS said that would likely hurt Qualcomm’s competitiveness, which in turn would “significantly impact” U.S. national security. The letter doesn’t mention that Broadcom is incorporated in Singapore, which is reason CFIUS could weigh in on the deal. The company is currently in the process of reincorporating in the U.S.

    Qualcomm’s Spending Buys the Right Friends

    The letter appears to put an end to Broadcom’s chances of acquiring Qualcomm. More important, it could put a chill on foreign acquisitions of U.S. companies that do a lot of R&D. The chip sector in particular could be vulnerable to a deal freeze, given the growing interest of Chinese companies in procuring semiconductor assets. Chinese firms accounted for 34% of all buyers in global semiconductor deals last year compared with 18% five years ago, according to Dealogic. Ironically, Qualcomm is awaiting approval from Chinese regulators to complete its own acquisition of NXP Semiconductors , a Dutch chip maker.

    Still, Qualcomm’s business model is unique, even among chip makers. The company spent about 25% of its trailing 12-month revenue on R&D, more than other peers and even tech giants such as Apple and Amazon. That in turn feeds Qualcomm’s licensing business, which accounts for more than two-thirds of its operating profit.

    Qualcomm’s Spending Buys the Right Friends

    That licensing business has landed it in bitter disputes with Apple and other mobile phone makers. Broadcom has criticized Qualcomm for spending too much on R&D when its licensing business could be endangered. Such could ultimately prove to be the case, but as the letter from CFIUS shows, Qualcomm’s spending has at least bought some friends in the right places.

    Write to Dan Gallagher at dan.gallagher@wsj.com