(From article, captioned "Qualcomm’s headquarters in San Diego. Broadcom, which is attempting a hostile takeover of the chip maker, said it was informed Sunday night that Qualcomm had asked regulators to review the bid.")
Background:
Qualcomm is America's biggest computer chip maker, and Broadcom, a company headquartered in San Jose but incorporated Singapore, is also a titan in the semiconductor industry. Since late last year, Broadcom has had its eyes set acquiring Qualcomm. Doing so would give Broadcom a huge influence on chip manufacturing, a chance to cut costs for Qualcomm, and allow the merges company to be a one-stop-shop for phone manufacturers (basically horizontal integration). Broadcom is now attempting a hostile takeover of Qualcomm, by consulting directly with shareholders, who will vote to add 6 Broadcom members to Qualcomm's Board. If that is done, Qualcomm would gain a majority in the board, who would vote to allow a buy out and merger of the two companies. A successful deal would be the biggest ever made between tech companies, with influences on a wide range of markets and industries.
Summary:
The Trump administration stalled the move, however, citing security concerns. According to Senator Tom Cotton (R, Arkansas), “Qualcomm’s work is too important to our national security to let it fall into the hands of a foreign company." The decision was made by the Committee on Foreign Investment in the United States (CFIUS), which typically reviews deals only after they are announced, but in this case reviewed the deal before the shareholder meeting occurred. Broadcom was ordered to delay the meeting to give the CFIUS more time to investigate, a decision that most likely will end the deal. This action coincides perfectly with Trump's "America first" push, and perhaps more will be expected.
Analysis/opinion/connection to econ:
This issue connects economics to government because of the discussion on the role of governments (specifically the U.S.'s) in monitoring markets. The government is reaching a little bit from what it has done in the past, and the issue is more controversial because it pits the United States government against foreign business.
This issue also relates to the subject of competition of markets, which we covered in class today, as a Qualcomm-Broadcom merger would hurt the competition in many industries. In the chip industry, Broadcom will obviously gain a lot of control in the global market, but this influence extends to other manufactured electronics that rely on it for parts, as Qualcomm does businesses with smaller phone makers, but a merger would resolve its relationship with Apple and supply chips to Apple while ignoring smaller companies. This would turn the phone market into practically a monopoly, making it very difficult to enter and compete in that industry and justifying higher phone prices. It is for this reason that I believe the CFIUS's decision was a good one, even though I don't think there is a real security risk as stated.
Questions:
1. Did the Trump administration do too much in this situation? Should they have waited for a shareholder vote?
2. What do you think the economic effects of the merger would have been?
3. Do you think Trump's aggressive approach to international business is a good idea? Can he successfully put America first without facing retaliation or punishment?
4 comments:
I feel like Trump's administration did not do too much. Their intervention was justified and actually beneficial to the people who voted for Trump, since he is actually carrying out his words. If they had waited for a shareholder vote and they decided to bring 6 Broadcom members into Qualcomm board, then it would be too late for government intervention anyway, and Qualcomm would have been acquired by a foreign company. The economic effects of this deal would have been huge, since two huge companies would be merging together to control a large part of the computer chip market. They would be able to make decisions regarding sale price and supply without much resistance, which could be very bad. Lastly, I think Trump's aggressive approach to put America first could get messy if misused, but as long as Trump is accomplishing what he wants regarding moving businesses back to America with consent from his government, his actions should be justified.
I agree with what Sahith said. I think that we've learned that market freedom isn't the same as market competition, and allowing too much freedom in this case will hurt competition and non-competitive markets do not function well, as has been proven in the past. Plus, there is a fairly inelastic demand I would imagine from the phone companies for these parts, so the control of the majority of the supply by one company would raise prices for phone companies and thus for phone consumers. We should democratize technology more than we should put the power into the hands of a few major company, and I think that the Trump administration here is doing right by not just the American people but consumers of phones everywhere by keeping the market for the materials competitive.
I like what Gabe said about the inelastic demand of computer chips. Society has made technology, especially smartphones, a necessity, so consumers are willing to buy it at almost any price. If Qualcomm and Broadcom were to merge, they would have a monopoly and be able to set the price at whatever they want... and people would still buy it. In the technology sector, I believe competition is super important because the field is still developing. Competition allows companies to push each other to keep researching and developing better products. Also, the idea of one tech company taking over in a certain area sounds scary. It would have so much power. I think Trump's administration made a good decision here.
It is interesting to me that Trump is pushing for such an isolationist economic policy at the moment. Between this and the steel tariff, it seems that Trump is controlling the economy quite a lot and working to isolate our markets from those of the international stage. This seems like it will result in repercussions from many of our allies and major business partners as they expect fair trade, but may be facing something that is not as friendly to them. It is also surprising that the CFIUS acted preemptively. While this is an important issue for the nation, it does not seem like something important enough to act out of character for and I am curious if there is more behind the situation.
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