Article: The Geopolitics of Investment Controls
Ansgar and Michael Weiß have written an article on the geopolitics of investment controls for Tagesspiegel Background (in German). Find the English translation below.
How corporations invented the “Geopolitical Poison Pill”
Ansgar Baums | Dr. Michael Weiß
Geopolitics dictates stricter investment controls. The USA would like to see stricter rules from their European partners regarding China, but in the end, it could also affect American investment plans in Europe. However, companies might also see an opportunity.
It is January 28, 2018. In two days, the annual shareholder meeting of Qualcomm, one of the most important tech companies, will take place. Qualcomm patents are found in every smartphone. However, this year, shareholders are less interested in the revenue from patent licenses, as there is a 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 feverishly searching for a defense strategy. Stock buybacks? Issuing new shares? Is there a 'white knight' investor? None of the options seem good.
In the end, the rescue comes from an unexpected direction: politics. Didn't the newly elected Trump administration loudly advocate for a more robust economic policy? For more national security and less 'free trade ideology'? Qualcomm grasps at this straw. Just 48 hours before the shareholder meeting, Qualcomm asks the relevant investment control authority, CFIUS, to review the proposed acquisition with regard to U.S. security interests. The timing is good, as the Trump administration is currently waging a campaign against the Chinese telecommunications company Huawei. Qualcomm's patents in the 5G area seem quite relevant from a geostrategic perspective. And indeed: as soon as the news of the CFIUS review becomes public, Broadcom's plans get thrown into disarray. Even before CFIUS comes to a final report, President Trump prohibits the acquisition.
Case closed? Not quite. Because the Qualcomm case could become a precedent. First, it is helpful to take a look at the policy of investment controls. These have moved to the center of geopolitically motivated regulation. Investments from Chinese companies, especially in the tech sector but also in medicine and even real estate and land, are seen as a geopolitical risk in the USA—direct investments from China have declined significantly since 2018, with a complete halt in the tech sector. The 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 introduced a significant tightening with the amendment to the Foreign Trade and Payments Act—now, investment control is already possible if foreign direct investments are deemed to 'affect security or public order' (previously, a 'threat to public order or security' was the threshold for intervention). However, Washington is not entirely satisfied. The pressure is increasing to further tighten these controls and especially to apply them against China.The USA would be wise to exercise caution. Because investment controls can also target American direct investments. And given the current political situation, this seems very likely.
The mood in Berlin is certainly sour. Neither the uncoordinated approach of the Biden administration's subsidy program (Inflation Reduction Act) nor the tariffs against European companies from the first 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 planning investments, such geopoliticization of investment controls poses a significant process risk. However, there is another viewpoint on the matter—and this is where the Qualcomm case becomes relevant: Wouldn't it be attractive for target companies of a hostile takeover attempt to use these geopolitically justified investment controls for their own defense? 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 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 Germany, a transatlantic crisis would be inevitable. A Trump administration would see such a veto as further evidence of Europe's alleged anti-American stance and would likely threaten retaliation. 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.
Ansgar Baums is a Senior Fellow at the Stimson Center and Senior Advisor to Sinolytics.
Dr. Michael Weiß is a Partner at A&O Shearman.