Broadcom’s Other Regulatory Hurdle: How It Treats Customers

Such accusations help explain why the Federal Trade Commission started an investigation of Broadcom’s business practices, which was disclosed in January. They add to the reasons that Mr. Tan’s hostile bid for Qualcomm — which would be the costliest technology acquisition ever — has consumed Silicon Valley and companies on three continents.

Broadcom declined to discuss the document, and a Western Digital spokesman declined to comment. A Federal Trade Commission spokeswoman also declined to comment.

The fate of Broadcom’s bid for Qualcomm was expected to be settled Tuesday in San Diego. There, shareholders at Qualcomm’s annual meeting were scheduled to choose between the company’s incumbent directors and six Broadcom nominees expected to back the deal.

But the Committee on Foreign Investment in the United States on Sunday ordered Qualcomm to delay the meeting by 30 days so it could investigate the transaction. On Monday, Cfius sent a letter to Qualcomm and Broadcom stating it would investigate the deal for national security reasons. Broadcom is based in Singapore, though it has announced plans to move its headquarters to the United States.

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Shareholders of Qualcomm had been scheduled to hold their annual meeting in San Diego on Tuesday, but a federal government committee ordered a 30-day delay.

Credit
Graham Walzer for The New York Times

On Wednesday, Broadcom pledged that it would keep the United States at the forefront of emerging mobile technology if it were to acquire Qualcomm, saying it would increase Qualcomm’s research and development spending and create a $1.5 billion fund to train American engineers.

Before the committee’s unusual move, antitrust authorities were the ones who paid the closest attention to the chip makers — mainly Qualcomm.

Qualcomm is the biggest supplier of chips for smartphones but gets much of its profit from patent royalties. Its business practices have prompted antitrust probes in the United States, Europe and Asia and a lawsuit by Apple, a longtime customer, challenging the royalty payments. Qualcomm denies wrongdoing.

Broadcom has built its market muscle by acquiring several dominant lines of chips, a mainstay of smartphones, data storage gear, set-top boxes and networking hardware. Customers include Apple, Samsung Electronics, Hewlett Packard Enterprise, Dell, AT&T and Cisco.

Buying Qualcomm would sharply expand Broadcom’s position in smartphones, adding technology that manages cellular communications and runs apps. For that and other reasons, Qualcomm has predicted long and risky antitrust reviews of the deal in several countries, though Broadcom has said it could navigate the process swiftly.

Any Broadcom tactics that the Federal Trade Commission is studying now are not likely to affect merger reviews unless some link can be found to Qualcomm’s business, said James Rill, a lawyer at Baker Botts who once headed the Justice Department’s antitrust division.

Broadcom said in January, “This F.T.C. review is immaterial to our business, does not relate to wireless and has no impact on our proposal to acquire Qualcomm.”

But it has been difficult to handicap such oversight, particularly in China. The authorities there forced Qualcomm to lower patent royalty rates in 2015, and some big smartphone makers have expressed fears that Broadcom would raise chip prices if it bought Qualcomm.

At a minimum, the Federal Trade Commission’s review adds another facet to the aggressive image of Mr. Tan, a Malaysian-born executive who has pleased Wall Street but alarmed tech workers by cutting jobs and long-term research after acquisitions.

“He’s as tough as nails,” said Raymond Bingham, a Silicon Valley veteran who helped found the China-backed private equity fund Canyon Bridge Capital Partners.

A CNBC article last week said Broadcom had used price increases and other threats to press for exclusive sales deals from customers such as Amazon, which was also hit by a Broadcom patent suit that was later settled. An Amazon spokeswoman declined to comment.

Some competitors and former customers echo such stories, insisting on anonymity because the negotiations are confidential. Western Digital’s document, titled “Broadcom Matters,” provides a new level of detail.

At issue were chips known as preamps, used in sending signals to and from disks that store data in drives. The document said Western Digital had no problems in acquiring them until its supplier, LSI, was acquired by Avago in 2014. Avago was renamed Broadcom after buying that company in 2016.

Broadcom executives demanded that Western Digital commit to buying 100 percent of its preamps from their company, a gambit to block new rivals, the document said. Western Digital, which had been testing other chips for potential use, wrote that “a new entrant was compared to a ‘suicide bomber’ that would put downward pressure on prices.”

Western Digital refused to comply with Broadcom’s demands. Broadcom then stopped preamp shipments in February 2017, Western Digital wrote, though the cutoff was temporary. Broadcom “attempted to backtrack,” citing “various excuses” for the cutoff and ultimately “admitted that it should not have withheld shipments,” the document said.

Toshiba filed the document in response to a SanDisk lawsuit that unsuccessfully sought to block a sale of operations involved in their memory chip venture, which became part of a sale led by Bain Capital. The suit was settled last year.

Other Broadcom customers said the chip maker had been fair. “Broadcom is a pretty good partner for us,” said Bruce McClelland, chief executive of Arris International, which makes set-top boxes using Broadcom chips.

In an interview in December, Mr. Tan scoffed at the notion of raising prices or otherwise exploiting customer reliance on key Broadcom chips.

“That’s not sustainable,” he said. “If you do that, customers never come back to you.”

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