On 2 March 2012, China's Ministry of Commerce
("MOFCOM") conditioned its approval of Western
Digital's acquisition of Hitachi's hard disk drive division
(renamed "Viviti Technologies") under the PRC
Anti-Monopoly Law ("AML"). This decision comes
three months after MOFCOM imposed similar conditions on
Seagate's acquisition of Samsung's hard drive business (see
our prior alert, "
China Conditionally Approves Seagate Acquisition of Samsung Hard
Drive Business") MOFCOM's decisions in these hard disk
drive transactions demonstrates again that MOFCOM will chart its
own course, regardless of decisions taken on the same deals by
other enforcement authorities such as the U.S. and EU.
This is the thirteenth merger decision published so far by MOFCOM, which only releases decisions that prohibit concentrations (only one so far, Coca-Cola/Huiyuan) or impose remedies.
Timing of Chinese review
China's merger review procedure includes three phases, of
30, 90 and 60 days. MOFCOM is not required to justify why it
opens a second or third phase review. In the past year, most
transactions even without any competition law issues went into
second phase review. This is due in part to the fact that
MOFCOM is understaffed and in part to the necessity for MOFCOM to
obtain comments from other ministries and stakeholders as part of
In addition, the pre-acceptance phase (before the phase 1 "clock" begins to run) is getting longer. It is ordinary for merging parties to have to respond to at least one set of supplemental questions before MOFCOM decides that the filing is complete and can be accepted. A pre-acceptance period of one month or more is not unusual.
MOFCOM's review of the Seagate/Samsung transaction took 7 months in total (including the pre-acceptance phase), while Western Digital/Viviti required 11 months. In Western Digital/Viviti, the parties withdrew their original notification a few days before the end of third phase and later re-notified; it was cleared at the very end of (the second) phase 2.
MOFCOM's decision in Seagate/Samsung
In Seagate/Samsung, MOFCOM came to the conclusion that the
merger would have anticompetitive effects by reducing competitive
pressure on remaining competitors and increasing the risk of their
coordination. MOFCOM therefore required Seagate to maintain
Samsung as an independent competitor by establishing an independent
subsidiary to produce, price, and market Samsung products, and by
building a wall to prevent information exchanges between Seagate
and its Samsung subsidiary. MOFCOM indicated that Seagate
could apply for a waiver of such conditions after one year,
depending on competitive conditions then.
MOFCOM's decision diverged significantly from the decisions taken in the U.S. and Europe, where the authorities cleared the transaction without any remedy.
MOFCOM's decision in Western Digital/Viviti
MOFCOM's review of Western Digital/Viviti transaction took
place against the backdrop of the European Commission's earlier
decision requiring that Western Digital divest production assets
for the manufacture of 3.5 inch hard disk drives. After
Toshiba had agreed to acquire those assets, the transaction was
also cleared by the U.S. Federal Trade Commission.
In both Western Digital/Viviti and Samsung/Seagate, MOFCOM concluded that the merger would have anticompetitive effects by reducing the number of competitors, reducing competition and innovation, and increasing the risk of coordination among the remaining competitors, given the high degree of market transparency.
MOFCOM accepted the divestiture that had been imposed by the EU and U.S., but went further to impose additional remedies:
- Maintain Viviti as an independent competitor and independently operating business.
- Viviti to continue to market hard disk drive products independently by its original sales team, under the same brands as before.
- Establish a firewall to prevent the exchange of information.
- Continue to invest in R&D as before.
- Appoint a trustee to supervise the implementation of these obligations.
MOFCOM provided that Western Digital could ask for a waiver of
the obligation to maintain Viviti as an independent competitor
after two years, "based on the status of competition on the
market" at the time.
Several lessons can be drawn from these two decisions:
1. Even if the markets at stake are worldwide, MOFCOM will not shy away from taking decisions different than those taken by foreign authorities. Of course, MOFCOM's review under the AML is not limited to purely competition law issues. For example, MOFCOM must also assess the effect of a concentration on national economic development. This means that, even in worldwide markets, MOFCOM will pay particular attention to the impact of a transaction on the Chinese economy. In the Uralkali/Silvinit merger, MOFCOM required two merging Russian potash producers to continue to sell potash to Chinese customers just as they had pre-transaction (see our prior alert " China Approves Merger between Russian Potash Producers but Requires They Continue to Supply the Chinese Market"). Similarly, in these two HDD matters, it appears that MOFCOM viewed the impact of these transactions as particularly strong in China, noting that China is the world's largest consumer personal computers.
2. Competition law authorities around the world generally prefer divestiture remedies, as they do not require continuous government supervision. In the past, MOFCOM has been relatively comfortable with behavioral remedies, for example an obligation to continue to supply under the same conditions (in the Russian potash deal) or a prohibition on bundling (see " China Publishes Two New Merger Decisions Under Anti-Monopoly Law"). The remedies MOFCOM imposed in the two hard drive disk deals are a new creature, analogous to a temporary prohibition on the transaction: while the purchaser is allowed to acquire ownership of the target, it is not allowed to exercise control at least for some period of time.
This new remedy raises new issues. First, since the buyer is not allowed to exercise control over the target, but must let the target continue to operate independently for a time, this suggests MOFCOM found the proposed deal currently to be anticompetitive. The logical decision would have been to prohibit the transaction outright and not grant an option to the buyer to exercise control at some point in the future if market conditions change.
Second, this type of remedy will allow MOFCOM and the trustee to exercise extensive supervision over the daily business operations of the two "combined" entities. This could constitute a real burden on the parties (not to mention MOFCOM) and does not seem a good recipe for optimizing ongoing competition.
Finally, one may ask whether competitive conditions might change enough in the next one or two years to justify a waiver that would allow the acquired entities to combine. Considering that MOFCOM found (i) high barriers to entry and (ii) risks of coordination and an unacceptable direct reduction in competition, it seems unlikely that the competitive problems quickly will disappear.
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