On March 2nd, 2012, the acquisition by Western Digital ("WD") of Hitachi Global Storage Technologies ("Hitachi") finally received conditional nod from the Ministry of Commerce ("MOFCOM"), three month after MOFCOM conditionally cleared the Seagate/Samsung deal1 .

Review Timeline

According to MOFCOM's announcement 2, this review process is particularly lengthy: the first submission was made on April 2nd, 2011, while the clearance was obtained 11months later. During this period, this filing was withdrawn by WD shortly before the expiry of the Extended Phase II due to "significant changes of facts". On November 7th, 2011, WD re-submitted the notification and the filing was cleared at the end of the second round of Phase II.

Competitive Assessment

MOFCOM primarily followed the same reasoning in Seagate/Samsung case in its analysis of the WD/Hitachi case. It explored the HDD market structure, purchasing pattern, capacity utilization rate, buyer's bargaining power, market entry, as well as the negative impact on Chinese consumers, before it came to the conclusion that the transaction would restrict or eliminate competition on the HDD market. When analyzing the market structure, it appears that MOFCOM took into account the conditions it put on the Seagate/Samsung deal3 and treated Seagate and Samsung as two independent competitors rather than a combined entity in the HDD market.

Remedies

MOFCOM imposed significant behavioral and structural remedies in this deal, although the assets to be divested are covered by the EU decision. According to the announcement, WD shall divest Viviti's 3.5-inch HDD assets to a third party in accordance with the relevant Chinese laws.
In terms of conduct remedies, the parties are required to ensure that Viviti (a wholly-owned subsidiary of Hitachi, engaging in HDD business) will exist in the relevant market as an independent competitor. To achieve such purpose,

  • the parties shall maintain Viviti in its pre-transaction state in respect of R&D, production, procurement, marketing, after-sales, administration, financing,investment, HR related matters and others;
  • Viviti shall continue to produce with its existing production lines, sell under the original brands via the original sales team following an independent and reasonable pricing mechanism;
  • the parties shall establish firewalls to avoid any exchange of competitive information between WD and Viviti;
  • in exercising its right and fulfilling its obligation as a shareholder of Viviti, WD shall be subject to the supervision of the supervision trustee and MOFCOM;
  • the parties shall maintain independent R&D institutes. Any R&D cooperation between the parties shall be reported to the supervision trustee and subject to the pre-approval by MOFCOM.

Moreover, the parties are also required:

  • to report their production capacity and output to the supervision trustee on a monthly basis;
  • not to materially change the pre-transaction business model;
  • to continue to invest in innovation.

The parties can only apply for release of the "maintain-independence" conditions after the elapse of 24 months from the date of the decision. In the Seagate/ Samsung deal, the review period is only 12 months.

Comments

Remedies in this case appear to be much more restrictive than those in the Seagate/Samsung case. WD is subject to a much wider scope of obligations for maintaining the independence of Viviti and for a longer period than Seagate has to do with Samsung. Although MOFCOM did not indicate in its decision the reasons underlying its approach, we understand that this could be caused by the different level of competitiveness of the targets (i.e., Hitachi and Samsung) and therefore the different implications each transaction may have on the competition dynamics of the HDD market.

On the other hand, MOFCOM is the only antitrust agency that imposed significant conduct remedies on the deal that are not necessarily associated with structural remedies. It once again shows MOFCOM's confidence in making its own decision by taking into account the particular characteristics of the Chinese market, rather than just following the decisions of the other major antitrust authorities. It is also the only authority that imposed (conduct) remedies in the Seagate/Samsung deal. By emphasizing in its decisions that China has one of the world's largest populations of computer users, MOFCOM might have considered the China market to be particularly vulnerable to these concentrations.

This case has also witnessed close cooperation among various antitrust agencies, in terms of the timing of review, substantive analysis and potential remedies. The table below shows the date of clearance and outcome of WD/Hitachi case in some major antitrust jurisdictions:

Jurisdiction Date of Clearance Outcome
EU 2011.11.23 Cleared with structural remedies, including the divestment of the essential production assets for 3.5-inch HDD to a purchaser approved by the EU Commission (later confirmed to be Toshiba), and accompanying measures.
Japan 2011.11.24 Cleared without conditions in view of WD's commitment to the EU Commission to divest its essential production assets for 3.5-inch HDD.
Korea 2011.12.21 Cleared with structural remedies including the divesture of certain assets essential to produce 3.5-inch HDD products.
China 2012.3.2 Cleared with both conduct and structural remedies. (See above)
US 2012.3.5 Cleared with structural remedies, including the divestment of Viviti's 3.5-inch desktop HDD assets to Toshiba, and accompanying measures, including requiring WD to provide Toshiba with access to employees, licenses to IP and supply of certain components.

Footnotes

1See our article entitled With conditions, MOFCOM Clears Seagate/Samsung Deal.
2A copy of MOFCOM's Announcement [2012] No. 9 could be found here (in Chinese) :http://fldj.mofcom.gov.cn/aarticle/zcfb/201203/20120307993758.html
3In Seagate/Samsung, MOFCOM requires Seagate to maintain Samsung as an independent competitor for at least 12 months.

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