On 2 March 2012, China's Anti-Monopoly Bureau of the Ministry of Commerce ("MOFCOM") conditionally approved Western Digital's acquisition of Hitachi's hard disk drive ("HDD") business. Similar to its recent decision in Seagate/Samsung, which also involved an HDD business, MOFCOM took a decision that differs from competition authorities in other countries. As was the case in the Seagate/Samsung deal, MOFCOM defined the relevant market as the global HDD market. It was of the view that the Western Digital/Hitachi transaction could result in the increased likelihood of coordination among competitors and therefore cause competition concerns, as there were only a handful of players in the HDD market and the market is highly concentrated and transparent.
The European Commission required Western Digital to divest Viviti's (the Hitachi subsidiary being acquired) 3.5 inch HDD production. The U.S. Federal Trade Commission also cleared the merger on the condition that Western Digital divests selected Hitachi assets related to the manufacture and sale of 3.5 inch desktop HDD to Toshiba.
MOFCOM went further and for the first time imposed a hybrid of structural and behavioural remedies:
- Western Digital needs to divest the 3.5 inch HDD business currently carried out by Viviti within 6 months of the MOFCOM decision. This is the same remedy imposed by the European and U.S. competition authorities.
- In addition to this divestiture, Western Digital is required to hold the entire Hitachi's HDD business (operated by Viviti) separate, so as to maintain Viviti as a viable independent competitor on the HDD market. More specifically, Vivita must maintain its independence in aspects including R&D, production, procurement, marketing, after-sales service, administration, finance, investment, personnel appointment, etc., and continue producing and selling its HDD products by using the pre-transaction brands TRAVELSTAR and ULTRASTAR. Further, firewalls must be established to prevent the exchange of competitively sensitive information between Western Digital and Viviti. This is similar to the "hold separate" remedy imposed by MOFCOM in the Seagate/Samsung deal.
- Western Digital and Viviti will reasonably determine the production volume and production capacity in accordance with market demand. The production capacity and volume of Western Digital and Viviti must be reported to the supervisory trustee on a monthly basis.
- To avoid potential foreclosure in the downstream market, Western Digital and Viviti have undertaken not to force their customers to exclusively procure hard disk products from Western Digital or Viviti either overtly or covertly.
- Similar to the Seagate/Samsung deal, as innovation has a significant impact on the HDD industry and competition in the HDD market is key to maintaining product innovation, Western Digital has made undertakings to continue investing in R&D in innovative areas consistent with its practice of recent years. Unlike the Seagate/Samsung deal, no exact dollar figure has been specified.
Twenty-four months after the implementation of MOFCOM's decision, Western Digital will be eligible for applying to MOFCOM for removal of the second and third remedies. MOFCOM will then decide whether to grant such removal based on the market competition conditions at the time.
The different approach between MOFCOM and the EU and U.S. competition authorities can in part be explained by the fact that MOFCOM does not purely focus on competition law issues. It also takes the effect of concentrations on the Chinese national economic development into account.
By taking 297 days, the Western Digital/Hitachi deal underwent the longest China merger review period among all published cases. This is longer than the mandatory maximum review period of 180 days because of the withdrawal/re-submission strategy adopted by the notifying parties.
If you would like to receive the original Chinese version or an English translation of the MOFCOM decision, please send us an email by clicking here. You can also find our discussion of the Seagate/Samsung merger clearance in our China Update January 2012 by clicking here.
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