Turkey: Unconditional Authorization To The Acquisition Of Control Over The Hard Disk Drive Business Of Samsung By Seagate!

The Competition Board ("Board") has unconditionally authorized, the acquisition of the control over the Hard Disk Drive ("HDD") of Samsung Electronics Co. Ltd. ("Samsung") by Seagate Electronics PLC ("Seagate"; "Samsung" and "Seagate" hereinafter referred to as the "Parties") in its decision dated 29.12.2011 and numbered 11-64/1656-5861, by concluding that, even though this operation will result in the creation or strengthening of a dominant position, it will not result in the significant lessening of the competition in the relevant market.

Parties to the Operation

Seagate, the transferee, is a public company active worldwide in the design, production and marketing of mobile, processing, desktop and consumers' electronics as well as computer running equipments composed principally of HDD and hybrid HDD. Seagate also produces registry media for thin-film and disk read and write heads in order to use them within the HDD.

Samsung, the transferor, on the other hand is active worldwide in the design, production and marketing of HDD for computers systems, sub-systems or consumers' electronic equipment; and the sale of these products to Special Product Producer and Special Design Producer companies.

Subject of the Transaction

Within the scope of the asset sale agreement signed between the Parties on 19.04.2011, Samsung will transfer the control over the HDD business to Seagate and will acquire, at the end of the operation, part of Seagate's current shares.

The assets subject to acquisition consist of some factories, equipments and other tangible and intangible assets exclusively used by Samsung and owned or leased by Samsung and used in the research, development and sale of HDDs.

The transaction will neither create any modification in the shareholding structure of Seagate, nor in the ownership, control and administration structure of Samsung.

Legal Framework of the Transaction

Article 5 of the Communiqué No. 2010/4 Concerning the Mergers and Acquisitions Calling for the Authorization of the Competition Board2 ("Communiqué No. 2010/4") enumerates the cases considered as a merger or an acquisition. As per this article, "the acquisition of direct or indirect control over all or part of one or more undertakings by one or more undertakings or by one or more persons who currently control at least one undertaking, through the purchase of shares or assets, through a contract or through any other means" constitutes a merger or an acquisition transaction.

Pursuant to the Communiqué No. 2010/4, transactions considered as a merger or acquisition are subject to the authorization of the Board if (1) the total turnovers of the transaction parties in Turkey exceed one hundred million TRY, and turnovers of at least two of the transaction parties in Turkey, each exceed thirty million TRY or (2) the worldwide turnover of one of the transaction parties exceeds five hundred million TRY, and at least one of the remaining transaction parties has a turnover in Turkey, exceeding five million TRY.

In the present case, Samsung transfers the control over HDD business to Seagate with an agreement. Therefore, the transaction between the Parties is considered as a merger or an acquisition transaction pursuant to the Communiqué No. 2010/4. Moreover, this transaction is also subject to the authorization of the Board since the thresholds stated above are exceeded.

Investigation of the Transaction by the Board

Merger or acquisition transactions: which (1) create or strengthen a dominant position (2) result in significant lessening of the competition in the relevant product market are illegal and prohibited under the Turkish competition law.

For that reason, in order to determine whether the transaction between the Parties is prohibited under Turkish competition law, the Board conducts the following steps of investigation:

  1. The Board determines the relevant product market effected by the transaction;
  2. The Board examines whether the said transaction will create a dominant position or strengthen a dominant position in the relevant market (first test);
  3. The Board determines whether the transaction will significantly lessen the competition in the relevant market as a result of creating or strengthening a dominant position in that market (second test).

Thus, the Board has separately applied, within this case, both tests foreseen under competition law; although it normally does not strictly apply the tests. Indeed, Board decisions generally do not include concrete facts related to these tests. Moreover, in some decisions, the creation or strengthening of a dominant position is considered, without any justification, as the "significant lessening of competition". For instance, the Board, in its decision dated 08.07.2010 and numbered 10-49/900-314 related to the acquisition by Mey İçki Sanayi ve Ticaret A.Ş. ("Mey İçki") of Burgaz Alcoholic Beverages Commercial and Economic Union, which the Saving Deposit Insurance Fund offered for sale, decided that Mey İçki was in dominant position in the markets for raki and gin and that Mey İçki will significantly lessen the competition in the market by strengthening its dominant position through this acquisition.

Determination of the Relevant Market

Relevant Product Market

A relevant product market means a market which includes all those products and/or services, which are regarded as interchangeable or substitutable by the consumer by reason of the products' characteristics, prices and their intended use. Hence, in determining the relevant product market, the interchangeability or substitutability of the products and/or services by the consumer is taken into account.

Within this scope, the Board has first determined that HDDs are used in different areas such as "desktop applications", mobile applications" and "products produced within the scope of consumers' electronics". Nevertheless, since the HDDs as a whole constitute the object of the acquisition, the Board does not take into consideration these differences in the usage, and regards the HDDs as a whole, specifying the relevant product market as "all HDD products".

Relevant Geographic Market

A relevant geographic market means an area in which the undertakings are active in the supply and demand of products or services and in which the conditions of competition are sufficiently homogeneous and which can be easily disassociated from neighboring areas especially because competitions conditions are sensibly different from there.

Within this scope, even though the Board considered that the relevant geographical market shall be considered globally for reasons such as the structures of prices and demands, the Board has determined the relevant geographical market as "Turkey" since it has determined that the Turkish market's structure is different from other markets.

Test of Dominant Position

The Board has expressed that a market share superior to 50% may reveal, save for certain exceptional cases, the existence of dominant position and examines the market shares of the Parties between the years 2007 and 2010 in the HDD general market and in the markets for mobile applications, desktop and corporate solutions. The Board, as a result of the examination that it has conducted, decided that Seagate will acquire an important market power within Turkey.

As it can be seen, the Board dos not clearly determine whether Seagate will be in a dominant position or will strengthen its dominant position after the acquisition. The Board has probably not made a clear determination because the consequences of both assumptions are the same. As a matter of fact, regardless of whether Seagate reaches a dominant position or strengthens its dominant position after the transaction, the second test will apply. However, even if the consequences are the same, it would have been better to make a clear determination to ensure the clarity and definiteness in law.

Test of Significant Lessening of Competition

In order to determine whether the merger transaction will cause a significant lessening of competition in the relevant market or not, the Board takes into account various criteria.

Positive Effects to be Created in the Relevant Product Market by the Transaction

As a result of interviews realized with undertakings, the Board concluded that, except national computer producers, most of the undertakings will not be negatively influenced by this transaction. Indeed, even after the transaction, both Western Digital and Toshiba will continue to be important actors in the relevant product market. Moreover, the facts that the final products of HDD constitute a low percentage of its costs and that price differences between HDD producers are extremely low, will reduce negative effects of the transaction on competition.

Negative Effects to be Created in the Relevant Product Market by the Transaction

As a result of interviews realized with undertakings, the Board has determined that the said transaction may reduce the negotiating power in relation to the price and supply of computer producers which use HDD products as intermediate products, particularly local computer producers.

Effects of the Transaction on Potential Competition

The Board has determined that, in the following years, there may be some alternative products to HDDs. As a matter of fact, the Board has identified the Solid State Drive ("SSD") as a new technology that can powerfully enter into the market by reason of its superior characteristics such as its rapidity, resistance and battery life in comparison to HDDs.

In addition to the SSD technology, the Board has also identified the "cloud computing" technology, which corresponds to the storage of data in the server of data processing companies in lieu of physical servers of users as an alternative to the HDDs in the following years.

Finally, the Board has determined that in the following years, the effects of HDDs in the market will diminish and that SSDs will be an important alternative to HDDs.

Effects of Foreign Market in the Internal Market

The Board, by taking into account that the parties to the said transaction realize their production abroad and sell the products in Turkey through distributors or intermediates, that the transaction is realized in a global scale and that unconditional authorization was granted by eleven competition authorities including USA, EU, South Korea and Japan, determined that a more competitive market structure will be established in Turkey subject to the modifications of the market conditions in the world even if the Turkish market is actually different from other markets.

Conclusion

The Board, as a result of the examination realized, unconditionally authorized the said transaction by determining that, even though the operation will have certain negative effects on competition, these effects do not reach an extent which will "significantly lessen competition".

The said decision is an extremely important decision for Turkey. The Board reaches a conclusion after applying the two tests stated in the Communiqué No. 2010/4 separately, and clearly establishes the criteria to be considered in determining whether the competition will be significantly lessened after the merger or acquisition transaction (the second test).

Footnotes

1. Please see the following link to access the Board's decision: http://www.rekabet.gov.tr/Resources/GerekceliKurulKararlari/karar4587.pdf (accessed on: 18.01.2013).

2. Please see the following link to access the Communiqué No. 2010/4: http://www.rekabet.gov.tr/Resources/Tebligler/teblig88.pdf (accessed on: 18.01.2013).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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