Although at the backdrop of Covid-19 outbreak, China’s merger review practice has not been negatively affected. Currently, the average review time is 8 days shorter than that in last year. According to public statistics, the first quarter of 2020 witnessed completed review of 111 filings by China’s antitrust authority, the State Administration for Market Regulation (“SAMR”), with a slight year-on-year growth of 0.9%.
With the period of economic downturn, people may have the question or anticipation: May SAMR relax its scrutiny standard to encourage M&A activities? The recent merger review practice in China answered it at least does not apply to the semiconductor sector.
On the 8th and 16th of 2020 April, SAMR respectively released the first and second case it imposed remedies in this year. Both of them are related to semiconductor sector, and they are Infineon/Cypress deal and the Nvidia/Mellanox deal. Although it may be a coincidence, it at least suggests two things: First, the mergers and acquisitions in semiconductor areas are still active in spite of the influence of worldwide Covide-19 pandemic. Second, China keeps the vigilant and stringent antitrust scrutiny on global semiconductor mergers.
- Introduction of The Infineon/Cypress Deal
The Infineon/Cypress deal was notified with SAMR on August 8, 2019 and approved with remedies on April 8, 2020. SAMR identified horizontal overlaps in four relevant markets, which are automotive microcontrollers (MCUs), industrial MCUs, consumer MCUs and power management chips. The neighboring relationship in five pairs of relevant markets are also identified and they are automotive MCUs/automotive IGBT, automotive MCUs/automotive NOR flesh memory, automotive MCUs/automotive wireless connection chip, automotive MCUs/automotive gate driver, consumer wireless connection chip/security chip respectively.
The relevant geographic market is defined as worldwide, in line with most of semiconductor precedents. Through the comprehensive competitive analysis, SAMR concluded that this deal may lead to effects of eliminating or restricting competition in the automotive MCUs worldwide market, because of the neighboring relationship between Cypress automotive MCUs and Infineon automotive IGBT, and between Infineon automotive MCUs and Cypress automotive NOR flesh memory.
Specifically, for the automotive IGBT, Infineon’s market share is 35-40% worldwide and 55-60% in China. For automotive NOR flesh memory, Cypress has a market share of 65-70% worldwide and 30-35% in China, ranking on No. 1. Under such market competition landscape, SAMR elaborated its competition concerns from three perspectives.
First, SAMR believed that the filing parties may conduct tying practice because of the above neighboring relationship. When downstream customers refuse to accept the tying, the entity ex post the merger (the “party”) is capable of forcing them to accept the tying through refusal to deal. Second, SAMR concerned that the party can develop the all-in-one product and creasing to sell automotive IGBT, automotive NOR flesh memory and automotive MCU separately. Third, it is suspected that the party can also decrease the interoperability between its NOR flash memory products and third-party MCU products.
In the end, SAMR accepted four behavioral remedies proposed by the filing parties and approved this deal. The final remedies as follows will be automatically expired in five years.
First, the party are prohibited from tying sales of automotive IGBT and automotive MCU or sales of automotive NOR flesh memory and automotive MCU in China, without justifiable reasons. Other unreasonable conditions must not be imposed on those sales, and refusal to sell those products separately are prohibited to Chinese customers either. Second, if the all-in-one product or solution is feasible from technological perspective, the party should undertake to continue to offer Chinese customers a choice of purchasing automotive IGBT, NOR flesh memory and MCU separately. Third, the party should undertake to ensure the automotive NOR flesh memory sold to Chinese customers are in compliance with the interface standard commonly accepted by industry, and to ensure the standard compliant automotive MCUs sold by third parties interoperable with the party’s automotive NOR flesh memory. Fourth, the party should supply those products to Chinese customers on fair, reasonable and non-discriminatory (“FRAND”) principle.
- Introduction of The Nvidia/ Mellanox Deal
The Nvidia/Mellanox deal was notified with SAMR on April 24, 2019. The withdraw and refile was applied in February of 2020, and SAMR ultimately approved this deal with remedies on April 16, 2020. In this case, SAMR identified vertical relationship between data center server and general ethernet adapter. The neighboring relationship in two pairs of relevant markets are additionally identified and they are GPU accelerator/private network interconnection equipment and GPU accelerator/high speed ethernet adaptor respectively.
The relevant geographic market is defined as worldwide, in line with most of semiconductor precedents handled by SAMR and MOFCOM. Through competitive analysis, SAMR identified competition concerns in the above-mentioned neighboring markets, including GPU accelerator, private network interconnection equipment and high speed ethernet adaptor both in China and worldwide.
Specifically, for GPU accelerator market, Nvidia’s market share is 90-95% worldwide and 95-100% in China. As to private network interconnection equipment, Mellanox’s worldwide and China market share are 55-60% and 80-85%. For high speed ethernet adaptor, Mellanox’s market share is 60-65% worldwide and 65-70% in China, ranking on No. 1 and being much more than other market players. Under such market structure, SAMR illustrated its competition concerns from four angles.
First, similar to the Infineon/Cypress case, SAMR believed that the entity after the deal (the “party”) can conduct tying because of the above neighboring relationship and the significant market power in each market. When downstream customers refuse to accept the tying, the party is capable of forcing them to accept the tying through refusal to deal. Second, SAMR concerned the party can decrease the interoperability between its GPU accelerator and third-party network interconnection equipment or between its network interconnection equipment and third-party GPU accelerator. Third, it is found that the party can access to competitive sensitive information from other GPU accelerator and network interconnection equipment manufacturers and thus possibly gain unfair competitive advantages.
In the end, SAMR accepted seven behavioral remedies proposed by the filing parties and approved this deal. Two remedies were made confidential in the released announcement and the other five are set out as follows. Those remedies can be applied for removal after six years.
First, it is prohibited from tying or imposing unreasonable conditions on sales of Nvidia GPU accelerator and Mellanox network interconnection equipment in China. It is prohibited from hindering or restricting customers to separately purchase the above products or discriminating those customers on service quality, price, soft function and etc. Second, the party should supply those products and related software and accessories to China on FRAND terms. Third, the party should warrant continuous interoperability between GPU accelerator and third-party network interconnection equipment, and between Mellanox high speed network interconnection equipment and third-party GPU accelerator. Fourth, the party should continue its open source commitment for the point-to-point communication software and collective communication software for Mellanox high-speed network interconnection equipment. Fifth, the party should adopt protective measures on information accessed from other accelerator and network interchange equipment manufacturers.
By looking at these two recent decisions on semiconductor, in combination with review of those PRC precedents, the following key observation or commentary could be shared.
First, semiconductor mergers usually go through a relatively long period with pull-and-refile being the frequent phenomenon.
For instance, the Nvidia/Mellanox lasted around one year with withdraw-and-refile being applied once. For the Infineon/Cypress deal, the total review period is 8 months, which is already relatively desirable, compared to most of other remedy cases in semiconductor sector. Specifically, the merger review procedure costed around 13 months in MediaTek/MStar deal, about 15 months in ASE/Silicon Precision deal, around 9.5 months in KLA-Tencor/Orbotech deal, about 7.5 months in NXP/Freescale deal, and about 7 months in Broadcom/Brocade deal. Among them, except for the Broadcom/Brocade and Infineon/Cypress, all of other cases involved the withdraw-and-refile procedure.
Second, neighboring relationships between the filing parties in semiconductor mergers have attracted increasing attention and competition concerns from SAMR.
Notably, in both Infineon/Cypress and Nvidia/Mellanox, SAMR had competition concerns on markets with neighboring relationship, rather than on the horizontal overlaps or vertical relationship markets. Whether or not the party ex post the transaction may conduct trying, refusal to deal or may decrease interoperability between products is the focus of SAMR antitrust scrutiny. In addition, as in Broadcom/Brocade and Nvidia/Mellanox, the possibility of accessing competitor’s sensitive information becomes a concern as well.
Third, the remedy type imposed mainly depends on where the competition concerns come from.
The current enforcement in China suggests, where competition concerns come from horizontal overlaps between the filing parties, structural remedy or quasi-structural remedy such as hold-separate is frequently adopted. When competition concerns come from vertical or neighboring relationship, SAMR mostly only imposes behavioral remedies. Furthermore, when concerns come from the complementary synergy caused by the neighboring relationship, the remedial measure very often involves prohibition of trying the products with neighboring relationships.
For instance, the remedies in MediaTek/MStar and ASE/Silicon Precision are hold-separate, and NXP/Freescale involved structural divestiture, because competition concerns in those three cases all come from horizontal overlaps. While the Broadcom/Brocade, KLA-Tencor/Orbotech, Infineon/Cypress and Nvidia/Mellanox deal involved only behavioral remedies, because competition concerns arises from vertical or neighboring markets.
Fourth, relevant stakeholders are solicited for opinions in various ways.
China’s antitrust authority usually solicits opinions from competent industry authority, industry associations, key competitors and downstream customers. In all of those semiconductor mergers including the above Infineon/Cypress and Nvidia/Mallenox, the above-mentioned four types of stakeholders were solicited for comments. In NXP/Freescale, industry experts were solicited for opinions additionally.
In the process of soliciting opinions, opinions of competent authority and trade associations are more important. For the semiconductor industry, there are mainly two competent authorities. One is the Electronic Information Department of the Ministry of Industry and Information Technology (MIIT), with the Integrated Circuit division being the competent division. The other is the High-tech Industry Department of the National Development and Reform Commission (NDRC). One of the major industry associations is China Semiconductor Industry Association.
In summary, from the past and most recent China’s merger review practice on the semiconductor sector, the antitrust scrutiny is continuously rigorous and cautious. In the preparation of merger filing in China, companies in this industry need to take it seriously and carefully. It is suggested that antitrust lawyers to be involved in the early stage of transaction negotiation, so that favorable transaction terms may be included by assessing the antitrust risks comprehensively and measure to shorten the review period could be planned in advance.