Antitrust Alert: China Conditionally Approves Seagate Acquisition of Samsung Hard Drive Business

China's Ministry of Commerce (MOFCOM) has approved Seagate's acquisition of the hard drive disk division of Samsung Electronics ("Samsung HDD") under China's Anti-Monopoly Law ("AML"), but imposed conditions to ensure that Samsung, although controlled by Seagate, remains an independent competitor.  This decision demonstrates once again how China's merger control regime now significantly influences the outcome of global transactions. More importantly, China now should be added to the list of major antitrust merger review jurisdictions that may approach the same global transaction very differently. This is illustrated by Seagate/Samsung and Western Digital's acquisition of Hitachi's hard drive division, two transactions proposed about the same time. The U.S. Federal Trade Commission unconditionally approved both transactions. By contrast, the European Commission (EC) cleared Samsung/Seagate without conditions, but imposed divestiture obligations on Western Digital/Hitachi. MOFCOM has yet to rule on Western Digital/Hitachi, but now has imposed conditions on Samsung/Seagate.  Samsung/Seagate is only the eleventh decision so far published by MOFCOM, which releases only decisions prohibiting transactions (only one so far) or approving transactions under conditions (10 so far).

China's merger review

MOFCOM's merger review process begins with the parties' submitting a draft filing that, typically after they respond to requests for additional information by MOFCOM, is accepted as complete by MOFCOM, initiating the first phase of MOFCOM's review, which lasts 30 days. This is followed by a second, 90-day phase. MOFCOM almost always moves even uncontroversial transactions into this second phase, to give it time to complete its review. Deals that raise more significant competitive concerns may be moved into a third, 60-day phase.

In Seagate/Samsung, MOFCOM received Seagate's draft notification on May 19, 2011, and as  usual requested supplemental materials. MOFCOM declared the notification complete on June 13. It conditionally cleared the case on December 12, at the very end of the third phase review period. Thus, the China review took 7 months in total, compared to 6 months before the European Commission and less in the U.S.

Competition analysis

MOFCOM came to the conclusion that the Seagate/Samsung transaction would lead to anticompetitive coordinated effects. According to MOFCOM, given the particular circumstances of the market, the reduction in the number of competitors would have enabled the remaining competitors to coordinate their conduct. MOFCOM found that market concentration "relatively high," with only five players worldwide – Seagate (33%), Western Digital (29%), Hitachi (18%), Toshiba (10%) and Samsung (10%) – and that competitor actions were relatively transparent to others.

Remedies

MOFCOM imposed significant behavioral remedies on the postmerger Seagate/Samsung, requiring that the company:

• Maintain Samsung HDD as an independent competitor, including by establishing an independent subsidiary to price and market Samsung products; independently produce, price and market the Samsung products; and build a wall to prevent information from being exchanged between Seagate and its Samsung subsidiary competitor.
• Increase its capacity to manufacture Samsung products within 6 months of the decision.
• Not substantially change its current commercial practices or force customers to purchase exclusively from Seagate or its affiliates.
• Not require TDK (China), an unaffiliated supplier, to exclusively supply HDD heads to Seagate or its affiliates or restrict TDK supplying other HDD producers.
• Invest at least US$800 million in each of the next three years to bring more innovative products and solutions to consumers.

MOFCOM also  required that Seagate submit its detailed implementation plans to MOFCOM for approval. However, MOFCOM will allow Seagate to apply for waiver of the first two conditions after one year.

Observations

Conflict with EU and U.S. decisions.  Both the EU and U.S. antitrust authorities unconditionally approved this transaction. In its press release of 19 October, the European Commission found that "the removal of Samsung is not likely to lead to a risk of coordination among the remaining HDD suppliers," which is directly at odds with MOFCOM's conclusion. Further, while MOFCOM will prohibit Seagate/Samsung from becoming TDK China's exclusive HDD heads customer, the EU found that TDK's business would not be jeopardized by the merger, because the combined entity would continue to purchase a significant volume from TDK. This suggests the EU focused only on potential impact on TDK without considering the potential harm of an exclusive supply arrangement between Seagate/Samsung and TDK on other competing hard drive producers. The U.S. FTC did not publish a decision.

It is noteworthy that MOFCOM and its EU counterpart reached such diverging views, even though they both believe that the relevant markets are worldwide. It is unclear whether they considered different facts, used different economic theories, or simply apply different threshold to assess transactions. It has been speculated that the two hard drive mergers are of greater concern to MOFCOM because the impact of the transactions will be felt most strongly in China, home to the manufacturing facilities of most of the major competitors and their customers (computer manufacturers).

The timing of the reviews also may be a factor. While the EC looked first at Western Digital/Hitachi, MOFCOM first considered Seagate/Samsung. MOFCOM may wish to see who will acquire the assets that the EC has required that Western Digital divest before taking a decision in China on that transaction.

Remedies.  The MOFCOM remedies raise several interesting questions. First, if the concern is that the transaction would lead to collective dominance (i.e. coordinated effects), then in many jurisdictions enforcers likely would conclude that only a divestiture remedy would make sense, not a remedy controlling the company's future competitive behavior. However, given that Seagate/Samsung already has been approved unconditionally elsewhere, and Western Digital/Hitachi merger is subject to an EC divestiture order, MOFCOM may have preferred to impose a softer remedy. The MOFCOM remedy is behavioral, but in context it will have the same effect as a divestiture over a specific time period, as MOFCOM is forcing Seagate to maintain Samsung as an independent competitor.

Nevertheless, second, requiring Samsung remain an independent competitor is a puzzling remedy. By definition, a concentration involves the acquisition of control by one undertaking over the other, so that the latter ceases to be an independent competitor. In this case, MOFCOM essentially is requiring Seagate not exercise control over Samsung HDD for at least one year.

Third, the last question is how MOFCOM will treat Western Digital/Hitachi. If the divestiture imposed by the EC is worldwide and leads to the creation of a wholly new player, then MOFCOM might not require additional commitments from Western Digital. The market already will have become more competitive through the combined efforts of the EC and MOFCOM to create and maintain two independent competitors, at least for some time. However, if the divested assets are acquired by an existing competitor, then MOFCOM is more likely to block the deal or to at least impose additional stringent remedies.

The original (Chinese) text of MOFCOM's 12 December 2011 decision can be found on the MOFCOM web site. An unofficial English translation is available here.

Lawyer Contacts

For more information, please contact your principal Jones Day representative or either of the lawyers listed below.

Peter J. Wang
Shanghai / Beijing
+86.21.2201.8040 / +86.10.5866.1111
pjwang@jonesday.com

Sébastien J. Evrard
Beijing
+86.10.5866.1112
sjevrard@jonesday.com

Yizhe Zhang
Beijing
+86.10.5866.1111
yzhang@jonesday.com

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