Introduction
On November 27 2015 the Ministry of Commerce (MOFCOM) conditionally approved NXP Semiconductors NV's proposed acquisition of Freescale Semiconductor Inc. This marked the second conditional merger clearance case of 2015.
NXP is a global semiconductor firm mainly engaged in the design, manufacture and sale of integrated circuits and discrete components. Its products are used in various sectors, including the automotive, wireless network infrastructure, lighting, mobile, consumer and computer industries. The target, Freescale, is mainly engaged in the manufacture, research and development of microcontrollers and digital networking processors (embedded processors). Freescale also provides customised semiconductor products to clients to complement its embedded processing solutions.
Following in-depth analysis of the potential impact of the concentration on the relevant product markets, MOFCOM established that the proposed deal could eliminate or restrict competition in the radio frequency power transistor product market. MOFCOM comprehensively evaluated the remedies submitted by NXP – which included divestment of its radio frequency power transistor business – and ultimately granted conditional clearance for the acquisition in light of these commitments. This marked the first conditional clearance granted by MOFCOM in the past three years, based on the condition that the parties adopt the structural remedy of divesting business that may have negative effects on competition in the relevant market.
As the deal required global notification, the undertakings also obtained conditional approval from the European Commission on September 17 2015 and the Korean Fair Trade Commission (KFTC) on November 23 2015. The remedy proposal that NXP submitted to MOFCOM was similar to that submitted to the European Commission and the KFTC. This was largely due to the fact that the geographical market of the relevant products was defined as the global market. This shows that MOFCOM's anti-monopoly review and law enforcement practices are becoming more closely aligned with international practice.
Conditional approval after refiling
Notably, the merger notification was refiled after withdrawal of the first filing. MOFCOM initially received the Freescale/NXP merger filing on April 3 2015. However, it deemed the filing incomplete and requested that the parties submit supplementary material. MOFCOM subsequently filed the case and initiated a preliminary review on May 15 2015. On September 11 2015 – with the agreement of NXP – MOFCOM extended the review period. When the extension period neared expiry, NXP requested withdrawal of its filing. On November 10 2015 MOFCOM initiated a fresh review of the parties' second filing. Unlike previous deals that were conditionally approved after refiling, the proposed deal was quickly approved; MOFCOM issued its decision on November 27 2015, only 17 days after the refiling. From the parties' first submission to MOFCOM to MOFCOM's publication of the conditional approval, the entire review process took 236 days. Nevertheless, the actual review period was 192 days, counting from the date that MOFCOM first filed the case.
MOFCOM has conditionally approved 26 cases since the implementation of the Anti-Monopoly Law, many of which involved refiling after withdrawal of the first filing. MOFCOM announcements generally do not disclose the reasons for withdrawal (eg, Glencore/Xstrata, Marubeni/Gavilon and Media Tek/MStar Semiconductor). However, in Western Digital/ Hitachi MOFCOM notably disclosed the reason for withdrawal – there were significant changes to the facts of the case. It seems that the usual reason for withdrawal is to allow for the notifying parties to buy more time to negotiate remedies with MOFCOM. In some complex cases, the notifying parties may voluntarily withdraw the filing if they cannot propose remedial measures to relieve MOFCOM's competition concerns within the timeframe prescribed by law. By taking such a step, they have more time to negotiate with MOFCOM in order to avoid rejection of the transaction and increase the likelihood of obtaining clearance.
NXP and Freescale had horizontal overlaps in the general microcontroller, automotive power-use analogue integrated circuits and radio frequency power transistor product markets. In defining the relevant product market, MOFCOM divided the analogue integrated circuit market by distinguishing between general analogue integrated circuits and special analogue integrated circuits. The products involved in this case were special analogue integrated circuits used in the automobile industry. MOFCOM further divided special analogue integrated circuits into power-use special analogue integrated circuits and non-power use special analogue integrated circuits. Due to the differing functions, IP modules and production technologies, MOFCOM held that automotive power-use analogue integrated circuits constituted an independent product market.
Defining the relevant market is crucial to competition analysis. According to the Guidelines on the Definition of Relevant Market promulgated by the Anti-monopoly Commission of the State Council, scientific and rational definition of the relevant market plays an important role in critical issues, such as:
- identifying existing and potential competitors;
- determining the market share of business operators and the market concentration ratio; and
- determining the market position of business operators.
Defining the relevant market is generally the starting point for competition analysis. When defining the relevant product market, the factors to be considered may include the product's characteristics, price and intended use, as well as consumer preference and substitutability of demand and supply. When the relevant product market is further sub-divided, the scope of assessment will be narrower and the notifying parties will be regarded as having greater influence on the market due to the increase in market share. This is more likely to attract the attention of antitrust authorities. In this case, MOFCOM defined the relevant product market as the automotive power-use analogue integrated circuit market, implying that MOFCOM is inclined to make narrow sub-divisions when defining product markets.
To ascertain the relevant geographical market, MOFCOM examined various aspects, including:
- regulatory barriers to trade;
- transportation costs; and
- supply and procurement scope.
MOFCOM defined the relevant geographical market for general microcontrollers, automotive power-use analogue integrated circuits and radio frequency power transistors as the global market, based on the following grounds:
- There were no regulatory barriers to the trade of the relevant products;
- Transportation costs accounted for a low percentage of the total market price;
- The manufacture, procurement and supply of the products were undertaken worldwide; and
- Suppliers competed on a global scale.
By taking into account the parties' market shares and control capabilities, the degree of concentration in the relevant market and the degree of difficulty in entering the market, MOFCOM established that the proposed deal could eliminate or restrict competition in the radio frequency power transistor product market. According to the Interim Provisions on the Assessment of Impact of Concentration of Undertakings on Competition published by MOFCOM, market share plays a significant role in the analysis of the structure of the relevant market and in determining the market position of both the undertakings and their competitors. MOFCOM found that the radio frequency power transistor product market featured few competitors and had high concentration levels. The top eight market players accounted for around 90% of the market and NXP's and Freescale's market shares were respectively first and second in the global market, with a combined market share of 54% in 2014.
The proposed merger would have thus eliminated competition between the top two market players and it accordingly attracted MOFCOM's close scrutiny. That said, similar mergers of parties with top market shares have previously been conditionally approved, on the condition that structural remedies involving divestment of relevant businesses be adopted. In Panasonic/Sanyo the notifying parties were the largest and second-largest manufacturers in the highly concentrated button-type rechargeable lithium battery market. The merger would have resulted in Panasonic holding a 61.6% market share. In light of this, MOFCOM requested that the notifying parties fully divest Sanyo's existing button-type rechargeable lithium battery business within six months of obtaining conditional clearance from MOFCOM. In Goodrich/United Technologies the notifying parties were the two largest market players in the aircraft alternating current power systems market. MOFCOM thus requested that United Technologies divest Goodrich's power systems business within six months of obtaining conditional clearance for the merger. In addition, in Maersk/Mediterranean Shipping/CMA CGM, a case regarding the establishment of a network centre, the notifying parties had the top three capacity shares in the Asia-Europe route. As the integration would have significantly increased the parties' market power, MOFCOM prohibited this concentration.
MOFCOM focused on the market shares of the two parties because the projected boost in market share that would result from the concentration gave rise to serious competition concerns. NXP and Freescale are the top two competitors in the radio frequency power transistor product market, with similar process technologies and similar pools of clients that tend to procure products from both companies. The two players have historically competed fiercely and created competition constraints for each other in the relevant market. The proposed deal would thus eliminate the intense competition between them, reduce options for clients and increase procurement risks. MOFCOM therefore considered that the deal had the potential to eliminate or restrict competition in the radio frequency power transistor product market.
In accordance with MOFCOM's decision, NXP has committed to completely divest its radio frequency power transistor business to Beijing Jianguang Asset Management. At the same time, NXP will fully fulfil its other obligations during the transition period. The NXP/Freescale deal will be implemented only after the divestment deal has been concluded.
This marks the first case in which MOFCOM has adopted the structural remedy of divesting business to counter potential negative effects on competition since the January 5 2015 implementation of the Provisions on Imposing Restrictive Conditions on the Concentration of Undertakings (Trial Version). The provisions govern the determination, fulfilment, supervision, change and termination of restrictive conditions. Article 20 of the provisions emphasises that divestment obligors must ensure the viability, competitiveness and marketability of the divested business. In addition to these concerns, MOFCOM focused on the scope and effect of the divested business, the suitability of potential buyers and the attitude of downstream buyers towards the remedies. These assessment points in MOFCOM's announcement provide helpful guidance for future notifying parties that are required to submit structural remedies.
In previous cases involving structural remedies, divestment obligors were usually required to find buyers and sign agreements for the divested businesses within a specified period following conditional clearance from MOFCOM. For instance, in Wyeth/Pfizer Pfizer was required to seek out and enter into an agreement with a buyer for the divested business within six months of obtaining conditional approval. In Goodrich/United Technologies United Technologies was required to divest on these same terms. This was partly due to market efficiency considerations, as the notifying parties had requested quick approval, and partly out of consideration for the divestment obligors potentially being unable to find a buyer immediately.
Nevertheless, it seems that the obligations which MOFCOM imposed on NXP were stricter than usual. This was primarily due to the fact that NXP proposed a structural remedy – including divestment of its radio frequency power transistor product operations to Beijing Jianguang Asset Management – during the early stage of the review of the second notification. Since NXP had already found and entered into an agreement with a buyer for the divested business, it was unnecessary for MOFCOM to grant extra time to NXP to seek a buyer.
In addition, MOFCOM required NXP to fulfil certain obligations during the transition period from the approval date to conclusion of the divestment deal. In particular, NXP will:
- not engage in unfair trade practices relating to the divested business;
- not implement acts which may have a significant adverse impact on the value, management or competitiveness of the divested business, or which may change the nature, scope, industry or business strategy or investment policy of the divested business;
- take reasonable measures to encourage core employees to stay in the divested business and not transfer employees to NXP's non-divested business;
- ensure supplies to the divested business in a fair, reasonable and non-discriminatory manner; and
- maintain the independence of the divested business and not exchange market-sensitive information between the parties and the divested business.
MOFCOM's conditional approval of the concentration closely resembled the decisions of the European Commission and the KFTC, as did its definition of the relevant geographical market as the global market. MOFCOM did not conduct a separate analysis of the impact of the acquisition on the Chinese market. Moreover, it focused its assessment on the market shares of Freescale and NXP in the radio frequency power transistor market. In terms of market definition, competition analysis and structural remedies, MOFCOM's approach to anti-monopoly law enforcement is increasingly converging with those of the European Commission and the KFTC.
As the first concentration approval with structural remedies following enactment of the Provisions on Imposing Restrictive Conditions on the Concentration of Undertakings, MOFCOM's evaluation of the viability, competitiveness and marketability of the divested business – as well as the suitability of potential buyers – sets a strong precedent for filing parties that may be required to submit structural remedies in future.
In addition, the concentration was refiled following withdrawal of the first filing. The notifying parties withdrew the first filing shortly before expiry of the extended review period in order to gain more time to discuss effective remedies with MOFCOM. In complex concentrations involving sensitive competition issues, withdrawing and refiling can be a flexible strategy to avoid the deal being rejected by MOFCOM.
For further information on this topic please contact Michael Gu at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.
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