On August 27, 2013, MOFCOM announced its conditional clearance on MediaTek Inc’s (“MediaTek”) 4 billion USD acquisition of MStar Semiconductor Inc (“MStar“) (the “Transaction“). This is the second “hold-separate” case since this year (the other one is Xstrata/Glencore), and the forth one in China’s merger filing history. 1 MOFCOM appears to be getting more and more confident with the “hold-separate” arrangement as a behavior remedy to address competition concerns. It is also worth to note that the parties are required to submit detailed operation plan within three months of the decision and the transaction can only be closed after the detailed operation plan is approved by MOFCOM.
The entire review process of the concentration lasted for more than a year. The filing was first submitted to MOFCOM on July 6, 2012, and was officially accepted by MOFCOM on September 4, 2012. After review, MOFCOM expressed its concerns to the parties that the transaction would restrict or eliminate competition on the design and sales market of LCD TV control chip (the key component of a LCD TV chip, “LCD TV control chip“). In order to remove MOFCOM’s concerns, the parties submitted rounds of commitment proposal. However, MOFCOM was not satisfied with any of the draft proposals.
Upon MOFCOM’s consent, the filing was withdrawn on February 22, 2013, and was re-submitted and re-accepted on March 12, 2013. The resubmission went through phase 1, phase 2 and the extended period of phase 2, until the parties’ commitment proposal was finally accepted by MOFCOM on August 15, 2013. The transaction was approved on August 27, 2013.
The products involved in the Transaction include LCD TV control chip and cell phone baseband chip. MOFCOM believed that the Transaction would not have anti-competitive effects on the cell phone baseband chip market, and therefore it only focused on the design and sales market of LCD TV control chip.
After considering the characteristics of LCD TV control chip, set-top box chip and LCT monitor chip from the perspective of demand-side substitutability and supply-side substitutability, MOFCOM defined the LCD TV control chip as an independent product market.
On geographic dimension, MOFCOM considered the LCD TV control chip market having global characteristics based on the analysis of tariffs, transportation cost, etc. Meanwhile, MOFCOM recognized the uniqueness of the China market, in consideration of the market’s different language culture, geographic location, technical service and price expectation. Therefore, China market is the emphasis of MOFCOM’s analysis and evaluation.
MOFCOM concluded that the Transaction will substantively change the market structure by increasing the HHI in the China LCD TV control chip market from 4533 to 6500, with an increment of 1962.
MOFCOM found that MediaTek and MStar were the top two competitors in the relevant market before the transaction, and they constrained each other in respect of innovation, service quality and price. After the concentration, these constraints will be removed. In addition, MediaTek and MStar will together have a market share as high as 61% in the global market and 80% in the China market. The current LCD TV control chip manufacturers would not be able to compete effectively with them. Moreover, the technical barrier in the market is substantial, and thus new entries into the market are rather limited. As a result, the downstream TV makers in China would be restricted on their choices in the procurement of LCD TV control chip.
MOFCOM further evaluated the factors that could to some extent offset the above anti-competitive effects, including the fast innovation in the relevant market, short life circle of the product, possible entry of potential competitors and the opportunities to small-size competitors. MOFCOM concluded that, despite of the above factors, the concentration would still have restricting or eliminating effects on the relevant markets in the short term, and may cause higher price, lower service quality, reduction in investment and postponement of the introduction of new products.
In light of the above, MOFCOM imposed the following conditions:
• After the transaction, MStar’s Taiwan subsidiary (“MStar Taiwan“) should take possession of MStar’s LCD TV control chip business, and MStar Taiwan should remain in the market as an independent company.
• MediaTek’s shareholder rights should be restricted. MediaTek is only allowed to exercise its rights with respect to dividends, financial report consolidation and conditional appointment of board members. The exercise of other rights is subject to prior approval of MOFCOM.
• MediaTek and MStar Taiwan should not conduct business cooperation without first obtaining consent from MOFCOM, and should set forth safeguard measures to avoid information exchange on both the employee and management level. Moreover, MediaTek and MStar Taiwan should maintain their pre-transaction practice regarding supply, after-sale service, open source, etc.
• Without prior approval of MOFCOM, MediaTek and MStar Taiwan should not acquire any competitor in the LCD TV control chip market.
• The initial period of the remedies is three years. Within the three-year period, MediaTek and MStar Taiwan should submit written report to MOFCOM on their compliance with the decision every three months. After the three-year period, MediaTek and MStar Taiwan may apply for the removal of the hold-separate obligations.
It appears that MOFCOM intends to advance the negotiation of operation plan to early stages. On one hand, the full text of the parties’ final commitment proposal is published together with the clearance decision, which may serve as a framework of the detailed operation plan. This is the third time after Xstrata/Glencore and Baxter/Gambro that the parties’ final commitments are attached to the decision. On the other hand, the parties are required to submit detailed operation plan within three months of the decision and the transaction can only be closed after the detailed operation plan is approved by MOFCOM. Having this condition in place, the parties will no doubt try their best to close the negotiation with MOFCOM on the detailed operation plan and finalize the document as soon as possible. It appears that MOFCOM has accumulated experience from previous hold-separate cases, and intends to avoid the uncertainties caused by lengthy negotiation over the operation plan.
In addition, it is worth to note that in the commitment proposal, the parties made substantial promises about price reduction of the new LCD TV control chip products. The promises are specific about the range of price reduction (although the specific figures are concealed for confidentiality consideration) and the timing of the reduction (e.g. three months or 12 months after the introduction of the new products). Such type of commitment is rarely found in other decisions of MOFOCOM.
1The other three are Seagate/Samsung (2011), WD/Hitachi (2012) and Marubeni/Gavilon (2013).