By Susan Ning and Hazel Yin
On June 15, 2012, the Ministry of Commerce (“MOFCOM”) approved the acquisition of Goodrich Corporation (“Goodrich”) by United Technologies Corporation (“UTC”) subject to the divestment of the electronic systems business of Goodrich. Both companies are headquartered in the United States and active in the production and sale of aviation equipment. This marks the fourth conditional clearance issued by MOFCOM in the first half of 2012 and the only case where the core remedies are structural.
Review Process. MOFCOM received the notification on December 12, 2011 and officially accepted it on February 6, 2012. A Phase 2 investigation was opened on March 2 and extended on May 31, which was set to expire on July 30. The companies submitted the final remedy proposal on June 6, one week before MOFCOM issued the final decision.
Relevant Markets. MOFCOM found that the transaction mainly involves aircraft electronic systems, lighting systems, flight control actuation systems and engine control systems. MOFCOM further identifies that each of nine narrower product markets, i.e. alternate current (“AC”) electrical generation systems, interior lighting systems, secondary flight control actuation systems, flight control actuation systems for rotorcraft, trimmable horizontal stabilizer actuator, missile actuation systems, electronic control systems, fuel metering units, and main fuel pumps, constitutes a separate product market.
The geographic market for each of the product markets is defined as global.
Competitive Assessment. MOFCOM mainly investigated horizontal overlaps of UTC and Goodrich in the global market for AC electrical generation systems.
According to MOFCOM, there are altogether six suppliers in the relevant market, with UTC and Goodrich being the top 2 competitors contributing to 72% and 12% of the market shares respectively. The HHI index post-merger will be 7158 with an increment of 1728.
MOFCOM also investigated the bidding history in the relevant market and found that UTC has won most of the bidding contests from 2007 to 2011 and Goodrich is one of the few other suppliers that were awarded a contract. With its advanced technologies, it is believed that UTC would further enhance its market power through the transaction.
Market entry. MOFCOM found that suppliers of AC electronic generation systems usually have to develop tailor-made products for different platforms. Since the market is characterized by significant R&D cost and long payback period, a supplier needs to have very strong technological and financial capabilities. At the same time, the product has relatively long life cycles: once a system is installed on a given platform, it will not be replaced for dozens of years.
MOFCOM mentioned that development of new platforms and technological innovation may provide opportunities to new entrants. Nevertheless, MOFCOM reached into the conclusion that barriers to entry is still high due to the high requirement for funding and technological capabilities, and the limited availability as well as unpredictability of market opportunities.
(1) Businesses to be divested: MOFCOM requested the parties to divest the electronic systems businesses of Goodrich, including the AC generation systems business and low-voltage direct current generation and distribution systems business located at Twinsburg in the U.S. and Pitstone in the U.K., as well as the 60% equity interests Goodrich holds in Aerolec, a joint venture with Thales Avionics.
In order to ensure the viability and competitiveness of the businesses to be divested, the parties are requested to transfer tangible and intangible assets, including but not limited to production facilities, sales department, R&D department, customer services and relevant intellectual property.
(2) Divestiture process: The companies are required to find a buyer and enter into a sales and purchase agreement (“S&P agreement”) within a period of six months. Upon application, the period can be extended to nine months. MOFCOM will be entitled to designate a divestiture trustee to find a buyer and cause the execution of an S&P agreement at no minimum price within three months if the parties fail to meet the deadline.
According to the MOFCOM Interim Provisions on Asset or Business Divestiture in a Concentration of Business Undertakings (“Interim Divestiture Provisions”), the closing of the divestment transaction(s), including the transfer of legal title should be completed within three months upon execution of the S&P agreement, unless otherwise approved by MOFCOM.
(3) Ancillary obligations: The companies are also required to maintain the viability and competitiveness of the divested business during the interim period and to provide reasonable technical support to the buyer of the divested business within one year after completion of the divestment.
(4) Supervision Trustee: MOFCOM also requested the companies to appoint a supervision trustee in accordance with the Interim Divestiture Provisions.
The market for aviation equipment is a paradigm example of a bidding market. In its competition analysis, MOFCOM considers not only the historical market shares but also the closeness of competition between Goodrich and UTC compared to other suppliers.
According to news reports, China is the first jurisdiction giving green light to this transaction. This suggests that MOFCOM is getting increasingly confident in making a decision independently, rather than following its counterparts in the other major jurisdictions. The European Commission has set an August 31 deadline to make a decision on the deal.