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Mofcom's hard line in hard-disk-drive deals

by Bill McConnell  |  Published March 30, 2012 at 12:00 PM

040212 rules.jpgOnly three years after writing its merger review rules, China's Ministry of Commerce has demonstrated that its competition reviews must receive as much attention from buyers as those in the U.S. and Europe.

Google Inc. is the most recent U.S. firm to get that lesson. The company announced March 19 that China has extended its review of the $12.5 billion purchase of Motorola Mobility Holdings Inc., which has already been approved by U.S. and European regulators.

Before that, two recent rulings by Mofcom imposing strict conditions on approvals for Western Digital Corp.'s $4.3 billion acquisition of Hitachi Global Storage Technologies Ltd. (now named Viviti Technologies Ltd.) and Seagate Technology LLC's $1.38 billion acquisition of Samsung Electronics Co. Ltd.'s hard-drive business illustrate the potential hurdles Google and other buyers face when trying to clear mergers in China.

Mofcom, headed by Commerce Minister Chen Deming, allowed both mergers to go through but said the buyers must maintain the targets' Chinese units as separate operations for a year or more and when the waiting periods expire can't integrate them without China's approval. The U.S. and European Commission, on the other hand, approved the Samsung deal without any conditions and required Western simply to sell selected Hitachi assets to Toshiba Corp.

In most cases, countries that have recently developed their competition review policies have been happy to follow the lead of the U.S. and EC and rarely impose their own merger conditions unless one of the parties is based within their borders. China's actions demonstrate that even when neither merging company is based in the country, it will act aggressively if consumers are affected.

It also appears China doesn't share the U.S. and the EC's reservations about merger conditions requiring continuous government supervision. Typically, the Western governments prefer divestitures or simply block mergers they believe are anticompetitive. Behavioral remedies that must be monitored have been a last resort when divestitures or blocking a deal won't help consumers.

Under Mofcom's March 2 approval, Western Digital must maintain Viviti's China operation as a separate competitor with its own branding and sales team. Western Digital also must establish a firewall to prevent the exchange of information between the two companies.

Seagate, approved in December, has similar separation restrictions and also was forbidden from forcing customers to buy hard-disk drives exclusively from Seagate or its affiliates. Seagate was also prohibited from forcing China's TDK (China) Investment Co. Ltd. to supply magnetic pickup heads for disk drives to Seagate or restricting how much TDK sells to other drive manufacturers.

In both cases, compliance requires oversight by a trustee.

While China will give the companies an opportunity to seek a waiver from the hold-separate requirement -- Seagate can apply one year after Mofcom's approval and Western Digital two years after -- U.S. antitrust lawyers question whether the companies will be permitted to extricate themselves from the hold-separate orders at those times.

In a client alert, Peter Wang, partner in charge of Jones Day's China practice, said the requirement implies that China "found the deals to be anticompetitive and will not grant an option to the buyer to exercise control at some point in the future if market conditions change."

Paul Cuomo, partner at Baker Botts LLP, says if China continues to prevent companies from really merging, "buyers need to think through what Mofcom might require and whether they're willing to go through with it."

Cuomo says China must be considered when deciding whether to include "hell or high water" provisions in merger agreements requiring the buyer to take all regulatory steps necessary to complete a merger. As baffling as China's decisions are to merging parties in the West, practitioners here aren't ready to declare Mofcom a disaster. They note that Mofcom's decisions have become more nuanced since it rejected Coca-Cola Co.'s bid for China Huiyuan Juice Group Ltd. in 2009, a decision seen as largely political. But since then, Mofcom has investigated 381 deals, of which it has imposed conditions on 10 and blocked none. Chinese officials also appear willing to address some of foreign buyers' concerns. Reacting to complaints that Mofcom's process takes too long, the director of the anti-monopoly bureau at the end of 2011 said the ministry would attempt to streamline the system.

Bill McConnell is The Deal magazine's Washington bureau chief.

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Tags: anti-monopoly | Baker Botts LLP | Chen Deming | China Huiyuan Juice Group Ltd. | Coca-Cola Co. | EC | European Commission | European Union | Google Inc. | Hitachi Global Storage Technologies Ltd. | Jones Day | Ministry of Commerce | Mofcom | Motorola Mobility Holdings Inc. | Paul Cuomo | Peter Wang | Samsung Electronics Co. Ltd. | Seagate Technology LLC | TDK (China) Investment Co. Ltd. | Toshiba Corp. | Viviti Technologies Ltd. | Western Digital Corp.
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