Two recent merger decisions by the European Commission in the hard disk drive sector will be of interest to Japanese companies planning M&A deals for a number of reasons. They demonstrate the Commission's approach to mergers taking place in parallel and the need for companies to ensure they are the first to notify their transaction in such circumstances, in particular in the context of a concentrated market. The cases also highlight the difference in approach adopted by the various competition authorities around the world and the fact that regulators may well reach opposite decisions when assessing the same transaction even where the geographic markets concerned are worldwide in scope.
In April last year the Commission received notifications of two transactions in the hard disk drive sector, within the scope of two days. The merger of Seagate and Samsung was notified on 19 April 2011 and the Western Digital and Hitachi merger on 20 April 2011.
The Commission started a detailed investigation (Phase II) in respect of both transactions as it was concerned that both deals could potentially adversely affect competition on the basis that the relevant market was already quite concentrated and that it viewed the product concerned as one of the backbones of the expanding digital economy.
The priority rule
The Commission has previously had to face situations whereby two transactions were notified to it in close proximity and were then reviewed in parallel. In the past the Commission's approach was not always clear. In some cases, the Commission reviewed both mergers on their own as well as cumulatively, adopting a more holistic approach rather than a first to notify rule. In those earlier cases, the Commission could leave the question as to which scenario ought to apply open, as in any event the mergers did not raise serious concerns and both could ultimately be cleared.
The first time the Commission used a more legalistic so-called priority rule, was in the First Choice/TUI and MyTravel/Thomas Cook cases (cases M.4600 and M.4584 - 'the travel cases'). Again, however, in these cases application of the priority rule did not make any difference to the ultimate outcome. The same approach was applied in TomTom/Tele Atlas (M.4854), notified in October 2007 and Nokia/Navteq (M.4942), notified in February 2008, although the gap between the two notifications was considerably wider than was the case with the recent hard disk drive mergers.
The travel cases made it clear that the Commission's preferred approach was that of adopting a priority rule whereby the first merger to be formally notified would be reviewed as if the subsequent merger did not exist, whereas the second merger to be notified would be reviewed as if the first merger had already been implemented. Clearly this priority, 'first come first served' approach when examining transactions in the same market which are notified within close proximity, means that it is very important to notify first if two mergers are taking place in the same sector. In a scenario where, for example, there are four competitors in a sector, a first merger would result in a '4 to 3' situation whereas a subsequent merger would be a '3 to 2' scenario, a much more difficult review from a merger control analysis perspective.
The Seagate/Samsung merger
The Seagate/Samsung transaction did benefit from the priority rule and was therefore assessed first, under market conditions which still considered Western Digital and Hitachi as separate independent players on the market, i.e. as if the Western Digital/Hitachi merger would not take place.
The Commission was still concerned that the merged Seagate/Samsung would have a significant market share in the overall market for hard disk drives which could impact on competitive pricing and reduce manufacturers' incentives to innovate. The transaction was, however, cleared unconditionally. The Commission's detailed investigation made it clear that there are separate worldwide markets for hard disk drives, based on their end use application and the parties were not competitors in those different segments. In addition the Commission identified a separate market for external hard disk drives in the EU for which the parties were competitors but there would remain a sufficient number of alternative sources. In general the merger benefited from the priority rule, as an important factor in the Commission's assessment was the fact that a sufficient number of other competitors, including Western Digital and Hitachi as separate players, would remain on the market.
The Western Digital/Hitachi merger
The assessment of the Western Digital/Hitachi transaction on the other hand was made taking into account the Seagate/Samsung merger. This meant that, on the market for 3.5-inch desktop hard drive disks and consumer electronics, the merged entity would only face competition from the recently merged Seagate/Samsung, i.e. this was a 3 to 2 merger scenario. In contrast to the Seagate/Samsung merger which was cleared unconditionally, the Commission cleared the transaction on condition that Western Digital divest essential production assets for the manufacture of 3.5 inch HDDs, including a production plant, the transfer or licensing of the IP rights, the transfer of personnel and the supply of components to the divestment business. Western Digital has agreed not to close the deal until a binding agreement is reached for the sale of the divestment business to a suitable purchaser approved by the Commission.
It is therefore clear that Western Digital/Hitachi was treated more harshly because the Seagate/Samsung merger was notified one day earlier and hence was deemed by the Commission to have been implemented when reviewing the Western Digital/Hitachi merger. This could seem particularly unfair on Western Digital/Hitachi as it was in fact the first of the two transactions to have started pre-notification discussions with the Commission (evidenced by the fact that it received a case number before Seagate/Samsung). If the Commission insists on applying the priority rule, it may have to reconsider the appropriate date for allocating priority. Given that the EUMR itself is silent on this point, and that the date on which notification is deemed to be complete by the Commission is often outside the parties' control, alternative dates such as the date of announcement of the deal, or the date when the parties start their pre-notification discussions with the Commission, may be more appropriate and achieve greater fairness. However, each method has its own drawbacks so it is difficult to conclude that any method is inherently better than another.
Western Digital has lodged an appeal with the General Court seeking an annulment of the Commission's priority decision in the case of these two parallel mergers. It claims that the Commission lacks the authority to adopt a priority rule which has no legal basis in EU law, and that the decision is in breach of the general principles of fairness and good administration. A ruling from the General Court on this issue is however not expected within the next year. Western Digital is reported to have also appealed the Commission's final conditional clearance decision.
The transactions were also notified in other jurisdictions, in particular in the US and China. Whereas the US authorities cleared both transactions unconditionally, the Chinese competition authorities (MOFCOM) imposed significant remedies before agreeing to clear the Seagate/Samsung merger (see our e-bulletin on MOFCOM's analysis). The Western Digital transaction is still under consideration in China, and it remains to be seen whether MOFCOM will be satisfied with the divestment undertakings already provided by the parties to the European Commission.
Divergent outcomes by key competition authorities in the same transaction remain an important issue for multijurisdictional transactions and highlight the need for careful consideration by the parties of the decisional practice of the authorities in key jurisdictions to their deals and coordination of their strategic approach to merger filings across the world.