This is taken from the Asia Desk column providing commentary on regulatory and policy developments across the region. The opinions expressed here are those of the writers only unless otherwise indicated.
- Silicon Motion/MaxLinear simple case filing was a ‘risk worth taking’
- Attempt may result in extension of overall SAMR review timeline
- Tower/Intel and Activision Blizzard/Microsoft also made simple case filings
- Simple case filing criteria stipulates profile of deals unsuitable for simplified reviews
- Nine case studies assessed for further takeaways for simple case filers
The decision by China’s antitrust authority to tell Taiwan-based Silicon Motion Technology Corp [NASDAQ:SIMO] and US-based Maxlinear [NASDAQ:MXL] to refile their merger under the normal procedure should not have come as a surprise.
The deal is one of several ongoing high-profile M&As, including Microsoft’s [NASDAQ:MSFT] proposed USD 68.7bn acquisition of Activision Blizzard [NASDAQ:ATVI], that have struggled in recent months to convince China’s antirust agency they qualify for its speedy simplified review procedure.
It's unlikely they will be successful.
Shares in Silicon Motion fell 10% on its announcement Thursday that the State Administration for Market Regulation (SAMR) on 31 August had advised it and MaxLinear to refile under the normal procedure. The news comes after the deal parties had filed with SAMR under its simplified procedure on 6 July, as per the merger’s 13 July proxy.
Unusually for companies going through a SAMR review, the deal parties have been very open about the status of the regulatory process. Steven Litchfield, MaxLinear’s CFO on 6 June, at JPMorgan’s TMC Conference, said that the [SAMR] regulatory process to date “had been slow”. A month later the proxy filing revealed that even though the deal parties thought Sino-US tensions could result in an extended regulatory review (“up to 15-months”) they still believed they were eligible for SAMR’s simplified process.
Over the past few weeks, if not earlier than that, it became increasingly evident that SAMR was not going to accept a simple case filing.
Normally, companies need a month (30 days) from a deal announcement to prepare for a simple case filing. The regulator will usually accept the filing - which is signaled via a publicly announced consultation process - within a further two to three weeks.
In early August, a source familiar with the Silicon Motion/MaxLinear deal said the simple case application was a risk worth taking as it could shorten the deal timetable significantly. Aside from SAMR, the deal has no other remaining regulatory condition.
Since 1Q20, SAMR has taken an average of 14 days to clear simple cases, as reported (in 2Q22, this average was 17). Based on this information, deal parties can currently expect a simple case process – from deal announcement to clearance - to take around nine and a half weeks (68 days).
This is significantly quicker than the process for normal case reviews.
For unconditionally cleared normal case processes, the average timeline - from deal announcement to approval – was 150 days in 2Q22, according to PaRR records.
For complex and sensitive deals that receive conditional approvals, the average deal announcement to review completion timeline is 444 days based on a review of all the 19 deals to have received such clearance from SAMR since the first - the Essilor/Luxottica deal - in 2018.
Having now been steered towards the normal review procedure, Silicon Motion and MaxLinear are clearly settling in for a lengthy review, which explains the share price fall and the deal’s 50.29% spread.
In Thursday’s announcement they said they intend to submit a normal case application as promptly as reasonably practicable. They added that they cannot predict with any certainty the length of a review under the normal procedure but expect a decision in 2Q or 3Q23. This compares with an expected decision in 1H23 at the time the deal was announced on 5 May.
It looks like the attempt to secure a simple review has extended the overall deal timeline.
Other deals struggling with simple case filings include Microsoft’s proposed USD 68.7bn acquisition of Activision Blizzard, which was announced on 18 January and filed with SAMR under its simplified procedure in mid-to late April, as reported, and Intel’s [NASDAQ:INTC] proposed USD 5.4bn acquisition of Israel’s Tower Semiconductor [NASDAQ.GS:TSEM], which is reported to have been filed with SAMR as a simple case in April.
The status of these two SAMR reviews is not clear although the Tower/Intel deal is believed to have been refiled and accepted as a normal case a few months ago.
Several high profile deals have struggled with SAMR filings in recent times
The SAMR filing difficulties facing these mergers follow several similar cases in recent times where deal parties’ have been quietly diverted from the simple case process toward SAMR’s normal case procedure or have encountered strong objections from third parties during the 10-day public consultation period that signals the start of a simple case review.
Late last year, the Bain Capital-led consortium that is still trying to get SAMR approval for its proposed acquisition of magnetic materials company Hitachi Metals [TYO: 5486] saw its review moved to the normal case track after a series of complaints during the public consultation period. A year earlier SAMR quietly told Marvell Technology [NASDAQ:MRVL] and its target Inphi, a mixed signal semi-conductor producer, to refile their case under its normal procedure.
One deal with no apparent competition issues - Blackstone’s USD 3.3bn agreed acquisition of Chinese commercial real estate developer Soho China [HKG:0410] - was abandoned in September 2022 a month after its filing had been accepted “in light of the lack of sufficient progress in satisfying the Pre-Conditions”.
So, what is happening? Are merging parties trying their luck with the regulator’s simplified review system in a bid to pull the wool over SAMR’s eyes? Or is the simplified review qualification criteria becoming increasingly opaque in an era when political merger interventions are seen to be on the rise everywhere?
Like their counterparts in other jurisdictions, Chinese antitrust authorities have long suspected some merging parties will try to game the regulatory process. Three days after the first simple case was accepted on 22 May 2014, Shang Ming, the former director general of the then merger review regulator, the Ministry of Commerce's anti-monopoly bureau (MOFCOM AMB), said merging companies should carefully assess whether their deals are suitable for a simple case filing. Otherwise, he warned, they will have to refile as a normal case, and this will elongate the overall review timeline.
The Silicon Motion/MaxLinear case suggests this prediction is coming true.
Competition lawyers admit deal parties do sometimes try their luck when making regulatory filings. One indicated that while he would never recommend such a move, some deal parties file under a simplified procedure to test SAMR case handlers’ expertise. A second suggested some simple case filings are driven by companies rather than their advisors. This lawyer also said there have been occasions where deal parties have signed two entrustment contracts (for a simple case filing and a normal case filing) with the same law firm to encourage the advisor to lodge the simple case filing first. This is likely because lawyers will hesitate to make a simple case filing if they think another law firm will be hired in the event that SAMR requires the deal parties to file under its normal procedure.
Whilst a dual filing approach suggests some deal parties are trying to game the system, it might also indicate the simple case qualification criteria is not as transparent as it might be.
According to Article 2 of China’s simple case filing criteria, which was announced by MOFCOM in February 2014 and remains valid, deals qualify for its simplified procedure if the involved parties' combined market share is below 15% in a horizontal deal, or each party's market share in each relevant market is below 25% in vertical or conglomerate deals, among others.
However, Article 3 also lists several scenarios where a deal would not be reviewed as a simple case. These are: cases where a jointly controlled target is to be controlled by one of the stakeholders after a deal and such stakeholder is a competitor of the jointly controlled target in the same relevant market; when the relevant market of a deal is difficult to define; and when a deal will have negative influence on market entry, technology improvement, consumers and other relevant operators, or on national economic development.
Furthermore, the previous draft of the proposed amendments to China’s Antimonopoly Law (AML) listed other additional areas that should face enhanced merger reviews. These include fintech, science and technology and media as well as sectors and industries that are related to people’s livelihood, which can largely be interpreted as the digital economy. These specific sectors and industries were removed from the published AML amendments, which vaguely stipulate in Article 37 that (SAMR) shall strengthen the review of concentrations in critical areas concerning national development and livelihood according to law.
In practice, it is commonly interpreted by legal practitioners that the specific and detailed areas listed in the previous draft are the critical areas. Therefore, it is reasonable to expect SAMR to be hesitant when deal parties in these sectors make simple case review filings.
Notable simple case filings (in chronological order) and takeaways
In order to draw out some firmer takeaways for the benefit of M&A investors and advisors, the Asia Desk has selected and studied nine of the most notable deals involving attempted simple case filings.
1.Mead Johnson/Reckitt Benckiser
UK-based Reckitt Benckiser Group’s [LON:RB] USD 16.6bn all-cash takeover of Mead Johnson Nutrition Company [NYSE:MJN] was announced on 10 February 2017 when it was expected to complete “by end 2017”. It was accepted by MOFCOM (the then Chinese antitrust regulator) for review as a simple case on 30 March 2017 on the basis that neither company operated in a common relevant market, has any business overlap in upstream or downstream markets, and - in each of the markets relevant to the deal – has individual market shares of less than 25%. But during the 10-day public notice period, MOFCOM received complaints about Reckitt Benckiser’s large market share of Durex, which it estimated to be as high as 40% in China. MOFCOM then revoked the simple case status, as reported, and the deal was moved to normal procedure in early April before being unconditionally cleared on 12 June 2017.
Timetable impact and other takeaways: The deal’s move from a simple case review to a normal one did not appear to extend the Chinese review timetable beyond what the parties initially expected. MOFCOM appeared to initially have potential bundling concerns that ultimately were not borne out by its review, which faced little in the way of substantial complaints, according to our report at the time. The case suggests that if an involved party has adjacent product market share bigger than 25%, a simplified review will be revoked. The case also highlights the potential for deal parties and antitrust regulators to have differences of opinion on how the relevant markets should be defined (geography and sub-markets for example) and the importance of considering China as a geographic market when assessing market shares.
Microchip [NASDAQ:MCHP], a microcontroller, mixed-signal, analogue and Flash-IP solutions provider, announced the proposed acquisition of fellow chip business Microsemi on 1 March 2018. At the time the deal parties said they expected the transaction to close in 2Q18 due to the “negligible overlap” between the companies and the approximate “30-day Chinese regulatory approval timeline after filing in 2017”. The deal was filed with China’s Ministry of Commerce (MOFCOM) as a simple case on 27 March 2018, and received a simple case review by MOFCOM on 19 April 2018. The following day China’s merger reviews were transferred from MOFCOM to SAMR, as a result of the country’s consolidation of its three antitrust enforcement units into one, as reported. At that juncture, the trade war between the US and China had just started in earnest and Qualcomm’s [NASDAQ:QCOM] proposed acquisition of NXP [NASDAQ:NXPI] was infamously held up by MOFCOM (and ultimately aborted). But the Microsemi/Microchip deal remained under a simple case review with SAMR despite the sensitive environment for chip deals and obtained SAMR’s unconditional approval on 7 May 2018 which was, unusual for a chip deal, before it gained clearance in several other jurisdictions.
Timetable impact and other takeaways: A rare example of a chip deal being accepted and processed as a simple case. One possible reason for this is that the US-Sino trade and tech war had only just begun when the deal was being reviewed.
The acquisition of US-based aluminum product maker Aleris Corporation by domestic peer Novelis, a subsidiary of India-based Hindalco Industries [BOM:500440], was announced on 26 July 2018 and expected to close “9-15 months” later (April-Oct 2019). The deal eventually completed in April 2020 after facing deep scrutiny from SAMR, the US DoJ and the EC. According to the SAMR conditional approval decision, the deal parties made a simple case filing with the Chinese regulator on 31 August 2018 and accepted it on 30 September 2018. This was months ahead of the respective US and EU processes. Following various third-party Chinese objections it was withdrawn from a simplified procedure on 26 October and refiled as a normal case on 1 November. This was accepted on 13 December. In early June 2019 and again in early December, the SAMR review was withdrawn, refiled, and accepted within the space of a few days. When it was cleared on 20 December, the deal was in the first few days of Phase 1 of its 3rd 180-day SAMR normal case review. The SAMR review timeline, from the initial simple case acceptance to clearance, lasted almost 15 months.
Timetable impact and other takeaways: The deal was the first – and as yet only - simple case filing to be accepted but then moved to a normal procedure and receive a conditional clearance. Although the lengthy SAMR review was consistent with deep scrutiny and conditional approvals from the US and EC, the deal parties filed with SAMR well ahead of the other regions’ regulators. The simple case filing appears to have made the overall review longer than if it had simply filed as a normal case from the outset. Three and a half months elapsed between the simple case filing the case being accepted under SAMRs normal review timeline, which is significantly longer than the average of 2 months for acceptance of a normal case filing. During this time, SAMR will have had to verify the simple case complainants’ information and reach a decision on whether to revoke the case. The deal parties will then have had to refile under the more complex normal procedure. Speaking at a recent webinar, an antitrust scholar raise said that in extreme cases, such as where parties undergo a simple case review but regulatory issues are found that warrant a conditional clearance, then a fine could be justified if evidence shows the parties provided false market data to SAMR.
Marvell Technology’s [NASDAQ:MRVL] USD 8bn cash and stock acquisition of Inphi was announced on 29 October 2020 and expected to complete “by 2H21” (it had a 29 June 2021 extendable termination date). According to a 23 December report, the deal was notified to SAMR in early December as a simple case. Unconfirmed rumour emerged in late December saying SAMR had, in mid-December, told the parties to notify the deal under the normal procedure. This was backed up by this news service’s report on 5 March that SAMR had reached out to third parties for comment – a strong signal that the case was indeed undergoing a normal review. The only official SAMR review process related news came on 24 March when Marvell said the deal had received SAMR clearance and would complete in April.
Timetable impact and other takeaways: This the first instance – as far as we are aware – of SAMR requiring a simple case filing to be withdrawn and refiled under the normal procedure. That the case still gained swift approval from the regulator strongly suggests SAMR advised the companies to refile as a normal case because it was on high alert regarding any and all semiconductor related deals regardless of the antitrust perspective and therefore unwilling to process them under its simplified review process. (It should be noted that Inphi generated 45% of its sales from China in 2019.) A normal case review filing and procedure provides the regulator with more information and time to properly consult with third parties. The development is evidence of the ratcheting up of scrutiny of chip deals that followed months of mounting tensions between China and the US as then US President Donald Trump attempted to “cement his legacy of being tough on China”.
On 17 June 2021, Chinese commercial real estate developer Soho China [HKG:0410] announced a USD 3.3bn takeover offer from US private equity firm Blackstone that would see Chairman Shiyi Pan and CEO Marita Pan sell the bulk of their controlling stake. The following month Blackstone, in a monthly update required by the Hong Kong stock exchange, confirmed it had made a filing with SAMR. At least one source claiming to be in touch with the deal parties said the deal had been filed as a simple case. This would have made sense on the basis that the deal had close to zero antitrust issues as this news service reported. In early August, Soho confirmed SAMR had formally accepted its filing. An 11 August 2021 Morning Flash AP report pointed out the deal was very likely being reviewed under SAMR's normal case procedure due to the absence of a public consultation announcement. Then on 10 September Soho China shocked the market by announcing the deal parties would not be proceeding with the review “in light of the lack of sufficient progress in satisfying the Pre-Conditions”. Shortly afterwards this news service reported that the “issues that prompted Blackstone to pull out of the deal were not competition-related and not about Blackstone being a foreign bidder but were linked to the Chinese overseas-based founders’ plan to sell a controlling stake in the company as part of the deal”.
Timetable impact and other takeaways: The deal’s failure was broadly attributed by the mainstream media to political factors. This news service had alluded to such a possibility in a 30 June analysis and a 28 July story. It is not known for sure if Blackstone sought a simple case review considering the absence of competition and market share concerns. But if it initially opted for a normal case review then its likely Blackstone was conscious of the sensitive aspects of the deal. Going forward, deal parties with potential sensitive elements may choose to file as a normal case to avoid the simple case third party public consultation process and ensure they maintain as low a profile as possible. The normal case review process is kept confidential.
The Bain Capital-led consortium’s USD 8.46bn (equity value) ongoing acquisition of steel products and magnetic materials company Hitachi Metals [TYO: 5486] was announced in late April 2021. It was expected to gain all seven required regulatory approvals by late November 2021 when it would launch a tender offer. The deal parties kicked off regulatory filings in some jurisdictions in early July, as reported. Bain appears to have filed with SAMR slightly later as the regulator did not launch its simple case consultation until 16 September. Despite the low market shares of the concerned parties in the relevant global and Chinese markets, third parties challenged the deal during the 10-day public notice period and it was refiled under the normal process. The challenges were related to Hitachi Metals’ businesses in the sensitive rare earth sector where the Japanese company holds more than 600 global patents related to the production of sintered neodymium iron boron (NdFeB) magnets, which are crucial to making military equipment such as lasers and guidance systems. Currently SAMR’s review of the deal is ongoing but, as reported on 25 August, there is belief that the deal may yet receive an unconditional clearance.
Timetable impact and other takeaways: In hindsight, the fact that the deal faced strong third-party complaints should not have been a complete surprise. Hitachi Metals’ earlier 2015 joint venture deal with China-based rare earth permanent magnetic materials producer Beijing Zhong Ke San Huan also encountered similar third party complaints during the simple case public notice period and was subsequently moved to a normal case review procedure. That JV deal was accepted by the then merger review regulator MOFCOM on 25 August 2015 and was unconditionally cleared on 29 May 2016. The review duration was nine months. That case also appears to have been affected by substantial competition related industrial concerns (the lawsuits were antitrust lawsuits). Whether the complainants' disputes with Hitachi Metals were the same as the concerns generated by the JV deal is unknown and worth exploring. It should also be noted that MOFCOM clearly did not think the concerns targeting the JV deal were competition related as it cleared that deal unconditionally. Whether or not the deal has been caught up in the US-China battle over rare earths is unclear.
Microsoft’s [NASDAQ:MSFT] proposed USD 68.7bn acquisition of Activision Blizzard [NASDAQ:MSFT], which will create the world’s third largest gaming company by revenue behind Tencent [HKG:0700] and Sony [NYSE: SONY], was announced on 18 January. At the time the deal parties said it is expected to close in fiscal year 2023. The merger agreement, which includes very precise wording regarding remedies, is facing strong regulatory scrutiny in the US, UK, Europe, Japan and Brazil. It has an extendable 18 January 2023 termination date. Despite third party complaints in China, this news service reported that the deal was filed as a simple case in around mid to late April, which is in line with the bidder’s expectation the deal would not face too much trouble from SAMR. As of today (2 September) the deal parties are still trying to get the deal approved under SAMR’s simplified review.
Timetable impact and other takeaways: The deal is related to the gaming industry and content provision and so falls under the remit of the Ministry of Industry and Information Technology (MIIT) and the Department of Culture and Tourism (DCT). Due to the content provision nature, the gaming sector falls into the science and technology and media sector (TMT), a sector that was listed in China’s previous draft AML amendments as an area that China’s merger review regulator should enhance its review of business concentrations. Furthermore, it is in the digital economy and involves millions of game players, which might be viewed as related to livelihood. Given SAMR blocked the proposed merger of Douyu/Huya in the gaming sector and the deal is already undergoing scrutiny in other jurisdictions, it would be remarkable if the deal was accepted for a simple case review. In addition, Microsoft has been since 2014 under investigation by SAMR and formerly the State Administration for Industry and Commerce relating to China's AML. In 2019, according to Microsoft's 2021 Annual report, the SAMR presented preliminary views as to certain possible violations of China’s AML. The investigation suggests SAMR suspects Microsoft of dominance in the market and is not a conducive background for it to contest the merits of a simple case review application.
Intel’s [NASDAQ:INTC] proposed USD 5.4bn acquisition of Israel’s specialty chip maker Tower Semiconductor [NASDAQ.GS:TSEM] was announced 15 February when it was expected to close in approximately 12 months. Immediately after it was announced, the deal was met with a lot of concern in Chinese media relating to the deal parties’ market shares and the impact that the deal will have on Chinese companies in light of the US’ government’s export controls – a point frequently expressed as a concern in China for such deals. The 11 March shareholder proxy for the merger shows it is conditional on antitrust clearances in the US, China, Germany, Japan and possibly the UK and Italy. Shortly after the USD 53-per-share cash deal was announced, a report suggested that Intel had notified the deal with SAMR under a simplified procedure in around March or April. However, a source has told this news service SAMR accepted a normal case filing in mid-June. (One – as yet unconfirmed rumour - has suggested that the deal parties only filed the deal as a simple case for their own administrative timetable management reasons and always expected it to undergo a SAMR normal case review).
Timetable impact and other takeaways: Too early to draw conclusions but the simple case filing attempt looks odd if it was made with genuine belief that it could succeed as Intel has a 68.3% and 78.8% market share in China’s GPU and CPU market respectively.
US-based Maxlinear’s [NASDAQ:MXL] proposed USD 3.49bn cash and shares acquisition of Taiwan-based Silicon Motion Technology Corp [NASDAQ:SIMO] was announced 5 May when it was expected to close “by 1H23”. The deal has gained HSR approval but is still conditional on clearance from SAMR – the only remaining condition. The 13 July merger agreement reveals that even though the deal parties discussed on 25 April the risk that Sino-US tensions could result in an extended regulatory review (“up to 15-months”) they still believed they were eligible for SAMR’s simplified process, which they filed for on 6 July and expected, “if accepted by SAMR” to result in a decision in around 3 months. Prior to making that filing, Steven Litchfield, MaxLinear’s CFO on 6 June, at JPMorgan’s TMC Conference, said that the [SAMR] regulatory process to date had been slow and that to counter this the deal parties would file as “quick as possible to get approvals as quick as possible”. At that conference and a more recent one on 10 August, he stressed that the deal parties don’t have many overlaps and are both too small to perform the kind of bundling strategies known to be employed by some of their peers much to the concern of Chinese companies and regulators. We want to assure [SAMR] that that’s not the case here. We don’t have that bundling capability. We don’t have any controllers... there’s definitely a lot of alternatives from SSD manufacturers to controller companies to address that.” On 10 August, Litchfield reiterated the deal parties expected a 1H23 completion timeframe. This all changed on 31 August when the companies revealed SAMR had advised them to submit a normal case filing. The expected deal completion date is now 2Q23 or 3Q23.
Timetable impact and other takeaways: The deal parties tried to convince SAMR the deal qualified for the simplified procedure based on market share thresholds and that the deal did not present bundling concerns. But it seems that this is something SAMR wants to look closely at. A 22 June report by this news service pointed out that Silicon Motion plays an important role in mainland China’s supply-chain of storage chips and that JPMorgan has reportedly said that the company is the largest supplier of NAND flash controller for solid-state devices (SSD) in the world with a market share of up to 40%. Furthermore, the Taiwan aspect of the deal and the timing of the US House of Representatives' Speaker Nancy Pelosi’s controversial visit to Taiwan on 2 August suggest this deal has the added complication of having political risk exposure, as reported.