Key Takeaways
- On April 16, 2020, the Chinese competition authority finally announced its conditional approval of Nvidia’s $6.9 billion acquisition of Mellanox.
- The Chinese SAMR approved the acquisition after a yearlong investigation largely focused on conglomerate effects (during Phase II of the second cycle).
- Interestingly, given the political sensitivity of the deal and the potential impact on Chinese industry, SAMR’s decision in fact came earlier than many expected, compared with the approximately 18 month review of Qualcomm’s attempted acquisition of NXP Semiconductors (2016 to 2018).
- This earlier approval was likely driven by Nvidia’s skillful handling of the case and China’s desire in the current political and economic climate to demonstrate that it is a “responsible big country” which embraces globalization and encourages international cooperation.
- SAMR determined that the transaction as notified was likely to have restricted competition in the global and Chinese GPU accelerator, private network interconnection equipment and high-speed Ethernet adapter markets.
- After protracted negotiations SAMR accepted commitments not to bundle or tie products, to continue to supply on FRAND terms and to maintain interoperability with other suppliers’ products, plus some more novel measures that appear to have been designed to address Chinese concerns that the United States government may subsequently tighten the export restrictions on the merged entity’s products (see below for further details).
On March 11, 2019, Nvidia Corporation (a US-based developer of graphics processing units (GPUs)) announced its intention to acquire Mellanox Technologies, a leading supplier of end-to-end Ethernet and InfiniBand smart interconnect solutions and services for servers and storage. The transaction required merger control approvals in, inter alia, the U.S., Mexico, the European Union, Israel and China. The penultimate approval (i.e., EU approval) was granted on December 19, 2019. As such, going into 2020 the parties were laser-focused on obtaining Chinese State Administration for Market Regulation (SAMR) approval prior to the extended long-stop date of June 10, 2020.
SAMR Timeline
The merging parties notified the transaction to SAMR on April 21, 2019 (approximately six weeks after the deal was announced), and SAMR officially accepted the filing and commenced its Phase I review process approximately four months later on August 15, 2019. On February 9, 2020, prior to the expiry of the Phase III review process, the merging parties withdrew their notification. The re-file was accepted by SAMR on February 12, 2020, and the final approval came on April 16, 2020, during Phase II of the second cycle. As such, the total review period lasted 362 days from initial notification, meaning that it took in excess of approximately 13 months from the date on which the deal was announced to obtain SAMR approval.
However, considering the political sensitivity of this transaction and the potential impact it would have had on Chinese industry, SAMR’s clearance decision in fact came earlier than some industry experts were expecting. The earlier-than-expected approval may have been caused by a number of factors, including (i) SAMR’s policy during the COVID-19 pandemic of accelerating its review of transactions involving important industries (e.g., food, manufacturing, medicine and transportation); (ii) Nvidia being incentivized to put a very strong remedies offer on the table earlier than would otherwise have been expected so as to avoid extensive negotiations with SAMR, which would have been extremely time-consuming during the “lockdown”; and (iii) most importantly, China’s desire in the current political climate to demonstrate that it is a “responsible big country” which embraces globalization and encourages international cooperation.
Substantive analysis
SAMR identified substantive antitrust concerns in the following neighboring markets, that is, in the GPU accelerator/private network interconnection equipment markets and the GPU accelerator/high-speed Ethernet adapter markets. From a geographic perspective, SAMR defined the market as being worldwide in scope, whilst also taking into account the impact of the transaction on the Chinese market (which is consistent with the approach adopted in the majority of the semiconductor transactions that have been reviewed by the Ministry of Commerce (MOFCOM) and SAMR to date).
SAMR noted that in the GPU accelerator market Nvidia had a global market share of 90 to 95 percent and a Chinese market share of 95 to 100 percent. As for the market for private network interconnection equipment, Mellanox’s market share is 55 to 60 percent globally and 80 to 85 percent in China, and its share of the high-speed Ethernet adapter market is 60 to 65 percent globally and 65 to 70 percent in China.
Based on these market shares, SAMR concluded that the merged entity would have strong market power, significant price control capabilities and the ability to engage in tying and otherwise raising barriers to market entry. As such, SAMR concluded that substantive antitrust issues would arise based on a conglomerate effects theory of harm (or a neighbouring market theory of harm in SAMR parlance—horizontal theories were not applicable given the lack of competitive overlaps between the parties). This conclusion is consistent with SAMR’s past practice when reviewing transactions involving high-tech industries (as well as more generally with the fact that SAMR has shown itself to be more willing than other major antitrust authorities to invoke conglomerate theories of harm).
Remedies
The merging parties and SAMR engaged in multiple rounds of remedy discussions lasting many months. However, ultimately SAMR concluded that the final draft of the remedies submitted by the merging parties on April 10, 2020, would offset the potential negative impact of the transaction. As such, SAMR decided to accept this remedy offering and conditionally approved the deal on April 16, 2020.
The agreed remedy package included a number of commitments that are commonly seen in the context of SAMR’s conditional approval of semiconductor deals, most notably commitments not to bundle or tie the relevant products, to continue to supply on fair, reasonable and non-discriminatory (FRAND) terms and to maintain interoperability with other suppliers’ products. However, the remedy package also included some more unusual commitments that are worth discussing in more detail given their potential relevance to future SAMR reviews:
- Firstly, two of the commitments in SAMR’s decision letter were redacted as “confidential information.” This is very unusual—in fact, this is the first time SAMR (or its predecessor MOFCOM) has ever published a decision letter with redacted information. Our working assumption is that these commitments were likely redacted for national security reasons given that some of Mellanox’s customers in the supercomputing sector are no doubt involved in military contracts or otherwise have military connections. It may also be possible that part of the redactions relate to a hold-separate remedy in relation to the merging parties’ research and development (R&D) capabilities which were rumored to have formed part of earlier remedies negotiations, but has not been substantiated.
- Under the terms of the FRAND commitment the merged entity must provide customers, distributors and original equipment manufacturers (OEMs) with the opportunity to procure and stockpile Nvidia’s GPU accelerators and Mellanox’s high-speed network interconnection equipment for a period of up to one year. This is the first time that SAMR has imposed a remedy requiring the merging parties to guarantee the ability of third parties to stockpile products. We believe that this requirement is not only intended to address the transaction-specific concerns raised by the parties’ customers, but also concerns that the U.S. government may subsequently tighten the export restrictions on the merged entity’s products.
- The remedy package also contains another commitment that we believe is intended (at least in part) to address customers’ concerns regarding a future tightening of U.S. export restrictions. That is, the merged entity is required to maintain the open source commitment for point-to-point communication software and collective communication software of Mellanox’s high-speed network interconnection equipment. This type of commitment is uncommon if one analyzes previous SAMR precedents.
- Another commitment imposes an obligation on the merged entity to take measures to protection confidential information of third-party GPU accelerators and interconnect manufacturers, as well as setting out a detailed description of how this should be achieved (e.g., by signing confidential agreements with the relevant third parties, separately storing confidential information, conducting confidentiality training, etc.). Whilst commitments designed to protect third-parties’ confidential information were first included in MOFCOM’s decision in General Motors/Delphi (2009), this type of commitment only started to reappear in decisions after 2017 (e.g., Broadcom/Brocade Communications (2017) and KLA-Tencor/Orbotech (2019)). Our current view is that going forward, commitments designed to protect third-parties’ confidential information are likely to become an increasingly regular remedy in high-tech merger cases.
- Interestingly, the remedy package in Nvidia/Mellanox also requires the merged entity to keep the personnel and working teams associated with GPU accelerators and Interconnect equipment completely separate from one another and prohibits any exchange of confidential information between the two groups. To our mind, this remedy achieves a purpose beyond merely protecting confidential information, that is, it in effect ensures the operational independency of the Interconnect equipment business. As such, whilst a “hold separate” remedy was not formally imposed, the same effect is arguably achieved via the commitments designed to protect confidential information.
- Finally, the remedy package has a six-year term and the merged entity is prohibited from seeking the removal of any commitments until this term expires. The six-year duration for which the commitments must remain in place is a relatively long period in comparison with SAMR’s recent practice. For example, in the past five years, SAMR has conditionally approved 21 cases and, with the exception of Nvidia/Mellanox and two other cases, the commitments were put in place for between two to five years. The two exceptions were Broadcom/Brocade Communications (10 years) and Novelis/Aleris (10 years). Given that the Broadcom/Brocade Communications and Nvidia/Mellanox transactions both involved the semiconductor/telecommunications industry, we believe the longer durations imposed by SAMR likely reflect the fact that, as SAMR expressly stated in its decision letter in Nvidia/Mellanox, in this industry, “new entrants need to invest significant resources and time in R&D and trial production.”
