GLOBAL deals may be growing at a rapid clip, but they seldom offer instant gratification. Qualcomm, an American chipmaker, first bid for NXP Semiconductors, a Dutch company, in October 2016. The union has since been blessed by eight regulators worldwide, but one hurdle remains: China. With no decision yet from its regulator, the companies, which were expecting to have closed the $44bn deal this week, now hope to conclude it by July. The purchase of the chip unit of Toshiba, a troubled Japanese company, by a consortium led by Bain Capital, an American private-equity firm, is similarly awaiting sign-off from China.
Some suspect the delays stem from the threat of a trade war with America. Holding back regulatory approval, particularly on sensitive high-tech deals, could be part of the arsenal in any trade conflict. Organisational change may also be to blame. Fay Zhou, who works in Beijing for Linklaters, a law firm, points out that a recent reshuffle, which took merger reviews away from the commerce ministry and put them under the same roof as other competition authorities, may have contributed to lags. Either way, the delays bring home the importance of the Chinese authorities to international deals.
They are now one of the three big regulators to reckon with, together with the Americans and Europeans, says Mark Furse of Glasgow University. Research by Allen & Overy, a law firm, shows that Chinese regulators sought remedies on seven deals in 2017 (see chart). Though fewer than American and European interventions, that is a record for China.
As with much else, China’s approach to mergers is distinctive. Like in other jurisdictions, foreign businesses must seek approval for a merger if their sales or assets in the country cross a certain threshold. But in addition to protecting consumers, the Chinese authorities are required by law to promote “the healthy development of the socialist market economy”. That industrial-policy objective means that regulators can intervene even when competition is not strictly a concern, notes Charles Pommiès of Allen & Overy (although plenty of cases are judged purely on competition grounds).
Deals tend to attract scrutiny if they involve industries where China wants to catch up with the West, such as high-tech sectors, or where it has interests to protect, such as commodities. Although the European Commission was relatively relaxed about Microsoft’s takeover of Nokia in 2013, for example, the Chinese authorities fretted that its firms would lose access to intellectual property as a result. They also intervened in a merger between two mining firms, Glencore and Xstrata, even though their combined market share was less than 20% in each of their product markets in China. Mr Furse points out that, in contrast, it typically takes market shares of over 40% to raise concerns in Europe; thresholds are even higher in America.
Chinese authorities also seek distinctive conditions before clearing a deal. Some divestments have been known to directly benefit the state. The Glencore and Xstrata merger, for example, was approved on the condition that a mine in Peru was sold off; soon afterwards it was snapped up by a consortium of Chinese state-owned firms, led by the China Minmetals Corporation. And “behavioural” remedies can require a combined company to keep prices unchanged after the merger, or to stay out of certain markets. Such conditions can be intrusive, requiring the companies to report regularly to the authorities. Western regulators tend to avoid them, as they are a nuisance to monitor.
A stricter, but rarer, condition is the “hold-separate” remedy, which has been applied to a handful of hardware deals, including the merger last year of two Taiwanese chipmakers, Advanced Semiconductor Engineering and Siliconware Precision Industries. The two firms cannot integrate their operations for a certain period of time, which kicks the benefits of merging even further down the road. As ever more deals come into the purview of Chinese regulators, dealmakers will have to remind themselves that patience is a virtue.