China Approves HGST Acquisition by WD

The Ministry of Commerce of the People’s Republic of China (Mofcom) has approved after eleven months of work the acquisition of Hitachi’s subsidiary Hitachi GST (or Viviti) under conditions being about the same as EU.

Following the recent deal to acquire the Thai plant, to sell its 3.5-inch HDD equipment and related IP to the Japanese company, we don’t see any reason for the deal not to be completed in the next days.

Remember that "if the planned acquisition has not closed by March 7, 2012 due to the failure to receive any required antitrust or competition authority’s consent, approval or clearance or any action by certain governmental entities to prevent the planned acquisition for antitrust or competition reasons, the company will, concurrently with the termination of the transaction, be required to pay Hitachi a fee of $250 million in cash," according to WD’s SEC filing.

Chinese decision follows the approval of Australia, EU, Japan and Korea. Europe did the better job and its conclusions have been followed by most other countries. We have no news concerning USA but it’s difficult to believe that the country’s regulation body could be intransigent for an American company in a market where the two main competitors are based in USA.

WD targets the transaction to close in its third quarter of fiscal 2012 ending this month, the result being the reduction of the number of HDD makers to only three in the world: Seagate, Toshiba and WD.

At this time, WD and HGST have not communicate on the China’s statement but it will probably happen in few days or few hours.

If we understand the conditions of China (published in Chinese only, see below), the Mofcom approved the acquisition under the following main conditions that TrendFocus confirmed in a report:

WD and HGST will have to operate almost independently for two years, producing separately their HHDs, not exchanging information, and then to apply to remove these restrictions.
The amount of money in R&D of both companies will remain the same.
WD’s agreement with Toshiba will have to be done six months after the closure of the acquisition.

Here is the (really bad) translation from Chinese language (by http://webtranslation.paralink.com) of part of the text issued by the anti-monopoly service of PRC’s Ministry of Commerce dated March 2, 2012 at 14:24. It’s worst using Google translation. We just modify some evident errors.

April 2, 2011, the Commerce Department received the Declaration of Concentration of the Western Digital acquisition operation of the Hitachi storage. Asking for a report to be supplementary, the Commerce Department decided to further examine this focus on the implementation of the closing date for March 6, 2012.

During the period under review, the Commerce Department declares that this concentration will generated to exclude or restrict competition, and round of talks on how to eliminate the competition problem. The declaration has proposed several solutions to the Commerce Department to submit additional restrictive conditions in the European Union approved the concentration of a written document. After assessment, the Commerce Department that the declaration submitted by the final solution, including the sale to an independent third party in accordance with EU requirements the Viviti the entire 3.5-inch hard asset content solutions that can reduce the operators to focus on the adverse effects on competition.

The review found that Western Digital’s acquisition of Viviti company’s hard disks market has removed restricting competition. The Commerce Department decided additional restrictive conditions to the approval should fulfill.

These are:

Focused upon the completion of the relevant market Viviti companies, as an independent competitors, including but not limited to the following:

First, maintain Viviti company before the trading status, to ensure that Viviti to maintain the legal status and independent operations, including but not limited, research and development, production, procurement and distribution, after-sales, administrative, financial, investment, personnel appointments. To ensure that the independence, the Western Digital and Viviti company should be a prior safeguards. The report oversight of it and the Department of Commerce approval by the decision under the supervision.

Second, after the completion concentration, Viviti should continue to use established the production lines and related production team production hard disk products, and after the original sales team to HGST manufacturer’s name after a transaction.

Viviti company directly hold the Hitachi Global Storage Technologies Netherlands B. V. Companies and the associated companies in the Hitachi Global Storage Technologies or Hitachi global storage technology will be changed to HGST.

As a trading before the Travelstar use and Ultrastar brand, in an independent and reasonable pricing mechanism to continue independent sales hard disk products. Western Digital and Viviti mutual no communication or interfere with each other’s production, pricing and sales and other matters. To achieve the goals, Western Digital and Viviti to pre-established security measures, in particular the two sides should build a firewall to ensure that both sides will not competitive information exchange. Competitive information is any may lead between competitors coordination of their information operations, especially any relevant products cost, price, production, customers.

Third, after the completion concentration, Western Digital to Viviti company exercise shareholders’ rights shall not damage the obligations shareholders two company’s independence, cannot be excluded or restrictions on the competition between the two companies. Western Digital any exercise of Shareholders’ Rights fulfill obligations under the supervision should be previously report from it, of whom were arrested for prejudice the two companies independence. Second excludes or restricts competition among companies and should be prior reported the Commerce Department approval. The two sides should pre-established security measures, in particular should build a firewall, the report oversight of it and the Department of Commerce approval by the decision under the supervision.

Fourth, Western Digital and Viviti should maintain their respective mutually independent research institutions. The two sides may hard disk product research and development, to improve the two sides production efficiency and competitiveness, but not to communication competitive information and undermine the independence, exclude or limit the competition between the two companies.

Western Digital and Viviti should be on R&D cooperation with the prior submission of specific programs, the report oversight of it and the Department of Commerce approval.

In any information and personnel exchanges matters should be prior to the Authority it by people reported, the decision to the oversight.

Western Digital and Viviti should be based on the market demand conditions set reasonable production capacity. Western Digital and Viviti products capacity and production on a monthly should be the case of it to the Authority report, the under the supervision.

After the completion concentration, Western Digital and Viviti company shall not substantive change the business model that mandatory or disguised enforcement of customers from the two companies exclusive to purchase hard disk products.

Western Digital and Viviti will be in recent years, the speed consistent, continue to invest innovation R&D funds to ensure customers more innovative products and solutions.

Meeting conditions as the basis, the Western Digital commitments, in the public more decided six months, to a third party Viviti divestiture company main 3.5-inch HDD assets. Stripping such assets transactions, in accordance with the anti-monopoly law, the operators assets or spin on the provisional regulations on related regulations.

Under the Ministry of Commerce operators assets or spin on the Interim Provisions concerning
Western Digital to it independent oversight of the Western Digital it fulfilment of these obligations monitor.

The decision to implement 24 months later, the Western Digital to the Department of Commerce to relieve mentioned.

To fulfill the above obligations, the Western Digital should be in monitoring it determined by a German submitted detailed operational programs and reported the Commerce Department approval.

The Commerce Department has the right through its oversight of it or self-monitoring inspection Western Digital fulfill the obligations.

Western Digital is not appropriate above obligations, the Commerce Department has the right under the anti-monopoly law related to handle it.