China Conditionally Approves Broadcom (AVGO) - VMware (VMW) Acquisition
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(Translated text of announcement)
Announcement of the State Administration for Market Regulation on Approving the Anti-Monopoly Review Decision of Broadcom's Acquisition of the Equity of VMware with Additional Restrictive Conditions
In accordance with the Anti-Monopoly Law of the People's Republic of China (hereinafter referred to as the "Anti-Monopoly Law"), the State Administration for Market Regulation conducted an anti-monopoly review of the merger concentration case (hereinafter referred to as the "case") of Broadcom Company (hereinafter referred to as "Broadcom") to acquire the equity of Weirui Company (hereinafter referred to as the "case"), and decided to approve the concentration of undertakings with restrictive conditions. In accordance with Article 36 of the Anti-Monopoly Law, the announcement is as follows:
1. Acceptance and Examination Procedures
On September 6, 2022, the State Administration for Market Regulation received the anti-monopoly application for the concentration of undertakings in this case. After review, the State Administration for Market Regulation considered that the application materials were incomplete and required the declarant to supplement them. On April 25, 2023, the State Administration for Market Regulation confirmed that the supplementary application materials complied with Article 28 of the Anti-Monopoly Law, accepted the concentration of undertakings and began a preliminary review. On May 25, the State Administration for Market Regulation decided to conduct a further review of the concentration of undertakings. On August 22, with the consent of the reporting party, the State Administration for Market Regulation decided to extend the period for further review. On September 25, the State Administration for Market Regulation made a decision to suspend the calculation of the review period in this case, and resumed the calculation of the review period on November 17. At present, the case is in the extended stage of further review, and the deadline is December 13. SAMR believes that this concentration has or may have the effect of eliminating or restricting competition in the global and domestic non-public cloud virtualization software, Fibre Channel adapters, storage adapters and Ethernet network card markets. During the review process, the SAMR solicited the opinions of relevant government departments, industry associations, competitors in the same industry and downstream customers, had in-depth discussions with economic, legal and industry experts, exchanged and cooperated with other jurisdictions, understood the relevant market definition, market structure, industry characteristics and the impact of concentration on all aspects, and engaged an independent third-party agency to conduct an economic analysis of the competition issues in this caseThe authenticity, completeness and accuracy of the documents and materials submitted by the applicant were reviewed.
II. Basic circumstances of the case
Acquirer: Founded in the United States in 2018, Broadcom is listed on the NASDAQ Stock Exchange's Global Select Market, without ultimate controller, and is mainly engaged in the design, production and sales of wired and wireless communication semiconductor products, as well as the provision of specific types of infrastructure software solutions.
Acquiree: Founded in 1998 in the United States, Weirui is listed on the New York Stock Exchange, without ultimate controller, mainly engaged in software production and technical services, and its core product virtualization software is mainly used in data centers and cloud computing environments.
On May 26, 2022, Broadcom signed an agreement with Weirui to acquire the entire equity of Weirui. Upon completion of the transaction, Veriz will be integrated into Broadcom.
3. Relevant markets
(1) Relevant commodity markets.
After review, there is horizontal overlap between Broadcom and Verrex in the endpoint protection software market. At the same time, Broadcom's Fibre Channel adapters, storage adapters, and network card products face a common customer base and exist in an adjacent relationship with Weirui's virtualization software. In this case, the relevant commodity markets are defined as the endpoint protection software market, the non-public cloud virtualization software market, the Fibre Channel adapter market, the storage adapter market, and the Ethernet network card market.
1. Endpoint protection software market.
Endpoint protection software is installed on endpoint devices such as PCs, laptops, and mobile devices to detect, prevent, investigate, and respond to security threats. From the perspective of demand substitution, endpoint protection software is not functionally substituted with other security software products, and endpoint protection software can only detect network traffic and cannot detect malware behavior. Endpoint protection software uses anti-virus, anti-spyware, and firewall capabilities to inspect inbound and outbound traffic attempting to cross network or cloud endpoints; From a supply substitution perspective, endpoint protection software is designed and developed in a very different way than other security software. It is understood that endpoint protection software vendors need at least 2 years of development time and 4-5 years of product maturity time to switch to other security software products, with a total cost of at least 40 milliondollars, vendors can't easily switch from endpoint protection software to other security software. As a result, endpoint protection software is defined as a separate market for related commodities.
2.Non-public cloud virtualization software market.
Virtualization software solves the inefficient use of server hardware by emulating computer hardware, allowing a single server hardware to be split into multiple virtual computers. Each virtual machine runs its own operating system (i.e., a guest operating system) and allocates computing resources independently from the server's underlying hardware. There are two aspects to consider when defining the market for virtualization software: the deployment model of enterprise workloads and the type of virtualization software.
According to the deployment model of enterprise workloads, virtualization software can be broken down into three types: on-premises data center, private cloud, and public cloud. While public clouds offer cost advantages, traditional data centers and private cloud environments eliminate the need to share computing resources with others, have a higher level of control and privacy over sensitive data, better security, and greater flexibility, providing enough bandwidth and storage to meet ultra-low latency requirements and customization needs. As a result, virtualization software deployed in on-premises data centers and private clouds is significantly different from virtualization software deployed on public clouds in terms of service nature and security requirements, and the substitution of the two requirements is limited. Therefore, virtualization software deployed in on-premises data centers and private clouds is different from virtualization software deployed on public clouds, and constitutes an independent market for related commodities.
According to the type, virtualization software can be subdivided into two categories: proprietary and open source. Proprietary virtualization software outperforms open source virtualization software in terms of functionality, reliability, compliance, and security. At the same time, there is a difference between paid open source software and free open source software, even if it is both open source software. Paid open source software usually takes a subscription model to provide customers with technical support, security updates, patches, and other services for the software, which is closer to the business model of proprietary virtualization software, and is also better than free open source software in terms of security. A successful virtualization platform needs to meet the five dimensions of mature technology, comprehensive management, reliability, high availability, and disaster recovery. Completely free open source virtualization software is difficult to achieve, and it cannot form an effective competitive constraint on proprietary and paid open source virtualization software. Therefore, proprietary virtualization software and paid open source virtualization software are defined as independent related commodity markets, excluding free and open source virtualization software.
In summary, proprietary and paid open-source virtualization software deployed in on-premise data centers and private clouds are defined as the relevant commodity market in this case, hereinafter referred to as the non-public cloud virtualization software market.
3.Fibre Channel adapters and storage adapter markets.
Fibre Channel adapters (FC HBAs) and storage adapters (Storage Adapters) are installed in the server to connect the server to storageProvides data input, output processing, and physical connectivity between servers and storage devices. Fibre Channel adapters connect storage devices located outside of servers in a storage area network (SAN) through Fibre Channel switches, and storage adapters connect server central processing units (CPUs). Connect directly to storage that is not on the storage area network, which may be internal server storage or external storage. Both are typically plugged into the PCI Express expansion slot on the server host system motherboard and connected to a switch (Fibre Channel adapter) or to a storage device (storage adapter) via a compatible cable. Taking into account the above differences between Fibre Channel adapters and storage adapters, Fibre Channel adapters and storage adapters are defined as separate related commodity markets.
4. Ethernet network card market.
The network interface controller, referred to as the network card, is one of the server components, mainly providing interfaces between the server and other computers and devices on the network. An Ethernet NIC is one of the most common types of NIC and is mainly used to connect computers or other devices to an Ethernet network and communicate using the Ethernet protocol. Ethernet network cards have the advantages of low cost, easy deployment, and easy management, and are widely used in local area networks. Other types of NICs include WiFi NICs, Bluetooth NICs, FC NICs, and InfiniBand NICs, which are suitable for different network scenarios and application requirements. In this case, Broadcom is engaged in the business related to Ethernet network cards, so the Ethernet network card is defined as the relevant commodity market in this case.
(2) Relevant geographical markets.
The relevant commodities involved in this case are supplied and procured globally, the suppliers compete on a global scale, there is no obvious price difference between the products in different countries, there are no significant cross-border trade barriers, and the proportion of product freight to the final selling price is low, especially the software products only need to be downloaded, and the transportation cost is zero. Therefore, the relevant geographical market for the above-mentioned commodities is defined as global, and the situation in the domestic market of China is also examined.
Fourth, competitive analysis
According to Article 33 of the Anti-Monopoly Law, the State Administration for Market Regulation (SAMR) conducted an in-depth analysis of the impact of the concentration on market competition from the aspects of the market share of the undertakings involved in the concentration in the relevant market and their control over the market, the market concentration of the relevant market, and the impact of the concentration on downstream user enterprises and other relevant undertakings. The storage adapter market and the Ethernet network card market have or may have the effect of eliminating or restricting competition.
(1) The centralized entity has the ability to eliminate or restrict competition in the non-public cloud virtualization software, Fibre Channel adapters, storage adapters, and Ethernet network card markets.
First, the centralized entity has market control in the global and domestic non-public cloud virtualization software markets. In 2021, Weirui's share of the global and domestic non-public cloud virtualization software markets was 92-97% and 2.2-27%, respectively (both ranked first), with market control. Customer surveys show that Weirui is in an absolutely leading market position, and it is difficult for other competitors to form effective competitive constraints on Weirui. More than 50% of customers consider Vervox to be an irreplaceable major provider in the non-public cloud virtualization software market.
Second, the centralized entity has a dominant position in the global and domestic Fibre Channel adapter market. In 2021, Broadcom's share of the global and domestic Fibre Channel adapter markets was 60-65% and 70%, respectively—75% (both ranked first), and the market share of the main competitors Marvell Electronics is 35-40% and 25% respectively—30%。 The HHI index of the global and domestic Fibre Channel adapter markets in China is 5247 and 6254 respectively, and the related markets are highly concentrated, with a duopoly market structure, and Broadcom has a dominant market position.
Third, the centralized entity has strong competitiveness in the global and domestic storage adapter market. In 2021, Broadcom's share of the global and domestic storage adapter markets in China was 30-35% and 15-20%, respectively (both ranked first). The market share of other competitors, Microchip and Marvell Electronics, is quite different from that of Broadcom. The unit price of Broadcom memory adapter is higher, and Broadcom has stronger pricing power and certain market power than Microchip and Marvell Electronics.
Fourth, the centralized entity is the main competitor in the global and domestic Ethernet network card market. In 2021, Broadcom's share of the global and domestic Ethernet network card market was 10-15% and 5-5%, respectively— 10%。 There are competitors such as NVIDIA and Intel in the market, but the number of competitors is small, and the HHI index of the global and Chinese Ethernet network card markets is above 3200 and 4300 respectively The market is highly concentrated, and Broadcom ranks third in the global and domestic Ethernet network card market in China, with certain competitiveness.
Fifth, Verruidium's non-public cloud virtualization software and Broadcom's Fibre Channel adapters, storage adapters, and Ethernet network cards are all used on servers, facing a common customer base and having a neighboring relationship. The hardware used in the server needs to communicate with Verruidx's non-public cloud virtualization software through a driver interface. As a virtualization software vendor, Veritex has established a process for certifying hardware that is used in servers that need to pass Veriz's hardware certification process to ensure interoperability with Veriz's non-public cloud virtualization software. After passing this certification process, the hardware can be guaranteed to run with Veritray software. In order to ensure interoperability with Veritray software and to obtain Veritex certification, hardware vendors may provide competitive sensitive information to centralized entities that can be used to gain an unfair competitive advantage to further enhance the competitiveness of their own products.
(2) The centralized entity has the motivation to eliminate or restrict competition in the non-public cloud virtualization software, Fibre Channel adapters, storage adapters, and Ethernet network card markets.
First, the centralized entity has an incentive to tie Weirui's non-public cloud virtualization software with Broadcom Fibre Channel adapters, storage adapters, and Ethernet network cards (hereinafter referred to as Broadcom hardware). Broadcom hardware and Weirui software have a high degree of overlap customer base, Weirui software price is very high, customers install virtualization software conversion cost is larger, virtualization software is more important consideration for customers when purchasing servers, and Broadcom hardware price is only 3.3% of the price of Weirui software, and it needs to be replaced every 5 years. At the same time, downstream customers have fewer choices in the relevant markets of Broadcom hardware, and the possibility of tying is further enhanced.
Second, the centralized entity has the incentive to reduce the interoperability of Weirui's non-public cloud virtualization software with the hardware products of Broadcom's competitors. According to market research, due to the requirement for Veritx to certify with server hardware, when Veritex and hardware cannot be mutually authenticated and interoperability issues arise, customers are more likely to choose to keep Veritex software and replace the hardware with a price 30 times higher than the hardware, rather than replace the Veritex software and keep the hardware. Economic analysis shows that a centralized entity would be profitable if it engages in behaviors that reduce interoperability.
Third, the entity after the concentration has the motive to improperly use the commercially sensitive information of other competitors. Hardware vendors need to ensure interoperability with Veritray software and obtain Veritray certification. Market research shows that Veritage's certification is crucial for hardware vendors, who can be included in the server vendor's hardware list before it can be sold to end customers. To ensure that Verita's new products and features are interoperable with hardware products, Veritex requires hardware vendors to provide competitively sensitive information such as product plans, functional parameters, and 12-24 month technology roadmaps. Most of these hardware vendors are in competition with Broadcom, which means that Broadcom can obtain sensitive information about its competitors through this transaction to further enhance the competitiveness of its products. Competitors' concerns about the improper loss of technical secrets may reduce the degree of relevant technical exchanges and cooperation, which will have a negative impact on technological innovation.
(3) The centralized entity has or may have the effect of eliminating or restricting competition in the non-public cloud virtualization software, Fibre Channel adapters, storage adapters, and Ethernet network card markets.
First, the centralized entity may tie in virtualization software and hardware such as Fibre Channel adapters, storage adapters, and Ethernet network cards, harming the interests and choices of downstream customers.
Second, the centralized entity may refuse or delay the certification or functional implementation of Veritis virtualization software for other non-Broadcom hardware products, reducing the interoperability between Veritex virtualization software and other non-Broadcom hardware products, and the interoperability between Broadcom's Fibre Channel adapters and non-Vertex virtualization software.
Third, the concentrated entity may obtain commercially sensitive information provided by other hardware manufacturers to Weirui through this transaction, so that it has a competitive advantage, exclude or restrict other competitors, and may have a negative impact on technological innovation in the industry.
5. Negotiation with additional restrictive conditions
During the review process, the SAMR promptly informed the declarant of the review opinion that the case had or may have the effect of eliminating or restricting competition, and conducted several rounds of discussions with the declarant on how to reduce the adverse impact of the concentration of undertakings on competition. The State Administration for Market Regulation (SAMR) has assessed the effectiveness, feasibility and timeliness of the restrictive conditions in accordance with the Provisions on the Review of Concentration of Undertakings.
After evaluation, the SAMR believes that the commitment plan with additional restrictive conditions submitted by the applicant on November 20, 2023 (see annex) can reduce the adverse impact of this concentration of undertakings on competition.
6. Review and decision
In view of the fact that the concentration of this operator in the non-public cloud virtualization software, Fibre Channel adapter, storage adapter and Ethernet network card market has or may have the effect of eliminating or restricting competition, according to the additional restrictive condition commitment plan submitted by the reporting party, the State Administration for Market Regulation has decided to approve the concentration with additional restrictive conditions, requiring the parties to the transaction and the entity after the concentration to perform the following obligations:
(1) When selling Broadcom's Fibre Channel adapters, storage adapters, Ethernet network cards (hereinafter referred to as "related hardware products") and Weirui's server virtualization software to the domestic market in China, it shall not tie in in any way or attach any other unreasonable trading conditions without justifiable reasons; shall not hinder or restrict customers from purchasing or using the above products alone; and shall not discriminate against customers who purchase the above products separately in terms of service level, price or function.
(2) Continue to ensure the interoperability of Verric's server virtualization software with third-party related hardware products sold in the domestic market.
(iii) Broadcom's Fibre Channel Adapter Certification team will continue to develop, certify, and release drivers for Broadcom's Fibre Channel adapters to ensure interoperability with third-party server virtualization software.
(4) Employing protective measures for the confidential information of third-party hardware manufacturers, including but not limited to signing confidentiality agreements with third-party hardware manufacturers, clarifying the scope of information use, storing confidential information separately, ensuring the separation of relevant personnel, and prohibiting cross-employment.
(5) [Confidential Information]
(6) [Confidential Information]
In addition to the supervision and implementation of restrictive conditions, the additional restrictive conditions commitment plan submitted by the reporting party to the State Administration for Market Regulation on November 20, 2023 is legally binding on the parties to the transaction and the centralized entity. The above commitments are valid for 10 years from the effective date and are automatically terminated upon the expiration of the period.
The SAMR has the right to supervise and inspect the reporting party's performance of the above obligations by supervising the trustee or on its own. If the reporting party fails to perform or violates the above obligations, the SAMR will deal with it in accordance with the relevant provisions of the Anti-Monopoly Law.
This decision shall take effect on the date of announcement.
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