Case of World’s Largest Merger
S. Korea’s antitrust authorities put the brakes on a merger between United States-based chipmaker Qualcomm and Dutch company NXP, the largest merger and acquisition (M&A) case in the semiconductor industry. As the Fair Trade Commission (FTC) granted a conditional approval for the merger, the ill-fated relations between the antitrust authorities and Qualcomm, which are in a legal battle on some 1 trillion won (US$934.14 million) fines, seems to continue again.
The FTC approved some 50 trillion won (US$46.71 billion) worth of the merger of two global memory chip producers – Qualcomm and NXP – on condition on January 18. It stipulated that NXP must not sell its standard essential patents for NFC and various system patents. NXP is also prohibited from exercising other NFC patent rights and independently providing licenses at no cost. The FTC took corrective measures restricting the right of standard essential patents as Qualcomm’s acquisition of NXP is most likely to limit the competition in the near-field communication (NFC) market.
Both Qualcomm and NXP run business in South Korea, though they are based in other countries – the U.S. and the Netherlands. Their sales in the domestic market amount to 4.55 trillion won (US$4.25 billion) and 430.3 billion won (US$401.96 million). A merger of companies with domestic sales of more than 20 billion won (US$18.68 million) must report to South Korea's antitrust agency FTC.
Qualcomm is seeking to the market of smart cars and Internet of Things (IoT) by combining its strong points in the mobile semiconductor sector and NXP’s car and security technologies. The merger of the two companies is worth US$47 billion (50.32 trillion won).
The FTC considered two primary things. First, it believed that both firms have the market strength in consideration of their market shares, market share changes and price changes compared to their competitors’ products.
It also thought that there can be competition limits. Qualcomm can change NXP’s NFC patent licensing or sell bundled products of its chip sets and NXP’s chips. In this case, the move can create a barrier for other companies to enter the related market.
Accordingly, the FTC requires NXP to sell its standard essential patents for NFC and system patents to a third party. NXP can sell other NFC patent to Qualcomm but is banned from exercising the patent rights. Moreover, the Dutch company must separate them from other patents and provide its competitors with licenses at no cost based on the fair, reasonable, and non-discriminatory (FRAND) principle.
NFC is a wireless communication technology which makes it possible to exchange data in area within 10cm and it is widely used in the IT, banking and distribution industries mostly for payment and identification purposes. In particular, NXP had a 74.6 percent share in the NFC chip market and a 69.1 percent share in the secure element chip market as of 2016.
The FTC also pointed out that Qualcomm can refuse to provide information and technologies that are needed to secure interoperability among components or change design to hamper interoperability through the acquisition. Currently, LTE chips and NFC chips are operated separately. However, Qualcomm can eventually hinder innovation in the mobile device market when the two technologies are combined into one, according to the FTC.
In addition, the FTC thought that Qualcomm is highly likely to limit the market competition by changing its patent licensing policy when the company, which holds a 70.2 percent and 56.4 percent share in the code division multiple access (CDMA) and long term evolution (LTE) chip set market, acquires NXP. The CDMA and LTE markets don’t overlap with the NFC market. However, changing licensing can raise a barrier for other companies to enter the markets considering the fact that these technologies are all equipped in mobile devices, including smartphone.
The FTC required Qualcomm to impede compatibility on its competitors’ baseband chipsets and NFC and security chipsets after the NXP acquisition. The company must not refuse to provide NXP’s MIFARE technology for the use of public transport and immigration.
Han Yong-ho, manager of the merger division at the FTC, said, “The FTC granted a conditional approval for the merger. We can address concerns over limiting competition on core technologies in the mobile industry through the corrective measures.”