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EU Commission examines hard drive mergers

The European Commission is to investigate whether two proposed takeovers within the hard drive disk (HDD) sector would impede competition and drive up consumer prices.02 Jun 2011

The Commission will investigate Seagate Technology's proposed acquisition of Samsung's HDD business, it has said. In a separate investigation the Commission will look at what the impact would be of Western Digital Corporation's planned takeover of Hitachi's storage business, it said.

The Seagate/Samsung investigation will be considered on its own, whilst the Western Digital/Hitachi deal will be assessed taking the Seagate/Samsung takeover into account, the Commission said.

"Hard drives are the backbone of the digital economy," Joaquin Almunia, Commission Vice President in charge of competition policy, said in a European Commission statement.

"The sector has already experienced significant consolidation and the proposed acquisitions will further reduce competition. The Commission will carefully examine if effective competition is preserved and innovation encouraged," Almunia said.

Major merger or takeover deals involving companies with big market share are ruled on by the European Commission using its Merger Regulation.

"The Commission clears the vast majority of mergers after a one-month review, but if it has competition concerns it must open an in-depth investigation. The opening of a full probe does not prejudge its outcome," the Commission statement said.

The Commission said that the results of its investigations will be available by 10 October.

There are currently five HDD manufactures in the world. They are Seagate, Western Digital, Hitachi, Toshiba and Samsung. The Commission said that an initial assessment of the Seagate/Samsung deal had raised concerns that one combined company could create an uncompetitive market place.

"The merged entity would have a significant market share in the overall market for HDDs, particularly in 3.5" desktop HDDs where it would only face two competitors (Western Digital and Hitachi)," the Commission statement said.

"This could impact negatively on customers’ ability to obtain competitive prices for the product. The merger could also reduce the manufacturers' incentives to innovate in the market. Respondents to the market investigation have raised concerns with respect to a risk of coordination between HDD manufacturers," the Commission said.

The Commission said it was concerned that the Seagate/Samsung deal could decrease the overall demand for 'heads', which read and record data within HDDs, from the sole independent manufacturer of heads in the market, TDK.

"This could in turn result in uncompetitive prices for heads and a weakening of TDK's ability to keep innovating," the Commission statement said.

"This would also negatively affect Toshiba's competitiveness in the HDD market, as Toshiba depends on TDK heads," it said.

A preliminary study into the Seagate/Samsung takeover also found that the proposed deal could negatively impact on the market for external storage devices (ESDs), the Commission said. ESDs plug in to computers and can be used to transfer data between locations.

"The initial investigation suggested the combined entity might have the ability and incentive to strengthen the market presence of its own branded ESDs by increasing HDD prices or restricting supply for non-integrated ESD providers," the Commission said. "This could negatively affect competition and innovation in the ESD market."

An assessment of the proposed Western Digital/Hitachi takeover found that a combined company would be the leader in the HDD market, the Commission said.

"For 3.5'' desktop HDDs, the only remaining competitor would be the combined Seagate/Samsung entity," the Commission said. "For 2.5'' mobile HDDs, used in notebooks and other portable electronic devices, it would only face Seagate/Samsung and Toshiba," it said.

"This could also have a negative impact on customers' capability to obtain better prices and on suppliers' incentives to keep competing through innovative products," the Commission said. "Concerns were also raised with respect to an increased risk of coordination between HDD manufacturers."

The concerns outlined in the case of the Seagate/Samsung takeover about the impact of the heads market on TDK and Toshiba were also raised during the preliminary investigation in the Western Digital/Hitachi deal, the Commission said. The takeover would also adversely affect the ESD market, the Commission said.

"The market investigation revealed concerns that the proposed transaction would reduce the available sources of HDDs to the detriment of ESD manufacturers so as to strengthen the combined entity's leading role in the ESD market." The Commission said. "This could negatively affect competition and innovation in the ESD market," it said.

The Commission has previously blocked major transactions of companies from going through.

In 2001 it prevented a $45m deal between General Electric and Honeywell, two US companies involved in the aviation industry, from going ahead. The Commission blocked the deal after over concerns that an integration of the firms could "foreclose" the market to competitors.

The European Court of First Instance later found that the Commission made a number of errors in how it had assessed the way the parts of the firms would merge and said it had failed to prove that the harm to competition would arise.

Technology law news is also available from Bootlaw, a free resource for technology start-ups, with regular events hosted by Pinsent Masons.