[ANALYSIS] Antitrust wall emerges 'fear factor' in deal-making

General Motors Chevy Camaros sit in a lot at the GM Lansing Grand River Assembly Plant on Sept. 2 in Lansing, Mich. GM has had to temporarily shut down most of its North American plants due to a semiconductor chip shortage. AFP-Yonhap

'Key risk' to M&A outlook is 'increased regulatory scrutiny': Goldman Sachs

By Kim Yoo-chul

Despite the justice ministry's decision to release Samsung leader Lee Jae-yong from prison with expectations for his help in addressing shortages of semiconductors and vaccines, the company is facing some difficulties along the road in terms of pushing major deals because of anti-competition concerns in the geo-political landscape.

The U.S.'s continued trade tussle with Beijing mostly over intellectual property rights has awakened demands for Washington to put more focus on supply chains. Also, because of a shortage in semiconductor chips hitting wider U.S. industries, the Biden administration is in the process of combining an industry-centric strategy with expanded revitalization of alliances.

That means semiconductors and electric vehicle (EV) batteries are increasingly being seen by many countries in terms of national security interests. Given South Korea's close ties both with China and the United States, this emerging trend will make it difficult for South Korean makers of semiconductors and batteries to pursue multi-billion-dollar deals with both countries.

The rationale is that any mergers and acquisitions (M&A) suggestions which would have greater impact on affected industries are attracting keen attention of antitrust bodies globally, as these M&As normally require approval from major countries. Watchdogs are positioned to throw global companies' M&A strategies into disarray as the final barrier.

Goldman Sachs, a top U.S. investment bank, recently warned that a key risk to M&As is "increased regulatory scrutiny due to antitrust concerns."

"Governments around the world are taking an increasingly active interest in M&A proposals. A key point is antitrust watchdogs around the world are assessing M&A proposals as national security matters," a senior executive in the local semiconductor industry said, Sunday.

Samsung chief Lee plans to fly to the United States during the Chuseok long weekend starting next week, sources said. Considering the two reasons behind his parole, the vice chairman is widely expected to meet Moderna's top decision-making executives and to discuss the best ways to strengthen its semiconductor business in the United States.

But amid worries over national security and the impact on American jobs, it's unlikely the Samsung chief will make any big M&A decisions during the trip. Despite the company's denial, Samsung is said to have been rethinking its bid to acquire NXP Semiconductors due to regulatory issues, and sources said it will look for ways to hedge investment risks and avoid regulatory challenges by pursuing M&As that top investment banks describe as "blockbuster" deals.

"The Biden administration is apparently cracking down on possible monopolies, which is worrying Wall Street. But based on Biden's July executive order for antitrust agencies to inspect M&As deeply, now isn't the right time for Samsung to pursue mega deals," another high-ranking industry executive said.

Nvidia's acquisition of British chipmaker Arm has also hit regulatory challenges, as it's unlikely for the U.K. government to have more time to review this deal based on both national security and anti-competition grounds. Google, Amazon and Tesla are said to have opposed Nvidia's acquisition of Arm due to antitrust concerns.

Samsung Electronics Vice Chairman Lee Jae-yong exits a detention center in Uiwang, Gyeonggi Province, Aug. 13. AP-Yonhap

Similarly, it's also unlikely for the United States to approve a proposal by a Chinese private equity fund (PEF) to acquire MagnaChip due to national security concerns. MagnaChip produces automotive chips and display driver chips for OLEDs.

"The Chinese PEF's suggested acquisition of MagnaChip will be disapproved," the executive added. China approved the proposal earlier, but the U.S. treasury ministry ordered the parties to halt their transactions in June this year.

Seeking detour with detailed remedies

Despite such looming challenges, South Korean battery companies can pursue sizable acquisition deals in target markets, but the actual approval will only come "if potential buyers specify remedy plans," according to investment banking sources.

Reports said Japan is prepared to support Western Digital's ambitious bid to acquire Kioxia, provided that control of its advanced technology stays in Japan. The acquisition deal, if it actually happens, will help Tokyo strengthen its expanded semiconductor alliance with the United States, but concerns are seen in Korea and China.

Acquisition of Kioxia will give Western Digital a 35 percent market share of the global NAND flash market, which will help it better compete with the market leader Samsung Electronics.

"The Chinese antitrust watchdog would delay the review process claiming that the proposal must be reviewed based on anti-competition grounds. But actually, because the Kioxia-Western Digital deal is a combination between a Japanese company and a U.S. company, the Chinese antitrust regulator will look at the matter based on a national security standpoint," a source familiar with the issue said. China had delayed the process of AMAT's earlier acquisition proposal with Japan's Kokusai Electric.

After nine months the proposal was submitted to the Chinese antitrust regulator, which gave its disapproval. Earlier, Beijing also interfered with similar deals including Qualcomm's $44 billion bid for NXP Semiconductors back in 2018.

Samsung Electronics, the longtime global leader in semiconductors, said it will be active in exploring major M&As over the next three years as it can do so given its abundance of cash and cash equivalents. As of the second quarter of this year, Samsung's cash and cash equivalents were some 200 trillion won.

"When it comes to M&As in the areas of memory chips and batteries, it's required to present detailed remedy plans in terms of sharing technology and less impacting jobs in affected countries," said an official at Korea International Trade Association.