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MOFCOM Announcement No. 30 of 2014 on Approval of Decisions on Anti-monopoly Review Against Concentration of Undertakings in the Acquisition of AZ Electronic Materials S. A. by Merck KGaA with Additional Restrictive Conditions

The Ministry of Commerce of the People’s Republic of China (hereinafter referred to as the “Ministry of Commerce”) received the anti-monopoly declaration of concentration of undertakings on the acquisition of AZ Electronic Materials S. A. (hereinafter referred to as “AZ”) by Merck KGaA (hereinafter referred to as “Merck”). Upon review, the Ministry of Commerce decided to approve the concentration of undertakings with additional restrictive conditions. In accordance with Article 30 of the Anti-monopoly Law of the People's Republic of China (hereinafter referred to as the “Anti-monopoly Law”), relevant matters are hereby announced as follows:

I. Case-filing and review procedures

On January 15, 2014, the Ministry of Commerce received the anti-monopoly declaration of concentration of undertakings on the acquisition of AZ by Merck. After review, examining the documents and materials for declaration, the Ministry of Commerce decided that they were insufficient, and required the declaring party to provide supplementary materials. On January 29, the Ministry of Commerce confirmed that the supplemented documents and materials complied with the requirements in Article 23 of the Anti-monopoly Law, and then filed a case on concentration of undertakings and began initial review. On February 28, the Ministry of Commerce decided to carry out further review on the concentration of undertakings. Upon further review, the Ministry of Commerce decided that the concentration of undertakings might eliminate or restrict competition in the market of liquid crystal (hereinafter referred to as “LC”) and photoresist (hereinafter referred to as “photoresist”), which are used for flat panel display in China.

In the course of the review, the Ministry of Commerce solicited opinions from relevant government departments, trade associations and relevant enterprises, obtained understanding of relevant market definition, market structure and industry characteristics and reviewed the authenticity, completeness and accuracy of the documents and materials submitted by the declaring party, and meanwhile, it also engaged independent third-party consultancy to conduct economic analysis to the competition issues of the concentration.

II. Basic information of the case

The acquirer: Merck was incorporated in Darmstadt, Germany in July 1995 and is listed in Frankfurt Stock Exchange. Its ultimate controller is the Merck family. Merck is mainly engaged in production and sales of biopharmaceutical products, life science instruments and special chemical products.

The acquiree: AZ was incorporated in Luxembourger in October 2010, and is listed in London Stock Exchange. Its equity structure is dispersed and it has no ultimate controller. AZ is mainly engaged in production and sales of special chemical materials for electronic products.

On December 20, 2013, Merck issued an announcement stating that it planned to acquire all issued and to-be-issued equities of AZ through tender offer. After the deal, AZ will be delisted from London Stock Exchange and become an indirect wholly-owned subsidiary of Merck.

III. Relevant markets

1 Relevant commodity markets

Flat panel display is a kind of display with thin screen, which is produced by using LCD technology or other substitutive technology. It is composed of front panel, LC and back panel. Merck and AZ manufacture LC and photoresist, respectively. LC is the raw material to realize the lighting function between the front and the back panels of the flat panel display, while photoresist is the material used to manufacture the electronic circuit of the back panel. LC and photoresist are mutually supplemented to each other and constitute adjacent markets. For the purpose of substitutability of demands, LC and photoresist cannot be replaced with other materials, and constitute independent commodity markets, respectively.

2 Relevant geographic markets

LC and photoresist are manufactured and sold worldwide. The transportation cost accounts for a low proportion in the price of the products and there are no import barriers. Therefore, the relevant geographic market is the global market, and the Ministry of Commerce also reviewed the impacts on the market in China.

IV. Competition analysis

The Ministry of Commerce, after making evaluation on the market shares, controlling power and market access of relevant markets, in combination with economic analysis and industry survey questionnaire, considered that, upon the completion of the concentration, Merck has the ability for bundle sales or cross subsidization of LC and photoresist by using the relation of adjacent products, which may injure the market competition:

1. After the combination, the enterprise has the ability for bundle sales. It is found in the review that, Merck takes more than 60% of share in the global LC market and more than 70% in China’s LC market; AZ takes about 35% of share in the global photoresist market and more than 50% in China’s photoresist market. After the completion of the concentration, Merck will become the largest supplier of both LC and photoresist, and the other competitors can only supply either one with limited production volume. If Merck sells LC and photoresist in bundle, it may reduce the product price, expand sales volume and increase profit by cross subsidization.

2. After the combination, the enterprise may injure the market competition. Given that Merck and AZ have high market shares while the number of competitors and their market share are small, it is impossible for them to form sufficient competitive pressures to the enterprise after combination or to have the ability or condition to cope with the bundle sales. They will be disadvantaged in competition with Merck and may be squeezed or even exit the market. After the combination, when the enterprise fulfills the purposes to expand market share, enhance market controlling power and squeeze out competitors, the downstream customers have fewer suppliers for option and their bargaining power will be weakened. It is difficult for them to counterbalance the unilateral price increase by the enterprise after combination. Therefore, the enterprise after combination may injure relevant market competition though bundle sales and cross subsidization.

3. There are high access barriers in relevant markets. In the LC market, Merck has more than 3,500 patents, some of which constitute substantive barriers, difficult for competitors and new market players to break in a short term. And meanwhile, it may take 2 to 3 years for the downstream customers to test and certify the technology of photoresist suppliers, and the customers will not, in practice, turn to photoresist suppliers with no marketing performance. The research shows, new market players will barely exist.

V. Negotiation on the additional restrictive conditions

During the review, the Ministry of Commerce pointed out to the declaring party the possible competition issues that may arise from the concentration of undertakings, and conducted several rounds of negotiations on how to reduce such impacts. Upon assessment, the Ministry of Commerce believes that the remedial plan submitted by Merck to the Ministry of Commerce on April 25, 2014 may reduce the adverse impacts on the competition from the concentration of undertakings.

VI. Review decision

Upon the review, the Ministry of Commerce considers that the acquisition of AZ by Merck has competition-eliminating or restricting effects over the markets of LC and photoresist. According to the commitment made by Merck to the Ministry of Commerce, the Ministry of Commerce decides to approve the concentration with additional restrictive conditions. Merck shall fulfill the following obligations:

1. Merck shall not conduct bundle sales in any form or in any way, directly or indirectly force Chinese customers to purchase both the products of Merck and AZ and shall not conduct cross subsidization in any form between the LC products of Merck and the photoresist products of AZ.

2. When Merck licenses LC patents, it shall be based on the non-exclusive and non-sublicensing articles. All articles shall comply with commercially reasonable and non-discriminating principles.

3. Merck shall report the fulfillment of the obligations above to the Ministry of Commerce once every half a year; and if Merck intends to sign any licensing agreement concerning any LC in China, it shall notify the Ministry of Commerce in advance.

4. The obligations above shall be and remain valid for three years from the date of the announcement to April 30, 2017.

In order to fulfill the obligations above, Merck shall formulate a detailed operating plan and submit it to the Ministry of Commerce, and carry it out after it is approved by the Ministry of Commerce.

The Ministry of Commerce has the power to supervise Merck on its own or through the supervision trustee on the fulfillment of the obligations above. Where Merck fails to fulfill the obligations above, the Ministry of Commerce will handle according to the Anti-monopoly Law.

This Announcement shall come into effect as of the date of issuance.

Ministry of Commerce of the People’s Republic of China

April 30, 2014

Translated by Hou Zuowei


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