UK clears Broadcom buying VMware, but deal yet to scale Great Regulatory Wall of China

Middle Kingdom has made a habit of scuppering western mergers of late

After all the drama, the UK's competition regulator has given chipmaker Broadcom its unconditional blessing to acquire VMware. However, the merger can still not be considered done and dusted as it faces a potential roadblock from China.

The Competition and Markets Authority (CMA) announced on Monday that it has cleared Broadcom's proposed $69 billion purchase of cloud and virtualization specialist VMware, saying it considered the evidence and found no competition concerns.

Broadcom's buy was given a provisional go-ahead in July following the CMA's earlier decision in March that the deal warranted an in-depth investigation. This was off the back of the Phase 1 investigation, which raised concerns the merger might stifle innovation and allow Broadcom to limit VMWare's compatibility with rival networking products.

The CMA said the independent panel that conducted the Phase 2 inquiry was of the opinion that any potential financial benefit to Broadcom and VMware of making rival products work less well with VMware's software would not offset the potential financial cost in terms of lost business.

It also considered whether the merger might harm innovation, in that Broadcom's rivals would need to share commercially sensitive information with VMware to ensure their hardware worked with its platform. The panel decided this is unlikely to be an issue as this information only needs to be shared with VMware at a stage when it is too late to be of commercial advantage to Broadcom.

The panel therefore confirmed its final decision, that the merger would not substantially reduce competition, and cleared it to proceed in the UK.

This differs from the decision taken by the European Commission, which was to grant conditional approval based on an agreement from Broadcom that it would preserve interoperability, which, as The Register noted at the time, was essentially a promise not to do what it wasn't planning to do anyway.

"The CMA's clearance decision is particularly noteworthy because it has given an unconditional thumbs up to the deal proceeding," commented Alex Haffner, competition partner at London-based lawyer Fladgate.

"In doing so, the CMA goes further than the European Commission's merger unit, which last month required the merging parties to give certain (interoperability) commitments to allow Marvell, Broadcom's main rival in the market for fiber channel adaptors, unencumbered access to the information needed to ensure that its adaptors can operate effectively in conjunction with VMWare's software."

Haffner said it was a "useful riposte" to those who have argued that the the CMA is not sufficiently flexible to deal with technology takeovers, but it also makes us wonder why it did not ask for commitments that interoperability would be preserved, as the EC did.

In a statement welcoming the UK decision, Broadcom said it now has legal merger clearance in the European Union, as well as in Australia, Brazil, Canada, Israel, South Africa, and Taiwan, and foreign investment control clearance in all necessary jurisdictions.

The US Federal Trade Commission (FTC) was also said to be considering the deal, but Broadcom claims that pre-merger waiting periods under the Hart-Scott-Rodino Act have now expired, and as no objections to its purchase of VMware have been raised, there is no legal impediment to closing under US merger regulations.

The company said it "continues to work constructively" with regulators in other jurisdictions, is in the advanced stages of obtaining the remaining required regulatory approvals, and is confident that its acquisition of VMware will close on October 30, 2023.

But the elephant in the room is China and its State Administration for Market Regulation (SAMR). Broadcom gets billions in revenue from China, enough for any merger it is involved with to trigger an antitrust review.

China has recently been holding back from giving approval to mergers involving US companies, in what is being seen as retaliation for the "Chip Wars" that involves Washington trying to restrict China's access to advanced technology.

Last week, Intel's planned $5.4 billion purchase of Israeli chip biz Tower Semiconductor was called off due to the failure of the two companies to get regulatory approval from China within the time frame for the deal to close.

The Wall Street Journal highlighted the uncertain situation in April, claiming that SAMR was asking companies to make available in China any products they sold in other countries as a precondition to its approval of mergers. This would effectively be asking US companies to break their own government's export rules.

In addition to dragging its feet over the Intel/Tower merger, the WSJ said that SAMR was holding up MaxLinear's buyout of Taiwan-based Silicon Motion Technology. MaxLinear announced it was terminating the merger at the end of July, citing certain conditions to closing not being satisfied.

It isn't clear if the VMware-Broadcom merger will wind up sharing the same fate as Intel's acquisition of Tower, but the nastiness around the Chip Wars continues to escalate.

Earlier this month, President Biden issued an executive order restricting US companies from investing in Chinese firms developing key technologies. For its part, China has placed export restrictions on gallium and germanium, key ingredients in some semiconductors for which China is the largest global source, and also sanctioned products from US memory maker Micron that the company admitted may cost it $4 billion in annual revenue. ®

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