Published on Feb 06, 2024
On January 1, Baidu (BIDU), operator of China’s most popular search engine, gave up on its three-year attempt to buy Joyy’s (YY) live-streaming business for $3.6 billion after failing to obtain approval from the country’s antitrust regulator.
However, just four weeks later, the Chinese government published a revised competition rule that didn’t include a provision restricting tech platforms’ so-called killer acquisitions of smaller, innovative rivals. Legal practitioners largely interpreted the absence of the provision, which had been in the rule’s earlier draft, as the government’s implicit admission it wouldn’t try hard to block such deals.
The two incidents—the Baidu deal’s abandonment and the omission of the killer acquisition clause—underscore what many company executives and competition attorneys view as the inconsistency of the State Administration for Market Regulation’s (SAMR) enforcement against the tech sector. They find themselves treading a cautious line, careful not to provoke regulators while taking advantage of the more receptive regulatory environment for tech transactions, legal experts said.
It is understood that many Internet firms operating in China are cutting their antitrust attorneys or transferring them to their government lobbying teams. This shift occurs just three years after companies were on a hiring binge, bringing on board many ex-regulators and government antitrust officials to help fend off Beijing’s crackdown of the country’s tech giants.
The abrupt change in the government’s approach toward the sector might have a fairly straightforward explanation. Economic growth—a source of Chinese pride for decades—is faltering.
“Now the economy is in recession, so the government doesn’t want to be too harsh on the Internet giants,” said a Guangdong-based lawyer.
The were 431 mergers and acquisitions proposed in China last year with a transaction value of 178.23 billion yuan ($25.1 billion), marking the lowest point in deal activity in nearly nine years, according to ITJUZI.com, a firm that analyzes Chinese M&A data.
Now that the government has loosened the leash on tech M&A, legal experts said they expect the deal activity will increase in response.
It’s unknown how long SAMR’s newfound tolerance for tech deals will last and if its approach will extend to foreign tech transactions. SAMR isn’t currently reviewing any major foreign deals in the sector.
Over the past 12 months, investors have grown more nervous about proposed mergers that require SAMR’s signoff. Their concern stems from the regulator last year withholding its approval of Intel’s (INTC) proposed $5.4 billion Tower Semiconductor acquisition and greenlighting the Broadcom/VMware and MaxLinear/Silicon Motion deals with conditions after weeks of drama and uncertainty.
Frosty China-U.S. relations, particularly the Biden administration’s efforts to keep valuable semiconductor technology from its adversary, are thought have influenced SAMR’s decisions in those three cases.
“For foreign transactions, it depends on whether it’s in a sensitive sector such as the chip industry, which is still going to face a lengthy review,” said a Beijing-based antitrust lawyer.
SAMR doesn’t comment on cases.
Softened stance. For now, though, China-based legal practitioners said the regulatory environment is more receptive to deals than in the recent past. The deletion of the killer acquisition clause “shows that the government has softened its stringent stance on Internet platforms,” a second Beijing-based antitrust lawyer said.
Behind this move is a government effort to boost development and encourage merger activities amid sluggish economic growth, he said.
Xu Lefu, the director-general at SAMR’s Antitrust Enforcement Department II, which handles merger review, said at a conference last week in Beijing that the regulator deleted the provision because it drew too many objections from some local industry players.
The new rule’s higher revenue thresholds for requiring companies to formally notify their deals to SAMR means that more transactions won’t need to go through a review.
Xu expected the thresholds will lead to 200 fewer cases, or 30% of the total number of filings, each year.
One beneficiary of the new thresholds could be Hewlett Packard Enterprise (HPE). Its proposed $14 billion bid for Juniper Networks (JNPR) is unlikely to require the Chinese regulator’s approval because the target generates so little revenue in the country.
Under the new rules, companies must file with the regulator when their collective global revenue in the last fiscal year exceeded 12 billion yuan ($1.9 billion) and at least two of the deal parties separately generated over 800 million yuan ($112 million).
The 800-million-yuan threshold is similar to the current U.S. standard of $111.4 million (which is increasing to $119.5 million on March 6). Unlike the U.S., China doesn’t increase the thresholds annually; the new SAMR thresholds were the first increases since China enacted its Antimonopoly Law in 2008.
SAMR still has the power to investigate proposed mergers that don’t meet the thresholds but that it suspects could restrict competition, although the agency hasn’t yet used that authority.
100 investigations. The current regulatory environment contrasts with SAMR’s approach just three years ago. The year 2021 marked a watershed in China’s campaign against the country’s tech platforms, which had often evaded their merger filing obligations without fear of government reprisal.
That changed in 2021, when SAMR launched over 100 investigations of transactions that merging parties failed to notify for government review. The regulator fined Tencent, Alibaba and other technology companies for not filing almost 40 acquisitions since 2017.
The regulator fined Alibaba $2.8 billion for abusing its market dominance, and food-delivery service behemoth Meituan was docked $533 million.
In 2021, SAMR also blocked the proposed Tencent-backed Douyu/Huya game streaming platform tie-up over antitrust concerns.
SAMR’s enforcement pace slackened significantly the next year, when it probed 38 cases of companies, including Tencent and Alibaba, that failed to notify their transactions for review. Last year, the regulator didn’t publicize any investigation of non-notification cases by Internet firms.
“Many clients are observing the actual enforcement efforts and assess the actual risks,” the Guangdong-based lawyer said. “In the past year, I have not seen any enforcement reports of Internet cases that failed to notify for review.”
Over the next few months, companies will find out if SAMR’s more hands-off approach is a sea change or just a temporary one.