Fair Trade Commission's First Corporate Merger Remedy This Year: Borealis-DYM Case

Merger Between Ultra-High Voltage Power Cable Material (Semiconductor) Manufacturers... "Concerns Over Anti-Competitive Behavior"
"Measures Only for Individual Case, Separate from Other Mergers Like Baedal Minjok-Delivery Hero"

[Asia Economy Reporter Moon Chaeseok] The Korea Fair Trade Commission (KFTC) imposed corrective measures for the first time this year during a corporate merger process. This is the first time since last year when corrective measures were imposed on five corporate mergers, including the SK Telecom-POOQ merger, LG Uplus's acquisition of CJ Hello's shares, and SK Telecom's acquisition of T-Broad. The KFTC stated that the measures regarding the merger between power cable semiconductive layer companies are unrelated to other mergers such as Baedal Minjok-Delivery Hero and Hyundai Heavy Industries-DSME. The semiconductive layer is a material that allows current to flow only through the conductor of power cables such as copper and silver, preventing cable malfunction.

On the 20th, the KFTC announced that it had decided to impose corrective measures on the merger between Borealis AG (Borealis), Austria's top company in ultra-high voltage power cable semiconductive layers, and DYMSolution (DYM), Korea's second-largest company in high-voltage semiconductive layers. DYM is a company on the verge of developing ultra-high voltage semiconductive layers. Previously, on October 20, 2018, Borealis signed a contract to acquire 90.52% of DYM's shares and filed a merger notification with the KFTC.

The KFTC judged that the merger between Borealis, the number one company in the high-voltage and ultra-high voltage semiconductive layer market, and DYM could restrict competition in the market. Accordingly, the KFTC imposed obligations on the two companies to supply semiconductive layers under fair, reasonable, and non-discriminatory conditions according to normal industry practices, and to provide ultra-high voltage semiconductive layer production technology to joint development partners.

Power cable configuration. (Source: Korea Fair Trade Commission)

First, the KFTC defined the relevant market. During the merger review process, the 'product market' was divided into medium-voltage, high-voltage, and ultra-high voltage semiconductive layer markets. This was based on the consideration that semiconductive layers for each voltage level are not easily substitutable, have different price levels, and that the merging parties (Borealis + DYM) also distinguish semiconductive layer products by voltage.

The 'geographic market' was defined as the domestic market. This was because DYM's sales are concentrated in Korea and the Middle East, the competitive situations domestically and internationally differ, and the power cable certification process is complex, making it difficult for buyers to switch to new products. Power cable manufacturers purchasing semiconductive layers must obtain safety certification for power cables coated with semiconductive layers from authorized certification bodies, which typically takes 6 to 18 months.

The KFTC judged that the merger between the two companies in the high-voltage market raises concerns about competition restrictions such as price increases. After the merger, the combined market share of the merging parties is 80-90%, meeting the 'presumption of competition restriction' under Article 7, Paragraph 4 of the Monopoly Regulation and Fair Trade Act. The law stipulates that competition restriction is presumed when ▲the combined market share meets the criteria for a market-dominant business operator, ▲the company is the number one business operator, and ▲the difference between the combined market share and the second-ranked company's share is at least 25% of the combined market share.

The market has been stagnant with no new entrants in the past three years, and cable manufacturers have no reason to use semiconductive layer products other than those from the merging parties, given the need to re-obtain safety certification. The fact that Borealis will gain new transaction information from two domestic power cable companies currently dealing with DYM after the merger was also considered.

In the ultra-high voltage market, the removal of DYM, a strong potential competitor, by Borealis also increases the possibility of competition restriction. Borealis, the acquirer, is a de facto monopolist holding over 90% of the domestic ultra-high voltage semiconductive layer market. The KFTC judged that even without this merger, DYM would have independently entered the ultra-high voltage semiconductive layer market.

The basis for this judgment includes ▲DYM's independent development of 345kV ultra-high voltage semiconductive layer manufacturing technology in 2002 and current participation in two ultra-high voltage semiconductive layer development projects ▲the fact that these projects are jointly promoted with power cable manufacturers, meaning that if development succeeds, DYM's ultra-high voltage semiconductive layers could immediately be distributed in the domestic market ▲and the difficulty for domestic power cable manufacturers to find a third-party supplier of ultra-high voltage semiconductive layers other than the merging parties.

Source=Korea Fair Trade Commission

First, the KFTC defined the relevant market. During the merger review process, the 'product market' was divided into medium-voltage, high-voltage, and ultra-high voltage semiconductive layer markets. This was based on the consideration that semiconductive layers for each voltage level are not easily substitutable, have different price levels, and that the merging parties (Borealis + DYM) also distinguish semiconductive layer products by voltage.

The 'geographic market' was defined as the domestic market. This was because DYM's sales are concentrated in Korea and the Middle East, the competitive situations domestically and internationally differ, and the power cable certification process is complex, making it difficult for buyers to switch to new products. Power cable manufacturers purchasing semiconductive layers must obtain safety certification for power cables coated with semiconductive layers from authorized certification bodies, which typically takes 6 to 18 months.

The KFTC judged that the merger between the two companies in the high-voltage market raises concerns about competition restrictions such as price increases. After the merger, the combined market share of the merging parties is 80-90%, meeting the 'presumption of competition restriction' under Article 7, Paragraph 4 of the Monopoly Regulation and Fair Trade Act. The law stipulates that competition restriction is presumed when ▲the combined market share meets the criteria for a market-dominant business operator, ▲the company is the number one business operator, and ▲the difference between the combined market share and the second-ranked company's share is at least 25% of the combined market share.

The market has been stagnant with no new entrants in the past three years, and cable manufacturers have no reason to use semiconductive layer products other than those from the merging parties, given the need to re-obtain safety certification. The fact that Borealis will gain new transaction information from two domestic power cable companies currently dealing with DYM after the merger was also considered.

In the ultra-high voltage market, the removal of DYM, a strong potential competitor, by Borealis also increases the possibility of competition restriction. Borealis, the acquirer, is a de facto monopolist holding over 90% of the domestic ultra-high voltage semiconductive layer market. The KFTC judged that even without this merger, DYM would have independently entered the ultra-high voltage semiconductive layer market.

The basis for this judgment includes ▲DYM's independent development of 345kV ultra-high voltage semiconductive layer manufacturing technology in 2002 and current participation in two ultra-high voltage semiconductive layer development projects ▲the fact that these projects are jointly promoted with power cable manufacturers, meaning that if development succeeds, DYM's ultra-high voltage semiconductive layers could immediately be distributed in the domestic market ▲and the difficulty for domestic power cable manufacturers to find a third-party supplier of ultra-high voltage semiconductive layers other than the merging parties.

Lee Soong-gyu, Director of the KFTC's Corporate Merger Division, said, "The KFTC's corrective measures this time are significant in preventing the monopolistic harms in the market related to core materials of high value-added products such as high-voltage and ultra-high voltage power cables." He added, "Going forward, we will closely examine competition restrictions during reviews of mergers related to materials, parts, and equipment companies, and promptly handle mergers that do not raise competition concerns in the relevant markets."

Meanwhile, the KFTC clearly stated that this merger review will not affect other corporate merger reviews such as Baedal Minjok-Delivery Hero and Hyundai Heavy Industries-DSME. The KFTC explained that the Borealis-DYM case and other mergers differ in market structure, market share concentration, and the substitutability of the merging parties by buyers.

Photo by Yonhap News

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