China’s approval of Cisco-Acacia deal conditional on fair competition but also an olive branch to Joe Biden

Masha Borak
·5-min read

US telecoms conglomerate Cisco Systems this week received the green light from China’s top regulator to acquire optical components maker Acacia Communications provided the two companies ensure fair competition, and analysts say approval could be an early olive branch to the Biden administration.

Approval from the State Administration for Market Regulation (SAMR) was the deal’s final hurdle, although China’s antitrust watchdog stipulated that the two US companies must honour existing contracts with Chinese customers and keep commercial terms unchanged for the next five years.

China’s regulator had been reviewing the deal since October 2019 amid a widening tech war between China and the US, which has seen restrictions placed on the export of cutting edge US-origin technology to many of China’s leading tech firms, such as Huawei Technologies.

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“It looked like the deal would not go ahead just a couple of weeks ago,” said Paul Haswell, partner at Pinsent Masons law firm. “SAMR seems to be taking a more proactive and decisive role in its antitrust investigations, as evidenced by the Alibaba investigation … the deal has also been playing out against the backdrop of the US-China trade war, and just as we have seen increased scrutiny of Chinese acquisitions of Western companies, the same applies in reverse.”

In the context of the tech war, analysts said the timing of regulatory approval could be seen as a positive signal to the new US administration.

“In the past China’s antitrust authority has held up mergers [such as Qualcomm/NXP] and used its deal approval as an economic tool for trade and foreign policy,” said Angela Zhang, associate professor of Law and director of the Center for Chinese Law at the University of Hong Kong. “So the fact that the authority has finally approved this deal is also sending a friendly signal to the new Biden administration.”

Qualcomm’s US$44 billion to buy Dutch chip maker NXP Semiconductors ultimately fell through in 2018 due to delays in obtaining approval.

Much like the European Commission, SAMR holds the right to approve mergers and acquisitions involving multinational corporations that could have a strategic impact on its economy. Amid rising export controls on sensitive US technology to China on national security grounds, particularly in the semiconductor industry, Beijing has been keeping a watchful eye on supply chain security.

China had concerns that the Acacia deal could put its own technology suppliers in an unfavourable position. Acacia, which was a Cisco partner before the merger proposal, provides a technology called coherent optical solutions designed to improve performance of telecoms networks. It is one of the few suppliers that can deliver optical wavelength speeds as high as 600 Gbps, so buying Acacia is a critical component in Cisco’s long term technology strategy, according to Jimmy Yu, vice-president and industry analyst at Dell’Oro Group.

“This should give Cisco a pricing advantage or profit margin advantage, depending on how they leverage the newly-bought, in-house technology,” said Yu. “Hence, it will help Cisco compete against other system manufacturers that include Huawei, ZTE, and Nokia.”

Some other big deals in the tech sector are still awaiting a decision or have already been blocked.

The marriage of US graphics chip giant Nvidia and UK-based chip design specialist Arm is still under review. A major concern for Beijing is that the deal will result in Arm’s technology coming under US export control regulations, potentially harming Chinese tech companies, according to analysts. Meanwhile, semiconductor machinery maker Applied Materials’ planned acquisition of Kokusai Electric remains subject to SAMR approval.

Why semiconductors are important in the US-China tech war

One of Acacia’s largest customers is Chinese telecoms and network gear giant ZTE. The US telecoms watchdog has designated both ZTE and its crosstown rival Huawei as security threats and banned American firms from using a fund to purchase their products.

Zhang Mao, Director of State Administration for Market Regulation, speaks at a press conference at the 13th National People’s Congress in Beijing in March 2019. Photo: Simon Song
Zhang Mao, Director of State Administration for Market Regulation, speaks at a press conference at the 13th National People’s Congress in Beijing in March 2019. Photo: Simon Song

The main concern for Chinese regulators was that Cisco and Acacia may limit and exclude competition by increasing the price of their products or refusing to sell it altogether. In particular, SAMR looked at access to coherent digital signal processors, a product which Acacia is a dominant provider of and which is hard to replicate and expensive to replace.

SAMR noted in its decision that demand for these processors has also been rising as data centers and construction of new 5G networks both rely on building optical fibre networks.

Latest US export controls further hamstring China’s semiconductor ambitions

The delayed decision actually played out in favour of Acacia. It applied to cancel the merger after failing to secure approval from the Chinese government by the extended deadline of January 8. Cisco then filed a lawsuit to ensure the original US$2.6 billion deal reached in July 2019 proceed, pending the decision.

Acacia finally acceded to the deal last week but only after securing a significantly higher price for its shares. Cisco agreed to raise the acquisition price from an original US$70 per share to US$115, meaning it will pay US$1.9 billion more than the deal agreed in 2019.

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