Nvidia-Arm deal's EU notification likely to herald a clash of regulators

As a major acquisition in the digital domain, Nvidia’s $40 billion purchase of software developer Arm looks likely to divide regulators around the globe. Big-name competitors are sounding the alarm, crying “foreclosure” and citing threats to innovation.

Yet it’s not the kind of case that lends itself to clear-cut structural remedies such as selloffs. The deal's EU notification is imminent, and the relatively permissive stance on behavioral remedies shown by the bloc's merger regulator may be hard to swallow for other regulators that disdain them.

California-based Nvidia, best known for its graphics processing units, or GPUs, for gaming and high-end computers, is a longstanding customer of UK-based Arm. Arm is a pure licensing company, designing processors for everything from smartphones to supercomputers. As well as Nvidia, it works with virtually all the top players in the industry.

Some competitors say that once Nvidia owns Arm, it will have the “ability and incentive” to harm the competitiveness of rivals that are also Arm customers — such as Microsoft, Google, Qualcomm, Intel and Samsung — by restricting access to the chip designer’s intellectual property. Nvidia says it will do no such thing, pledging to keep Arm “neutral” and guarantee an open licensing regime. It claims the support of Arm customers Broadcom, Mediatek and Marvell.

The merger is going to need authorization in all the major jurisdictions, including the EU, the US, China, and the UK.

The European Commission has been looking into the deal at the prenotification stage for a year now. There have already been extensive questions and submissions in response, both from the parties and from rivals and customers. The formal notification is expected early this month.

In the US, the transaction has been under in-depth review since last December, and the UK merger watchdog has just recently recommended an in-depth probe on competition grounds), criticizing the parties’ proposed behavioral remedies.

Paperwork has been submitted to Chinese regulators, but the deadline hasn’t started running because the filing hasn’t been formally accepted.

Vertical deal

Nvidia’s acquisition of Arm is a “vertical” deal, meaning that Nvidia is not proposing to buy a direct competitor, but a company at a different level of business — in this case a key supplier, which designs Nvidia’s chips and licenses its intellectual property.

Vertical deals generally raise fewer concerns for competition since they don’t reduce head-to-head competition. They are rarely blocked. But in this case, the competitors make the case that once Nvidia owns Arm, it might treat its competitors less “neutrally” than Arm did before. After all, they say, Nvidia is shelling out $40 billion, and there is more money in making products with Arm IP than in licensing it to competitors.

The regulators, worried about innovation and how market power can quickly become entrenched in the digital sphere, may try to find ways to mitigate the potential competitive harm.

Selling off particular businesses or assets is usually a cleaner cure, but in this case, since there are no horizontal overlaps in the companies’ businesses, there are no obvious entities to be divested. And divesting parts of the companies to undo the vertical relationship between them would undermine the rationale for the deal.

Thus Nvidia and Arm have floated behavioral undertakings that they say would “ensure an open licensing regime, based on equal access and interoperability, with protections against disclosure of competitively sensitive information.”

Collision course

Once behavioral remedies are on the table, the risk of clashes among the merger regulators around the world looms large.

While the European Commission says it “has a traditional preference for structural remedies,” it says that in practice, “behavioral or access remedies are more often used in vertical or conglomerate mergers because they are typically better suited to such cases.”

A case in point: the EU watchdog accepted an extensive package of complex behavioral remedies in Google’s acquisition of fitness tracker Fitbit last December, including restrictions on the use of Fitbit's data for advertising purposes and a promise to continue to allow its users to share data with rivals.

Regulators in other jurisdictions are less convinced that behavioral remedies work.

In the UK, the Competition and Markets Authority's chief executive, Andrea Coscelli, said in February that the package of remedies the EU regulator accepted from Google probably wouldn't have been accepted in the UK.

Then in April, a trio of regulators — Coscelli, Andreas Mundt of the German Bundeskartellamt and Rod Sims of Australia’s Competition and Consumer Commission — spoke out strongly against “complex behavioral remedies,” which they said create continuing economic “links and dependencies,” are prone to circumvention, and can “quickly become outdated” as market conditions change.

Plus, they cited the burden that behavioral remedies place on competition agencies and businesses by requiring constant monitoring.

Overall, they stressed the need for “rigorous and effective merger enforcement” — particularly in “dynamic and fast-paced markets.”

“Protecting competition and consumer welfare can sometimes only be achieved by blocking a merger outright,” they proclaimed.

UK review

True to form, the CMA has already come out swinging in the Nvidia-Arm deal. On Aug. 20, the UK government published a summary of the results of the watchdog's phase I investigation, launched when the government issued a public-interest intervention notice on the grounds of national security).

In its analysis, the CMA said it found the competitive risk of the Nvidia-Arm deal “significant,” given the complex and evolving nature of the contracts and markets involved, the magnitude of the concerns identified — which span a number of markets and applications — and the breadth and technically specialist nature of the offer.

Not surprisingly, the CMA concluded that the deal needs to undergo an in-depth probe on competition grounds.

In coming to that conclusion, the regulator explicitly rejected the behavioral remedies proposed by Nvidia, saying that it “does not consider that the conduct required to address the competition concerns identified can be specified with sufficient clarity, to provide a lasting remedy that is capable of effective monitoring and enforcement.”

That’s not the UK watchdog's final word on the question. It's now up to the UK’s digital minister, Oliver Dowden, to decide whether to ask it to conduct a phase II investigation. That would give the company more time to try to persuade the CMA that its offer could work. But the regulator's conclusions at this stage signal strong initial skepticism about the appropriateness of behavioral remedies in this case.

The timing of that pronouncement, just as Nvidia is on the cusp of notifying the deal in the EU, is unfortunate for the company. Although the Brexit split means the UK and EU reviews will be independent of each other, if the EU regulator welcomes behavioral remedies in this case, it may have some extra explaining to do.

Meanwhile, all the reviews will run in parallel. If the deal is blocked in any jurisdiction, the jig is up — and at the moment the UK regulator looks the one most likely to do so.

Nvidia trades on Nasdaq. Arm is a subsidiary of the SoftBank Group, which is traded on the Tokyo stock exchange.