Analysis: China to crank up anti-trust heat on Big Tech after unprecedented fines

China Literature

15/12/2020 11:56

* Market regulator to put more transactions under scrutiny
    * Keen to "make an example" of Tencent-Sogou deal - sources
    * Bid by MBK Partners to buy CAR Inc also in its sights

    HONG KONG/BEIJING, Dec 15 (Reuters) - China's unprecedented
anti-trust squeeze on its technology giants is only just
beginning. 
    Having levied fines and announced a probe on Monday into
deals backed by the likes of Alibaba Group  9988.HK  and
Tencent, China's market regulator is now gearing up to put more
transactions under scrutiny, reversing a once laissez-faire
approach towards its vast internet space.  urn:newsml:reuters.com:*:nL1N2IU07F
    The regulator is particularly keen to "make an example" of a
$3.5 billion plan for search engine Sogou Inc  SOGO.N  to be
taken private by shareholder Tencent Holdings  0700.HK , two
people with direct knowledge of the matter said.  urn:newsml:reuters.com:*:nL4N2GQ2UJ
    Also in its sights is a bid by private-equity firm MBK
Partners to buy China's top online car rental firm, due to
concerns it could cause competition issues as MBK already owns
the industry's No.2 player, a third source said.  urn:newsml:reuters.com:*:nL4N2FF0UB
    For the Sogou-Tencent tie-up, the State Administration of
Market Regulation (SAMR) is planning a thorough review that
could mean the deal may miss a July 2021 completion deadline,
two of the sources said. 
    "The deal now faces big uncertainty and there's a big chance
that it may not close as planned," one of them added.
    Internet search is a sensitive issue in China and the SAMR
will take into account the fact that Tencent already has a
leading position in several sectors, the person said.
    The high profile of the deal also makes it a target for
scrutiny, the person added. All three sources spoke on condition
of anonymity as they were not authorised to talk to media.
    Sogou said in a filing this month that it had submitted the
deal for antitrust review, a rare move in China's tech sector
where companies until recently had not proactively sought
permission from competition authorities.
    MBK too has submitted a plan to buy CAR Inc  0699.HK  to the
SAMR for antitrust review, according to a government statement.
    MBK, which controls eHi Car Services together with its
chairman, plans to merge the two, one of the sources said.
    Tencent, Sogou and MBK declined to comment. The SAMR, Car
Inc and eHi did not respond to requests for comment. 
    
    'NEW CHAPTER'
    China has vowed to strengthen oversight of its big tech
firms, which rank among the world's largest and most valuable,
citing concerns that they have built market power that stifles
competition, misused consumer data and violated consumer rights.
    Last month, Beijing issued draft rules aimed at preventing
monopolistic behaviour by internet companies, marking China's
first serious regulatory move against the sector.  
    Regulators globally, including in the United States, Europe
and India, have already been carrying out tougher anti-trust
reviews of tech giants such as Alphabet Inc's Google  GOOGL.O 
and Facebook Inc  FB.O .  urn:newsml:reuters.com:*:nL1N2IP1I0
    SAMR had so far produced less "headline-grabbing" cases
compared with global regulators, Jiaming Zhang, a partner at law
firm Allen & Overy, said. 
    "However, all these recent developments seem to suggest that
SAMR is ready to open a new chapter for its enforcement actions
in the internet sector," she said. 
    
    NO LONGER EXEMPT
    SAMR on Monday made it clear that the "Internet industry is
not outside the oversight of the anti-monopoly law" as it
penalized three deals involving Variable Interest Entity (VIE)
structured companies - the first time it has done so. 
    VIE structures allow listed foreign entities to control a
Chinese company through a series of contractual arrangements
while circumventing China's foreign investment restrictions. 
    Until Monday, it had been unclear whether such firms were
obliged to report deals under China's 2008 anti-monopoly law. 
    SAMR's latest move shows it expects VIE-structured companies
to submit their deals for vetting, lawyers said. 
    Most big Chinese tech firms such as Alibaba, Tencent, Didi
Chuxing, Meituan  3690.HK , ByteDance, Baidu  BIDU.O , JD.com
 9618.HK  and SINA Corp  SINA.O  use VIE structures.
    "From a pure antitrust perspective, the question has also
been: why treat VIEs differently?" said Adrian Emch, partner at
law firm Hogan Lovells. "Going forward, it seems, the
'same-same-but-different approach' will no longer hold." 

 (Reporting by Julie Zhu and Kane Wu in Hong Kong, Cheng Leng
and Zhang Yan in Beijing; Additional Reporting by Yingzhi Yang
and Sophie Yu in Beijing; Editing by Brenda Goh and Himani
Sarkar)
 ((cheng.leng@thomsonreuters.com; +8610-5669-2129;))