FTC Approves ON’s Acquisition of Fairchild With Structural and Behavioral Conditions

On August 25, 2016, the FTC announced that ON Semiconductor Corporation (“ON”) agreed to sell its Ignition Insulated-Gate Bipolar Transistor (“IGBT”) business in order to settle FTC allegations that its proposed $2.4 billion acquisition of Fairchild Semiconductor International, Inc. (“Fairchild”) is anticompetitive.

According to the complaint, the merged company would have a combined share of over 60% in the worldwide market for IGBTs specifically designed and calibrated for automotive ignition systems, or Ignition IGBTs.  Without a divestiture, it is likely that the proposed merger would substantially lessen competition in the worldwide market for Ignition IGBTs, resulting in higher prices and reduced innovation.  Ignition IGBTs are semiconductors that function as solid-state electronic switches in the ignition systems of automotive internal combustion engines.  They have to meet the demanding performance requirements and harsh environment of an automotive ignition system.

ON and Fairchild both develop, manufacture, and market a wide range of semiconductors.  They are each other’s closest competitors for Ignition IGBTs sold to automotive suppliers, who then incorporate Ignition IGBTs into the ignition systems that they sell to automakers.  The proposed consent order preserves competition by requiring ON to divest its Ignition IGBT business to Littelfuse, Inc. (“Littelfuse”) within ten days of the close of the transaction.  Littelfuse is buying the product portfolio of transient voltage suppression diodes, switching thyristors, and insulated gate bipolar transistors for automotive ignition applications for $104 million.  The divestiture will include design files and intellectual property that Littelfuse needs to manufacture ON’s Ignition IGBTs.  ON must also facilitate the transfer of its customer relationships to Littelfuse, and supply Ignition IGBTs for Littlefuse to sell to customers while Littelfuse sets up its manufacturing operations.  Littelfuse will  spend about $30 million at its semiconductor manufacturing facilities to upgrade production capabilities and add significant capacity to its China fabrication facility as the result of the purchase and production transfer.

Lessons Learned:

The FTC’s challenge to the ON/Fairchild transaction indicates that it is concerned about consolidation even in small narrow markets.   The remedy included not simply a divestiture of a business along with a licensing agreement for certain technology and intellectual property necessary for Littelfuse to succeed but also includes behavioral provisions that require ON to facilitate the transfer of customer relationships and to supply product to Littelfuse until Littelfuse sets up its manufacturing capabilities.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com