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China puts unprecedented anti-trust squeeze on its technology giants

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 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.

The regulator is particularly keen to “make an example” of a $3.5 billion plan for search engine Sogou Inc to be taken private by shareholder Tencent Holdings, two people with direct knowledge of the matter said.

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.

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 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.

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 and Facebook Inc.

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.

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, ByteDance, Baidu, and SINA Corp 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.” Reuters

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