Contract analysis

I. INTRODUCTION AND QUALIFICATIONS A. Identity and Engagement

1. My name is Dr. Franklin Morrow. I am the founder and Principal of Stonebridge Analytics LLC, an economic consulting firm specializing in antitrust economics, competition policy, and the economics of technology markets. Stonebridge Analytics is located at 1700 K Street NW, Suite 850, Washington, DC 20006. I submit this declaration based on my personal knowledge and professional expertise in the field of antitrust e

2. I have been retained by Calderwood & Harkness LLP on behalf of Defendant Halcyon Semiconductor Americas Inc. ("Halcyon Americas"), a wholly owned subsidiary of Halcyon Semiconductor AG (FSE: HLC), for the purpose of providing expert economic analysis regarding the competitive effects of Halcyon's acquisition of Meridian Photonics Inc. ("Meridian") and to respond to the economic theories of harm advanced by the Sta

3. My compensation for this engagement is billed at standard hourly rates through Stonebridge Analytics LLC. My compensation is not contingent on the outcome of this proceeding, nor is it contingent on the substance of my opinions or the content of my testimony. I have no financial interest in Halcyon Semiconductor AG, Halcyon Semiconductor Americas Inc., or any other party to this litigation. B. Professional Backgro

4. I hold a Ph.D. in Economics from the University of Chicago, where my doctoral research focused on industrial organization, with a particular emphasis on oligopoly theory, innovation competition, and the economics of merger analysis. I also hold a Master of Arts in Economics from the University of Chicago and a Bachelor of Arts in Economics, summa cum laude, from Williams College. My doctoral dissertation, complete

5. I have over twenty years of professional experience in antitrust economics, with a specialization in technology markets, the semiconductor industry, and merger analysis. Prior to founding Stonebridge Analytics LLC in 2011, I served for six years as an economist in the Bureau of Economics at the Federal Trade Commission ("FTC"), where I provided economic analysis and advice in connection with merger investigations,

6. I have been qualified as an expert in antitrust economics and have testified in federal and state courts, as well as before federal administrative agencies, on more than thirty occasions. My testimony has addressed issues of market definition, competitive effects analysis, merger simulation, unilateral and coordinated effects, vertical merger theory, innovation competition, and the quantification of merger efficie

7. I have published extensively in peer-reviewed academic journals and professional publications on subjects directly relevant to the issues in this case, including market definition methodology, merger simulation modeling, innovation competition in technology industries, and the economics of vertical integration in semiconductor markets. My publications include articles in the Journal of Industrial Economics, the An

8. My curriculum vitae, which sets forth my educational background, professional experience, publications, prior testimony, and other relevant qualifications in full detail, is attached hereto as Exhibit A and incorporated herein by reference. C. Materials Reviewed

9. In forming the opinions set forth in this declaration, I have reviewed and considered the following materials, among others: (a) The Complaint filed by the State of Oregon on April 17, 2023; (b) Defendant's Answer, filed May 5, 2023, and Defendant's Motion to Dismiss brief, filed May 19, 2023; (c) The Court's Order dated July 7, 2023 denying Defendant's Motion to Dismiss; (d) Plaintiff's Motion for Preliminary Inj

10. I may supplement this declaration in the future as additional materials become available or as the need arises in connection with further proceedings in this matter. D. Summary of Opinions

11. Based on my analysis and the materials I have reviewed, I have reached the following principal opinions, each of which is explained in detail in the sections that follow: (1) The AG's proposed relevant product market of "co-packaged optics transceiver modules for data-center applications" is overly narrow and fails to account for the significant competitive constraints imposed by pluggable transceivers, on-board

II. BACKGROUND ON THE TRANSACTION AND INDUSTRY A. Overview of the Acquisition

12. On September 8, 2022, Halcyon Semiconductor AG, acting through its wholly owned U.S. subsidiary, Halcyon Semiconductor Americas Inc. (4500 Great America Parkway, Suite 300, Santa Clara, CA 95054), entered into an Agreement and Plan of Merger (the "Merger Agreement") to acquire one hundred percent (100%) of the outstanding shares of Meridian Photonics Inc. The acquisition price was $2.15 billion in cash.

13. The acquisition was funded through a $2.2 billion senior secured term loan facility led by Vereinigte Kreditbank AG (Frankfurt, Germany) as administrative agent, with Nordmark Capital Group (Glenrock Assurance, Switzerland) and Pacific Rim Commercial Bank (Singapore) serving as syndicate members. Of the $2.2 billion available under the facility, $2.15 billion was drawn at the closing of the transaction, with the

14. On October 3, 2022, the parties submitted an HSR premerger notification filing to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice (HSR File No. 20221003-1847). On November 14, 2022, early termination of the HSR statutory waiting period was granted. Notably, neither the FTC nor the DOJ issued a second request for additional information or documentary material in connection

15. The acquisition closed on January 31, 2023. Following the closing, Meridian now operates as a wholly owned subsidiary of Halcyon Semiconductor Americas Inc. Meridian's principal headquarters remain at 1820 NW Everett Street, Suite 400, Portland, Oregon 97209. At the time of the acquisition, Meridian employed approximately 1,200 persons. Meridian was founded by Dr. Samuel Ashford, who served as its Chief Executive

16. Co-packaged optics, commonly referred to by the industry abbreviation "CPO," is an emerging technology for high-speed optical interconnects in data-center environments. CPO transceiver modules are silicon photonics-based devices that integrate optical transceivers directly with network switch application-specific integrated circuits ("ASICs") on the same substrate or within the same package. This co-packaging app

17. The primary application of CPO technology is in high-speed data-center optical interconnects. As data centers have grown in scale and complexity — driven by the exponential growth in cloud computing, artificial intelligence workloads, and high-performance computing — the demand for higher-bandwidth, lower-power, and lower-latency optical interconnect solutions has intensified. CPO technology promises to address t

18. Key industry standards governing CPO and related technologies include the OIF 400ZR coherent optical interface standard and the emerging OIF 800ZR standard. These standards, developed through the Optical Internetworking Forum, an industry-wide standards body with broad participation, define the optical, electrical, and protocol specifications that allow interoperability among components from different suppliers.

19. It is essential to recognize that CPO is an emerging technology that remains in the early stages of commercialization. While industry projections suggest significant growth in CPO adoption over the next several years, traditional pluggable transceivers currently account for the vast majority of optical transceiver deployments in data centers worldwide. Additionally, other related technologies — including on-board

20. Halcyon Semiconductor AG is a publicly traded semiconductor company headquartered in Munich, Germany, listed on the Frankfurt Stock Exchange under the ticker symbol FSE: HLC. The company is led by Chief Executive Officer Dr. Tobias Wendt. Katrin Schreiber serves as General Counsel, and Priya Nagarajan serves as U.S. Deputy General Counsel.

21. In FY 2022, Halcyon reported consolidated revenue of approximately €9.3 billion and employed approximately 28,500 persons worldwide. Halcyon's core business focuses on the design and manufacture of analog and mixed-signal semiconductors, power management integrated circuits ("ICs"), and related semiconductor components. These products serve a broad range of end markets, including industrial automation, automotive

22. Halcyon maintained a legacy CPO product line prior to the acquisition, but its CPO products were focused on control ICs and driver electronics — the semiconductor components that support and enable the operation of optical transceivers — rather than on the full photonics integration that defines a CPO transceiver module. Halcyon's legacy CPO line represented approximately 14% of the U.S. CPO transceiver market by

23. Meridian Photonics Inc. was founded by Dr. Samuel Ashford and is headquartered in Portland, Oregon. Meridian's core business is the design, development, and manufacture of silicon photonics transceivers and co-packaged optics modules for data-center and telecommunications applications.

24. In FY 2022, Meridian reported revenue of approximately $385 million. Based on this revenue, Meridian's estimated share of the U.S. CPO transceiver market was approximately 44% (i.e., approximately $385 million of the approximately $875 million total U.S. CPO market). Meridian holds 47 U.S. patents related to CPO technology, covering aspects of silicon photonics design, optical modulation, wavelength-division mult

25. Meridian's customer base includes major data-center operators with significant Oregon presences. Key Oregon-based customers include Cascadia Cloud Services Inc., which operates large-scale data-center facilities in Prineville and The Dalles, Oregon, and which spent approximately $62 million on Meridian CPO modules in FY 2022, and Northstar Digital Infrastructure LLC, which operates a data-center campus in Hillsbo

III. THE AG'S RELEVANT MARKET DEFINITION IS OVERLY NARROW A. The AG's Proposed Market Definition

26. In its Complaint and in its Motion for Preliminary Injunction, the AG alleges a relevant product market consisting of "co-packaged optics transceiver modules for data-center applications." The AG further alleges that the relevant geographic market is the United States, with particular emphasis on the impact of the transaction on Oregon-based data-center customers. Dr. Evelyn Ng of Ridgeline Economic Consulting LL

27. The AG's proposed market definition is critical to its competitive harm theory. If the market is defined narrowly to include only CPO transceiver modules, the post-merger combined entity appears to hold a significant share of the market and concentration metrics appear elevated. However, if the market is properly defined to include the broader set of optical interconnect solutions that compete with CPO modules fo

28. The AG's proposed product market ignores significant competitive constraints from adjacent product categories that directly discipline the pricing, innovation, and commercial conduct of CPO transceiver suppliers. Under well-established principles of antitrust market definition, the relevant product market must include all products that are reasonably interchangeable by consumers for the same purposes. The AG's na

29. Traditional pluggable optical transceivers remain the dominant technology. Traditional pluggable optical transceivers in the QSFP-DD and OSFP form factors remain the dominant technology for data-center interconnects today and are the workhorses of data-center networking infrastructure. These pluggable modules are functionally substitutable for CPO modules in the vast majority of current data-center deployments. T

30. On-board optics and near-package optics are intermediate alternatives. On-board optics ("OBO") and near-package optics ("NPO") represent intermediate technological approaches that sit on a spectrum between traditional pluggable transceivers and full co-packaged optics. OBO integrates optical engines onto the switch motherboard near the ASIC but not within the same package, while NPO positions optical components a

31. Customer evidence confirms cross-technology substitutability. The customer evidence available in this case confirms that data-center operators, including Cascadia Cloud Services Inc. and Northstar Digital Infrastructure LLC, do not evaluate CPO modules in isolation from other optical interconnect options. Rather, these sophisticated purchasers evaluate CPO modules alongside pluggable transceivers, on-board optics

32. A hypothetical monopolist test confirms the market is too narrow. The standard analytical tool for defining relevant product markets in antitrust analysis is the hypothetical monopolist test, also known as the SSNIP (small but significant and non-transitory increase in price) test. Under this test, the relevant market is defined as the narrowest set of products such that a hypothetical monopolist of those product

33. Including broader optical transceiver solutions dramatically alters market shares. If the relevant product market is properly defined to include pluggable transceivers, on-board optics, and near-package optics in addition to CPO modules — reflecting the true scope of competitive alternatives available to data-center customers — the combined entity's market share would be dramatically lower than the figures cited

34. The AG alleges a U.S. geographic market with particular emphasis on Oregon-based customers. While I do not dispute that the United States is an appropriate geographic frame of reference as an outer bound, the AG's emphasis on Oregon-based customers as a particular locus of competitive harm is misplaced and analytically unsound.

35. CPO transceiver modules are lightweight, high-value products that are shipped worldwide, with transportation costs that are negligible relative to the value of the product. There are no meaningful tariffs, regulatory barriers, or logistical constraints that would prevent Oregon-based data-center operators from sourcing CPO modules from any supplier globally. Indeed, the evidence shows that Oregon data-center oper

36. There are no meaningful regional price differences or supply constraints within the United States that would justify a geographic market narrower than the nation as a whole. CPO module pricing is substantially uniform across U.S. customers, regardless of their location. Oregon-based customers such as Cascadia Cloud Services and Northstar Digital Infrastructure pay the same prices and receive the same products as

37. Even within the AG's proposed national geographic market, the emphasis on Oregon-based customers is misplaced. Cascadia Cloud Services and Northstar Digital Infrastructure, while important Meridian customers, represent a small fraction of total U.S. demand for CPO modules and an even smaller fraction of the total U.S. optical transceiver market. There is no basis in antitrust economics for singling out customers

IV. MARKET SHARES AND CONCENTRATION METRICS IN CONTEXT A. Summary of Market Share Data

38. For purposes of completeness, and without necessarily accepting the AG's narrow product market definition as correct, I present below the estimated market share data for the U.S. CPO transceiver module market in FY 2022 as relied upon by the AG. I note that my analysis of these figures does not constitute an endorsement of the AG's market definition; rather, I address these figures to demonstrate that even under

39. Under these figures, the post-merger combined Halcyon/Meridian share would be approximately 58% (44% + 14%), representing combined revenues of approximately $507.5 million in the U.S. CPO transceiver market. B. HHI Analysis

40. The Herfindahl-Hirschman Index ("HHI") is a commonly used measure of market concentration in antitrust analysis. The HHI is calculated by summing the squares of the market shares of all firms in the market. Using the AG's market share figures, the HHI calculations are as follows: Pre-Merger HHI: 44² + 22² + 14² + 11² + 9² = 1,936 + 484 + 196 + 121 + 81 = 2,818 Post-Merger HHI: 58² + 22² + 11² + 9² = 3,364 + 484 +

41. I acknowledge that these figures exceed the thresholds set forth in the U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (2010), which provide that mergers resulting in a post-merger HHI above 2,500 with a delta exceeding 200 are presumed to be likely to enhance market power. These thresholds are the basis for the AG's and Dr. Ng's reliance on concentration metrics as evidence

42. However, it is well-established in antitrust economics — and recognized by the Merger Guidelines themselves — that HHI thresholds are screening tools that create a rebuttable presumption, not dispositive proof of anticompetitive effects. The Guidelines expressly recognize that market-specific factors may override the structural presumption created by concentration metrics. This is particularly true in nascent, ra

43. The AG's reliance on static, backward-looking market share figures as the centerpiece of its competitive harm theory is misguided in the context of the CPO transceiver market. There are several reasons why current market shares are particularly poor indicators of future competitive significance in this market.

44. Rapid market growth. The U.S. CPO transceiver market grew by approximately 45% between FY 2021 and FY 2022. Industry forecasts from multiple independent research firms project a compound annual growth rate ("CAGR") of approximately 28% through 2027, implying that the total U.S. CPO market could exceed $3 billion by 2027. In a market growing at this rate, the total addressable market will more than triple over the

45. Technology markets frequently exhibit volatile shares. The history of technology markets is replete with examples in which high initial market shares dissipated rapidly as competitors entered, scaled, and innovated. The transition from one generation of technology to the next frequently reshuffles competitive positions. For example, in the pluggable transceiver market itself, the leading firms of the early 2000s

46. Competitors are gaining share and expanding capacity. Within the AG's own narrow market, competitive dynamics are already shifting. Luminos Systems Corp. has been gaining market share and has publicly announced plans for expanded manufacturing capacity at its Austin, Texas facility. Crestwave Optical Technologies Ltd. is investing heavily in next-generation CPO platforms, including 800ZR and beyond, and is active

V. COMPETITIVE CONDITIONS: ENTRY, EXPANSION, AND RIVAL VIABILITY A. Luminos Systems Corp.

47. Luminos Systems Corp. is a Delaware corporation headquartered in Austin, Texas. Luminos is the second-largest CPO transceiver supplier in the United States, with an estimated market share of approximately 22%, corresponding to approximately $192.5 million in FY 2022 U.S. CPO revenue. Luminos is a well-established company with a full-spectrum silicon photonics technology platform, substantial engineering talent, a

48. Luminos has publicly announced plans for significant expansion of its manufacturing capacity, including a new fabrication line at its Austin campus that is expected to approximately double its production output for CPO transceiver modules by mid-2024. This expansion is financed through a combination of internally generated cash flow and a recently completed equity offering. Critically, Luminos has an independent

49. Luminos is well-positioned to compete aggressively for data-center CPO contracts, including contracts with Oregon-based customers. There is no evidence that the acquisition has impaired or will impair Luminos's ability to compete. To the contrary, industry analysts have noted that the Halcyon/Meridian transaction may create opportunities for Luminos to gain share, as some customers may seek to diversify their sup

50. Crestwave Optical Technologies Ltd. is a limited company organized under the laws of the People's Republic of China, headquartered in Shenzhen, China. Crestwave holds an estimated 11% share of the U.S. CPO transceiver market, corresponding to approximately $96.3 million in FY 2022 revenue. Crestwave is a substantial and growing competitive force in the CPO market, with access to significant capital resources and

51. Crestwave is actively expanding its presence in U.S. and European markets. The company has established a U.S. sales and technical support office and has been qualifying its products with major hyperscale data-center operators. Crestwave is also investing heavily in next-generation CPO platforms, including development of 800ZR and beyond coherent optical CPO modules. These next-generation products will be directly

52. The AG's analysis gives insufficient weight to Crestwave as a competitive constraint. While Dr. Ng acknowledges Crestwave's presence in the market, she discounts its competitive significance on the grounds that it is a foreign-domiciled firm. This reasoning is economically unsound. The relevant question is not where a competitor is incorporated, but whether it can and does supply U.S. customers at competitive pri

53. In addition to Luminos and Crestwave, other fringe competitors currently account for approximately 9% of the U.S. CPO transceiver market, or approximately $78.7 million in FY 2022 revenue. These fringe competitors include several smaller but technologically capable firms that are actively developing and commercializing CPO transceiver products.

54. More significantly, multiple well-capitalized semiconductor and photonics companies that are not currently active in the CPO market have publicly announced CPO development programs. These potential entrants include companies with existing capabilities in silicon photonics, coherent optical technology, and advanced semiconductor packaging — the key technological competencies required to design and manufacture CPO

55. The open nature of the OIF 400ZR and 800ZR standards is a critical factor facilitating entry. These standards define the optical interface, modulation format, forward error correction, and management interfaces for coherent optical transceivers. Compliance with these standards is independently verifiable through standardized testing procedures. Because the standards are open and publicly available, any firm with