PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION AND ATTORNEY WORK PRODUCT — NOT TO BE DISCLOSED WITHOUT PRIOR WRITTEN CONSENT OF CALDERWOOD & HARKNESS LLP
CALDERWOOD & HARKNESS LLP Attorneys at Law 1333 New Hampshire Avenue NW, Suite 700 Washington, DC 20036
MEMORANDUM
October 9, 2023
FROM: Howard Bellamy, Specialist Partner, Antitrust & Competition
TO: Oliver Mackenzie, Responsible Partner, M&A Derek Okonkwo, Lead Associate, M&A Dr. Luisa Hartmann, General Counsel, Halcyon Semiconductor AG
RE: European Commission Phase II Investigation — Implications and Strategy; Proposed Acquisition of Vectris Photonics, Inc. by Halcyon Semiconductor Aktiengesellschaft
ENGAGEMENT NO.: 1032-00005
This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation and regulatory proceedings. It is intended solely for the use of the addressees and their authorized agents. This memorandum contains legal analysis, strategic advice, and mental impressions of counsel. It should not be disclosed, copied, or distributed to any third party without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure does not constitute a waiver of any applicable privilege.
I. Executive Summary
On October 6, 2023, the European Commission (the "Commission") formally opened a Phase II in-depth investigation into the proposed acquisition of Vectris Photonics, Inc. ("Vectris") by Halcyon Semiconductor Aktiengesellschaft ("Halcyon") under Council Regulation (EC) No 139/2004, the EU Merger Regulation ("EUMR"). The proceeding has been designated as Case M.11247 — Halcyon Semiconductor / Vectris Photonics. The Form CO notification was filed by Halcyon on August 25, 2023, following which the Commission undertook a Phase I review lasting 25 working days. Rather than granting unconditional clearance or accepting Phase I commitments, the Commission concluded that the concentration raises "serious doubts as to its compatibility with the internal market" and accordingly referred the matter for an in-depth Phase II examination.
The Commission's principal concern centers on the combined entity's competitive position in the market for co-packaged optics ("CPO") chiplets sold to European cloud operators and original equipment manufacturers ("OEMs"). Based on the Commission's preliminary analysis, the combined entity would hold an estimated 38% share of the relevant market within the European Economic Area ("EEA"), a level that—when considered alongside the degree of competitive proximity between Halcyon and Vectris—prompted the Commission to conclude that further investigation is warranted.
This memorandum has been prepared to provide the deal team and Halcyon's General Counsel with a comprehensive analysis of the following critical issues arising from the Phase II opening decision:
(a) the Commission's stated theories of competitive harm and the evidentiary bases for those concerns;
(b) the expected Phase II timeline and key procedural milestones, including their interaction with the Merger Agreement's Outside Date provisions;
(c) the scope and nature of the information requests ("RFIs") that the Commission is likely to issue in the coming weeks, and how Halcyon should prepare to respond;
(d) the range of potential remedies the Commission may require as a condition for clearance, including structural divestitures, behavioral commitments, and the possibility of outright prohibition;
(e) the critical interaction between this Commission proceeding and the parallel investigation by the Antitrust Division of the United States Department of Justice (the "DOJ"), which issued a Second Request (Civil Investigative Demand) to Halcyon on September 15, 2023; and
(f) our recommended strategy for navigating both proceedings in a coordinated manner while preserving the commercial rationale and timeline of the transaction.
The key takeaway from this memorandum is as follows: The opening of a Phase II investigation adds significant timing pressure and complexity to the transaction. The statutory deadline for a Phase II decision is approximately 90 working days from the date of the opening decision, placing the expected decision date in late February or early March 2024. However, this timeline is subject to potential extension—the clock may be "stopped" if Halcyon fails to respond to information requests within prescribed deadlines, and the Commission may extend the deadline by up to 15 additional working days if the parties offer commitments during the Phase II process. When combined with the parallel DOJ proceeding—where a Second Request is already outstanding and the risk of a civil complaint remains material—the regulatory path to closing is substantially more complex than originally anticipated at the time of signing. Careful, coordinated engagement with both agencies is essential, and contingency planning for adverse outcomes in either jurisdiction must begin immediately.
II. Background and Procedural History
A. The Transaction
On August 10, 2023, Halcyon Semiconductor Aktiengesellschaft, a German stock corporation organized under the laws of the Federal Republic of Germany and listed on both the Frankfurt Stock Exchange (FSE: HSAG) and the Nasdaq Global Select Market (Nasdaq: HCYN), entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Vectris Photonics, Inc., a Delaware C-corporation (State of Delaware, File No. 5918437), and Halcyon Acquisition Sub, Inc., a Delaware corporation (State of Delaware, File No. 7634291) and a direct wholly owned subsidiary of Halcyon formed specifically for the purpose of effectuating this transaction.
Under the terms of the Merger Agreement, Halcyon Acquisition Sub, Inc. will merge with and into Vectris in a reverse triangular merger, with Vectris surviving the merger as a wholly owned subsidiary of Halcyon. The aggregate consideration to be paid by Halcyon to the stockholders of Vectris is $800,000,000 in cash, without adjustment for changes in the net working capital of Vectris at closing, subject to customary representations, warranties, and closing conditions. The merger consideration represents a premium of approximately 32% over Vectris's undisturbed enterprise value as of the date of the last trading day prior to public disclosure of deal discussions.
Halcyon Semiconductor AG. Halcyon is a leading European designer and manufacturer of analog and mixed-signal semiconductors, power management integrated circuits, and radio-frequency ("RF") components. Founded in 1987 and headquartered in Munich, Germany, Halcyon reported consolidated revenues of €6.8 billion for the fiscal year ended December 31, 2022. The company operates three semiconductor fabrication facilities ("fabs"): two in Germany (Munich and Dresden) and one in Singapore. Halcyon employs approximately 24,000 individuals worldwide. In recent years, Halcyon has expanded into the silicon photonics and optical interconnect space through a combination of internal research and development and selective acquisitions, including the 2021 acquisition of PhotonEdge GmbH, a Munich-based developer of optical transceiver technology.
Vectris Photonics, Inc. Vectris is a fabless semiconductor company headquartered in San Jose, California, specializing in the design of silicon photonics transceivers and co-packaged optics chiplets for hyperscale data center interconnect applications. Founded in 2014, Vectris has rapidly established itself as one of the leading innovators in the CPO space, supplying chiplets and transceiver modules to major hyperscale cloud operators and data center OEMs in North America, Europe, and the Asia-Pacific region. Vectris reported revenues of $312 million and EBITDA of $74 million for its fiscal year ended December 31, 2022. The company employs approximately 1,450 individuals, primarily engineers and technical staff, across offices in San Jose, Austin (Texas), and Cambridge (United Kingdom). Vectris holds a significant intellectual property portfolio, consisting of 187 issued U.S. patents and 43 pending patent applications, the majority of which relate to advanced silicon photonics design architectures, modulator technologies, and chiplet packaging techniques.
The strategic rationale for the acquisition, as articulated by Halcyon's Vorstand in the announcement press release dated August 11, 2023, is to combine Halcyon's manufacturing scale, process technology, and global distribution capabilities with Vectris's cutting-edge design expertise in silicon photonics—a market segment expected to grow at a compound annual growth rate of approximately 25–30% through 2028, driven by the insatiable demand for higher-bandwidth, lower-power optical interconnects within and between hyperscale data centers.
B. EUMR Notification
The transaction qualifies as a "concentration" within the meaning of Article 3 of the EUMR and has an EU dimension pursuant to Article 1(2) of the EUMR, as the combined aggregate worldwide turnover of Halcyon and Vectris exceeds €5 billion, and the aggregate EU-wide turnover of each of at least two of the undertakings concerned exceeds €250 million. The EUMR notification was therefore mandatory.
The Form CO notification was prepared by Calderwood & Harkness's antitrust team in Washington and Brussels, in coordination with Halcyon's in-house legal department and Halcyon's European regulatory counsel at Brennan & Tanaka LLP (Brussels). The Form CO was filed with the European Commission's Directorate-General for Competition ("DG COMP") on August 25, 2023. The filing was declared complete by the Commission on the same date, which commenced the Phase I review period.
Under the EUMR, the Phase I review period is 25 working days from the date upon which the notification is declared complete. This period may be extended to 35 working days if the notifying party offers commitments to address competitive concerns identified during Phase I. In the present case, Halcyon did not offer Phase I commitments, and the Commission determined—prior to the expiration of the 25-working-day Phase I period—that the concentration raises serious doubts as to its compatibility with the internal market within the meaning of Article 6(1)(c) of the EUMR.
Accordingly, on October 6, 2023, the Commission adopted a decision under Article 6(1)(c) of the EUMR to initiate proceedings under Article 8 of the EUMR—that is, to open a Phase II in-depth investigation. The opening decision was communicated to Halcyon and its counsel on the same date. The decision identifies three principal areas of competitive concern, which are analyzed in detail in Section III below.
C. Parallel U.S. Proceedings
In addition to the EUMR notification, the transaction required pre-merger notification to the Federal Trade Commission ("FTC") and the DOJ under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), 15 U.S.C. § 18a. HSR Act notification forms were filed by both Halcyon and Vectris on August 18, 2023. The initial 30-day HSR waiting period would have expired at 11:59 p.m. on September 18, 2023, absent government action to extend the review.
The transaction was assigned to the Antitrust Division of the DOJ (as opposed to the FTC) for substantive review, consistent with the agencies' clearance process for semiconductor industry transactions. On September 15, 2023—three days before the expiration of the initial waiting period—the DOJ issued a Second Request (formally, a Civil Investigative Demand) to Halcyon pursuant to Section 7A(e)(1)(A) of the HSR Act, 15 U.S.C. § 18a(e)(1)(A). A corresponding Second Request was issued to Vectris on the same date.
The issuance of a Second Request supersedes the initial 30-day waiting period and extends the waiting period until 30 days after both Halcyon and Vectris have substantially complied with the Second Request, or until the DOJ takes other action (such as filing suit to block the transaction or entering into a consent decree). Substantial compliance with the Second Request is expected to be a multi-month process; based on current projections, Halcyon anticipates certifying substantial compliance no earlier than January 2024.
The DOJ's competitive concerns, as articulated in the Second Request specifications and in preliminary discussions between the DOJ's Telecommunications, Technology, and Media Section and Calderwood & Harkness, focus on the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects. The DOJ has preliminarily estimated a combined U.S. market share of approximately 47% (Halcyon at approximately 19% and Vectris at approximately 28%). The DOJ's market definition is related to, but not identical with, the Commission's preliminary product market definition—an important distinction discussed further in Section VII below.
The existence of parallel investigations in two major jurisdictions is not unusual for transactions of this scale and in this industry sector, but it introduces significant coordination challenges that require careful management.
III. Analysis of the Commission's Phase II Opening Decision
The Commission's Phase II opening decision identifies several areas of competitive concern that warrant close analysis. We address each in turn, together with our preliminary assessment of the strength of the Commission's position and the arguments available to Halcyon.
A. Relevant Product Market
The Commission's preliminary view, as articulated in the Phase II opening decision, is that the relevant product market for the assessment of this concentration is the supply of co-packaged optics (CPO) chiplets for data center interconnect applications within the EEA. This is a relatively narrow market definition that reflects the Commission's emerging practice of delineating semiconductor product markets at a granular, application-specific level.
The Commission's reasoning appears to be based on the following factors: (i) CPO chiplets represent a distinct technological approach to optical interconnection, in which the photonic integrated circuit is co-packaged directly with the network switch ASIC on the same substrate, as opposed to traditional pluggable transceiver modules that are housed in separate, hot-swappable form factors; (ii) CPO chiplets are designed and optimized for different performance parameters (power consumption, latency, bandwidth density) than pluggable transceivers, and serve a distinct functional role within the data center architecture; and (iii) demand-side substitutability between CPO chiplets and pluggable transceivers is limited in the short to medium term, as customers that have committed to a CPO-based architecture face significant switching costs and integration challenges if they were to revert to pluggable solutions.
This narrower market definition is unfavorable to Halcyon because it excludes the significant revenues and competitive presence of a number of firms that participate in the broader optical interconnect market through pluggable transceivers but have not yet developed CPO chiplet products. If the Commission were to adopt a broader market definition encompassing all optical interconnect solutions for data center applications—including 400G and 800G pluggable transceivers, active optical cables, and CPO chiplets—the combined entity's market share would be significantly diluted, likely falling below 20%.
By contrast, the DOJ's preliminary market definition in the U.S. proceeding—"silicon photonics transceiver modules for hyperscale data center interconnects"—is related but not identical to the Commission's definition. The DOJ's definition is somewhat broader in that it encompasses both pluggable silicon photonics transceiver modules and CPO chiplets within a single product market, but it is narrower than a fully inclusive "all optical interconnect" market because it excludes non-silicon-photonics-based technologies (such as indium phosphide transceivers). The divergence between the two agencies' market definitions creates both challenges and opportunities, as discussed in Section VII.
Recommended Approach on Market Definition. We recommend that Halcyon vigorously contest the Commission's narrow CPO-chiplet-only market definition. Our principal arguments should include: (i) supply-side substitutability, as several major pluggable transceiver manufacturers (including Dunmore Industries/Avago, Marlowe & Co., and Intel/Altera) have demonstrated the capability and announced the intention to enter the CPO chiplet market, suggesting that the relevant competitive constraint is broader than current CPO shipments alone; (ii) demand-side chain of substitution, as hyperscale operators frequently evaluate CPO and pluggable solutions in a unified procurement process and make architecture-level decisions based on total cost of ownership; and (iii) the nascent and rapidly evolving nature of the CPO chiplet market, in which market shares based on current revenues are highly unstable and not predictive of future competitive dynamics. We note, however, that the Commission has historically been reluctant to adopt broad market definitions in technology mergers and has frequently defined markets at a product-specific level.
B. Relevant Geographic Market
The Commission's preliminary view is that the relevant geographic market is EEA-wide. This assessment is based on the Commission's observation that pricing, contractual terms, and distribution practices for CPO chiplets and related optical interconnect products are broadly uniform across EEA member states. There are no significant regulatory barriers, tariff differentials, or logistical constraints that would support the delineation of narrower national or sub-regional markets within the EEA.
Halcyon sells its photonics products to European cloud operators and OEMs from its Munich facility and, for certain product lines, from its Singapore fabrication facility (with subsequent importation into the EEA). Vectris supplies European customers from its San Jose, California headquarters through a network of European distribution agreements and through its Cambridge (United Kingdom) engineering and support office. In the wake of Brexit, the United Kingdom is not part of the EEA for purposes of the EUMR analysis, though the Commission's market investigation will likely consider UK-based sales as relevant context.
We do not anticipate significant scope to challenge the geographic market definition at this stage, as an EEA-wide or global market definition would not materially alter the competitive assessment in a manner favorable to Halcyon. The relevant strategic question is product market definition, not geographic market definition.
C. Competitive Assessment — Combined Market Shares
Based on data submitted in the Form CO and supplemented by the Commission's own market investigation during Phase I, the Commission estimates a combined EEA market share of approximately 38% in the supply of CPO chiplets for data center interconnect applications within the EEA. The Commission's market share estimates break down as follows:
The Commission identified at least two other significant competitors in the EEA—Lumitec Optoelectronics (headquartered in Eindhoven, Netherlands) and SiPho Solutions Ltd. (headquartered in Dublin, Ireland)—but expressed concern that the merger would eliminate one of the closest competitive alternatives in the CPO chiplet space. In particular, the Commission's Phase I market investigation reportedly revealed that several major European hyperscale operators and OEMs identified Halcyon and Vectris as their first and second (or second and first) choices in procurement processes for CPO chiplets, suggesting a high degree of competitive proximity between the merging parties.
From an HHI perspective, the pre-merger market—based on the Commission's share estimates—has an HHI of approximately 1,594 (reflecting a moderately concentrated market). The merger would increase the HHI by approximately 690 points (2 × 15 × 23 = 690), resulting in a post-merger HHI of approximately 2,284. Under the Commission's Horizontal Merger Guidelines, a transaction resulting in a post-merger HHI above 2,000 and an HHI delta above 150 gives rise to a presumption of competitive concern. The present transaction significantly exceeds both thresholds, which supports the Commission's decision to proceed to Phase II.
We should note, however, that market share analysis in a nascent and rapidly growing market such as CPO chiplets may be misleading. The CPO chiplet market is expected to grow at 35–40% annually through 2027, and market shares are highly volatile from year to year as new products are introduced and large customer contracts shift between suppliers. We will emphasize this point in our submissions to the Commission.
D. Theories of Harm Identified by the Commission
The Commission's Phase II opening decision identifies three principal theories of competitive harm. Each is discussed in turn.
1. Unilateral Effects (Horizontal Overlap)
The Commission's primary concern is that the merger would eliminate close and significant competition between Halcyon and Vectris in the supply of CPO chiplets within the EEA, thereby enabling the combined entity to profitably raise prices, reduce output, or diminish the quality or pace of innovation in the affected market. This is a standard unilateral effects theory based on the elimination of a close competitive alternative.
The Commission's Phase I market investigation appears to have generated evidence—primarily from customer responses to Commission questionnaires—suggesting that Halcyon and Vectris are perceived by customers as particularly close substitutes. Several hyperscale operators reportedly indicated that they would consider switching between Halcyon's and Vectris's CPO chiplet products in response to a price increase, and that the availability of the other party's product acts as a meaningful competitive constraint. If confirmed through the Phase II investigation, this evidence of closeness of competition would be damaging.
Our counter-arguments on unilateral effects should focus on: (i) the presence of other credible competitors (Lumitec, SiPho Solutions, Dunmore Industries) that would constrain the combined entity post-merger; (ii) the ease and speed of entry and expansion in the CPO chiplet market by well-resourced firms (Intel, Marlowe & Co., and several Chinese semiconductor companies); (iii) the sophistication and countervailing buyer power of the hyperscale cloud operators that constitute the primary customer base; and (iv) the significant merger-specific efficiencies—including the combination of Halcyon's fabrication capabilities with Vectris's design expertise—that would likely be passed through to customers in the form of lower prices and superior products.
2. Customer Foreclosure Risk
The Commission has also raised a vertical/conglomerate concern related to customer foreclosure. Specifically, the Commission is investigating whether the combined entity could leverage Halcyon's fabrication capacity and established relationships with European OEMs, together with Vectris's leading-edge design portfolio and intellectual property, to foreclose rival CPO chiplet suppliers from access to key customer relationships with European hyperscale operators.
The theory appears to be that Halcyon could offer bundled solutions—combining its analog/mixed-signal and power management products with Vectris's CPO chiplets—at favorable terms that competitors, which lack Halcyon's breadth of semiconductor product offerings, could not match. This could lead to competitors being marginalized in the EEA and ultimately exiting the market.
While we view this theory as weaker than the horizontal overlap concern—it is speculative and depends on assumptions about Halcyon's incentives and ability to bundle that may not withstand economic scrutiny—the Commission has shown increasing willingness in recent years to pursue foreclosure theories in technology mergers. We should prepare a robust response, including economic modeling demonstrating that foreclosure would not be profitable for the combined entity.
3. Innovation Concerns
Finally, the Commission has flagged concerns about the potential impact of the merger on innovation in next-generation photonics technologies. Vectris's significant patent portfolio—187 issued U.S. patents and 43 pending applications—represents a substantial share of the intellectual property landscape in silicon photonics and CPO design. The Commission may investigate whether the merger would reduce the combined entity's incentives to invest in research and development, or whether the consolidation of Vectris's patent portfolio under Halcyon's control could impede competitors' ability to innovate.
Innovation theories of harm have been a growing focus of the Commission's merger control practice, particularly in technology-intensive sectors. The Commission's investigation in this area will likely involve an analysis of each party's R&D pipeline, product roadmap, and patent filing activity, as well as an assessment of whether competing firms would retain sufficient ability and incentive to innovate post-merger.
Our defense on innovation should emphasize: (i) the complementary nature of the parties' R&D efforts (Halcyon's process and manufacturing innovation combined with Vectris's design and architecture innovation), which would enhance rather than diminish innovation; (ii) Halcyon's track record of maintaining or increasing R&D spending following prior acquisitions; and (iii) the existence of significant alternative R&D programs at Dunmore Industries, Intel, Marlowe & Co., and a number of well-funded startups.
IV. Expected Phase II Timeline
A. Statutory Deadlines
Under Article 10(3) of the EUMR, the Commission must take a final decision in a Phase II investigation within 90 working days of the date of the opening decision. The opening decision in this case was adopted on October 6, 2023. Counting 90 working days from that date—excluding weekends and Commission holidays—the statutory deadline for a final decision falls on approximately February 26, 2024, though the precise date is subject to the Commission's internal calendar and may shift by one or two days.
However, this statutory deadline is subject to two important potential extensions:
(i) Extension for Commitments. Under Article 10(3), second subparagraph, of the EUMR, if the parties offer commitments during the Phase II process (pursuant to Article 8(2) of the EUMR), the statutory deadline is extended by 15 working days. This extension is automatic upon the submission of commitments and would push the deadline to approximately mid- to late March 2024.
(ii) Clock Stops. Under Article 10(4) of the EUMR, the statutory period may be "stopped" if the Commission has issued an information request (pursuant to Article 11 of the EUMR) and the notifying party has not provided the required information within the prescribed deadline. The clock is stopped from the date of the deadline until the date on which complete and accurate information is provided. Clock stops can add weeks or even months to the Phase II timeline, and have been used with increasing frequency in recent cases. In extreme cases, the Commission may adopt a decision under Article 14 imposing fines for failure to supply information, though this power is rarely exercised.
Taking these potential extensions into account, the realistic timeline for a Phase II decision in this case is late February 2024 (best case, absent clock stops or commitments) to late March or April 2024 (if commitments are offered and/or clock stops occur).
B. Key Procedural Steps in Phase II
The Phase II process involves several key procedural steps, each of which carries specific preparation requirements and deadlines. We summarize these below, together with estimated timing based on our experience with comparable Commission proceedings.
1. Information Requests (RFIs). The Commission's case team will issue formal information requests under Article 11 of the EUMR within the first two to three weeks following the opening decision. We anticipate that the first set of RFIs will be issued by approximately October 23–27, 2023. These requests are expected to be extensive and will cover internal strategic documents, economic data, customer and competitor contact information, and detailed sales data segmented by product, customer, and geographic market. The response deadlines are typically two to four weeks from issuance, though extensions can be negotiated with the case team. Failure to respond within the prescribed deadline may trigger a clock stop.
2. Third-Party Market Investigation. The Commission will conduct a comprehensive market investigation by sending detailed questionnaires to customers, competitors, and other industry participants. This process typically begins within one to two weeks of the Phase II opening and may continue for four to six weeks. The responses received during this investigation will form a critical part of the Commission's evidentiary record. We have limited ability to influence the questionnaire design directly, but we can and should engage with the Commission case team to ensure that the questionnaires accurately describe the market and the parties' products.
3. Statement of Objections (SO). If the Commission's investigation leads it to conclude that the merger would significantly impede effective competition in the EEA—and absent sufficient commitments to address the identified concerns—the Commission will issue a formal Statement of Objections under Article 18 of the EUMR. The SO is a detailed document setting out the Commission's case, including the factual findings, economic analysis, and legal conclusions supporting its preliminary determination. Based on the anticipated Phase II timeline, we expect that an SO, if issued, would be issued in approximately January 2024. The parties have the right to respond to the SO in writing, typically within four to six weeks, and to request access to the Commission's file (subject to confidentiality protections).
4. Oral Hearing. Following the submission of a written response to the SO, the parties may request an oral hearing before the Commission. The hearing is conducted by the Hearing Officer, an independent official within the Commission, and is attended by representatives of DG COMP, the Commissioner's cabinet, and representatives of Member State competition authorities. The oral hearing typically takes place two to four weeks after the SO response deadline and provides the parties with a final opportunity to present their case in person.
5. Advisory Committee Consultation and Final Decision. Before adopting a final decision, the Commission must consult the Advisory Committee on Concentrations, which is composed of representatives of the competition authorities of the EU Member States. This consultation typically occurs in the final weeks before the statutory deadline. The Commission's final decision may take one of several forms: (i) unconditional clearance; (ii) clearance subject to conditions and obligations (commitments); or (iii) prohibition of the concentration.
C. Interaction with Merger Agreement Deadlines
The timing of the Phase II proceeding must be assessed in the context of the Merger Agreement's Outside Date provisions. Under Section 8.1(b)(i) of the Merger Agreement, either party may terminate the agreement if the closing has not occurred on or before March 10, 2024—the date that is 180 days following the signing date of August 10, 2023 (the "Initial Outside Date").
Critically, under Section 8.1(b)(ii) of the Merger Agreement, the Outside Date is subject to an automatic 90-day extension—to June 10, 2024—if, as of the Initial Outside Date, the sole remaining unsatisfied closing condition is the receipt of antitrust and competition approvals under Section 7.1(c) of the Merger Agreement. Given that all other closing conditions (including the Vectris stockholder approval, which was obtained at a special meeting on September 22, 2023) are either already satisfied or are expected to be satisfied well in advance of the Initial Outside Date, the 90-day extension is virtually certain to be triggered.
The expected Phase II decision date of late February to early March 2024 is tight against the Initial Outside Date of March 10, 2024. If the Commission issues an SO in January 2024 and the process proceeds through written responses, an oral hearing, and remedies negotiations, it is plausible that the final decision could extend into March or even April 2024. However, provided the automatic extension is triggered, the Extended Outside Date of June 10, 2024 should provide sufficient cushion.
That said, we must be alert to the risk that the Commission's process could extend beyond even the Extended Outside Date if the case proves particularly contentious, if clock stops are imposed, or if remedies negotiations prove protracted. Termination of the Merger Agreement after the Extended Outside Date would entitle Vectris to receive the reverse break-up fee of $28,000,000 pursuant to Section 8.3(b) of the Merger Agreement.
V. Anticipated Information Requests
A. Scope of Expected RFIs
Based on our experience with Phase II investigations of comparable scope and the specific concerns identified in the Commission's opening decision, we anticipate that the Commission will issue a series of detailed information requests covering the following categories of documents and data:
Market Data. The Commission will seek detailed data on Halcyon's EEA sales of photonics-related products, broken down by product category (CPO chiplets, pluggable transceivers, active optical cables, and any other optical interconnect products), by individual customer, and by year for the period from at least 2019 through the most recent completed quarter. Sales data should include revenues, volumes, average selling prices, and any applicable discounts or rebates. The Commission will also seek corresponding EEA sales data from Vectris, which will need to be coordinated with Vectris's outside counsel, Whitfield, Prager & Loomis LLP, and specifically with Catherine Whitfield, who is leading Vectris's antitrust workstream.
Internal Strategic Documents. The Commission will request production of internal documents that address Halcyon's competitive strategy in the optical interconnect and CPO chiplet markets, including board presentations, management committee materials, strategic planning documents, competitive analyses, product roadmaps, pricing strategies, and any documents analyzing the competitive landscape or identifying competitors. Of particular sensitivity will be any documents prepared in connection with the acquisition decision itself, including investment committee materials, due diligence reports, and synergy analyses, to the extent they discuss competitive dynamics or market share.
Economic Data for Quantitative Analysis. The Commission's economists (within the Chief Economist Team, or "CET") will seek data for quantitative competitive effects analysis, including bidding data, win/loss records, diversion ratio data, and any available data on customer switching patterns. If Halcyon participates in competitive tenders or Request for Proposal ("RFP") processes with EEA hyperscale operators, the Commission will likely request comprehensive tender data for at least the past three to five years.
Customer Correspondence and Contracts. The Commission will seek copies of supply agreements, framework contracts, and significant correspondence with key EEA customers, particularly the major hyperscale cloud operators (including, as applicable, Ridgeway Industries, Northgate Corporation, Crestline Systems, Bramwell Partners LLC, and Meridian Holdings / T-Systems).
R&D and Patent Information. In light of the Commission's innovation concerns, we anticipate requests for detailed information on Halcyon's and Vectris's R&D programs, including R&D budgets, headcount, project lists, and milestone schedules. The Commission may also request a detailed analysis of Vectris's patent portfolio and any licensing arrangements or cross-licensing agreements currently in effect.
B. Document Production Considerations
There is significant overlap between the document production required for the Commission's Phase II RFIs and the production already underway in response to the DOJ's Second Request. A substantial portion of the internal strategic documents, economic data, and customer information being collected and reviewed for the DOJ production will be relevant to the Commission's requests as well. We strongly recommend leveraging the document collection and review work already underway for the U.S. proceeding to the maximum extent possible, both to reduce costs and to accelerate response times.
However, several important considerations warrant attention in managing the parallel productions:
(i) Consistency of Data Submissions. It is critical that the data and factual representations submitted to the Commission are consistent with those submitted to the DOJ. Any material discrepancies—whether in market share calculations, revenue figures, or competitive characterizations—will be identified by the agencies (who will coordinate under bilateral cooperation agreements) and could be used to undermine Halcyon's credibility with both authorities. We recommend that a dedicated data integrity team, led by Derek Okonkwo's M&A team with input from the antitrust team, be established to cross-check all quantitative submissions before filing.
(ii) European Data Privacy Considerations. The transfer of personal data—including employee data and certain categories of customer contact information—from the EEA to the United States is subject to the General Data Protection Regulation (Regulation (EU) 2016/679, "GDPR"). While the recently adopted EU-U.S. Data Privacy Framework (effective July 10, 2023) may provide a lawful basis for certain data transfers, Halcyon's data protection team should be consulted to ensure compliance. Where personal data is included in document productions, appropriate redaction protocols and data processing agreements should be put in place.
(iii) E-discovery Vendor Coordination. We recommend engaging the e-discovery vendors already retained for the DOJ Second Request production—currently Tarrant Solutions and Camberwell Services Inc.—to manage the EU production in parallel. This will facilitate the use of a single document review platform, consistent custodial collections, and shared search term protocols, thereby reducing duplication of effort and cost.
(iv) Privilege Review. Documents produced to the Commission are not subject to the same privilege protections as documents produced in U.S. litigation or to U.S. regulatory agencies. In particular, the EU does not recognize the U.S. attorney-client privilege for in-house counsel communications to the same extent as U.S. law. Under EU law, only communications with external legal counsel admitted to practice in an EU Member State are protected by legal professional privilege (following the Akzo Nobel line of case law). Accordingly, a separate privilege review protocol must be implemented for the Commission production to ensure that documents protected under U.S. privilege are not inadvertently disclosed.
VI. Potential Remedies
If the Commission's Phase II investigation confirms its preliminary competitive concerns, the Commission will expect the parties to offer commitments (remedies) to address those concerns as a condition for clearance. The failure to offer adequate remedies would result in a prohibition decision. Below, we analyze the range of remedies that the Commission may consider.
A. Structural Remedies (Divestitures)
The European Commission has a strong and well-established preference for structural remedies—principally divestitures—over behavioral remedies in merger cases. The Commission's Remedies Notice (2008/C 267/01) states that structural commitments are "preferable" because they "do not require medium or long-term monitoring measures" and "effectively address the competitive concern." This preference is particularly pronounced in horizontal merger cases involving significant overlapping market positions.
In the present case, the most likely structural remedy would be the divestiture of Halcyon's existing EEA-focused CPO chiplet product line or business unit to an approved purchaser. This would involve the transfer of the relevant product technology, manufacturing know-how, customer contracts, personnel, and intellectual property to a buyer that the Commission determines to be a viable, independent competitor in the CPO chiplet market.
Alternatively, the Commission might require the divestiture of Vectris's EEA customer contracts and associated product lines, though this would be more complex given Vectris's fabless model and its reliance on third-party foundries for manufacturing.
A critical consideration is whether a single global divestiture package could be designed to satisfy both the Commission and the DOJ, or whether separate, jurisdiction-specific remedy packages would be required. Calderwood & Harkness has already submitted a preliminary letter to the DOJ (dated September 29, 2023) proposing the divestiture of Halcyon's U.S. silicon photonics product line as a potential remedy to address the DOJ's competitive concerns. If the scope of that divestiture could be expanded to include the EEA-relevant assets and customer relationships, a unified remedy might satisfy both agencies. However, the Commission and the DOJ have different institutional preferences, market definitions, and remedy standards, and it is possible that the Commission would require a remedy specifically tailored to EEA competitive conditions.
Key considerations in designing a structural remedy include:
(i) Scope of the Divestiture. The divested business must be sufficiently comprehensive to operate as a viable, standalone competitor. The Commission's Remedies Notice emphasizes that the divestiture package must include all assets necessary for the purchaser to compete effectively, including technology, equipment, personnel, customer relationships, and intellectual property rights.
(ii) Identification of Suitable Purchasers. The Commission will require that the purchaser be independent of and unrelated to the merging parties, possess the financial resources and industry expertise to compete effectively, and not raise prima facie competition concerns. Potential purchasers might include Lumitec Optoelectronics, SiPho Solutions, or a well-funded private equity or strategic acquirer with a platform investment in photonics.
(iii) Viability and Competitiveness. The Commission will assess whether the divested business can compete effectively on a standalone basis, without continued dependence on the merged entity for technology, supply, or other essential inputs.
(iv) Up-Front Buyer Requirement. In cases where the viability of the divested business as a standalone entity is uncertain, the Commission may impose an "up-front buyer" requirement—that is, the Commission will not grant clearance until the parties have entered into a binding agreement with a Commission-approved purchaser for the divested business. This requirement would extend the timeline for closing by several additional months.
B. Behavioral Remedies
Behavioral remedies are commitments by the merging parties to take or refrain from taking certain actions following the completion of the merger. While the Commission generally views behavioral remedies as inferior to structural remedies, they may be accepted as supplements to a structural remedy or, in exceptional cases, as standalone remedies where the competitive concerns are not primarily structural in nature.
Possible behavioral commitments in this case might include:
•  FRAND licensing of Vectris patents. The parties could commit to licensing certain of Vectris's key silicon photonics patents to EEA-based competitors on fair, reasonable, and non-discriminatory (FRAND) terms, thereby ensuring that the consolidation of the patent portfolio does not impede competitors' ability to innovate and compete.
•  Interoperability commitments. The parties could commit to maintaining open interfaces and interoperability standards for CPO chiplets, ensuring that customers are not locked into proprietary solutions.
•  Supply commitments. The parties could commit to continuing to supply CPO chiplets to key EEA customers on terms no less favorable than pre-merger terms, for a specified period (typically three to five years).
However, given the combined market share of approximately 38% and the horizontal nature of the Commission's primary competitive concern, we assess that behavioral remedies alone would be insufficient to secure clearance. The Commission's track record in recent technology mergers strongly supports this assessment. Behavioral remedies are most likely to be accepted only in combination with a meaningful structural remedy.
C. Prohibition
If no adequate remedies are offered or if the parties' proposed commitments are insufficient to address the Commission's competitive concerns, the Commission has the authority to prohibit the concentration outright under Article 8(3) of the EUMR. A prohibition decision would prevent the closing of the transaction and would effectively terminate the merger process insofar as the EEA is concerned.
Prohibition decisions are relatively rare—the Commission has issued fewer than 30 prohibition decisions since the EUMR came into effect in 1990—but they are not unprecedented, particularly in technology-intensive sectors. Notable recent prohibition decisions include the Commission's decisions in Harborview Group/Alstom (2019), Wieland/Aurubis Rolled Products/Schwermetall (2019), and Marlowe Group/GRAIL (2022, subsequently subject to judicial review). The present case does not, in our preliminary assessment, present the most extreme competitive concerns—the combined share of 38% is significant but does not constitute dominance, and credible competitors exist in the EEA market—but the risk of prohibition is real and must be taken seriously.
Risk Assessment. We estimate the probability of a prohibition decision, absent the offer of meaningful commitments, at approximately 25–35%. This probability would increase materially if: (i) the DOJ files a civil complaint to block the transaction in the United States, which would signal to the Commission that U.S. authorities view the competitive concerns as sufficiently serious to warrant litigation; (ii) the Commission's Phase II market investigation generates strong evidence of competitive harm from customers and competitors; or (iii) the Commission's economic analysis yields high diversion ratios and a significant Gross Upward Pricing Pressure Index ("GUPPI") between the merging parties.
VII. Interaction with Parallel DOJ Proceeding
A. Coordination and Consistency Challenges
The DOJ and the European Commission routinely coordinate their review of parallel merger investigations involving transactions with multi-jurisdictional effects. This coordination occurs under the framework of bilateral cooperation agreements between the United States and the European Union, including the 1991 U.S.-EU Competition Cooperation Agreement and the 1998 Positive Comity Agreement. In practice, coordination involves regular agency-to-agency contacts between the DOJ's investigating team and the Commission's case team, including the sharing of factual information, economic analyses, and assessments of competitive effects—subject to the merging parties granting appropriate confidentiality waivers to both agencies.
It is important that Halcyon authorize appropriate waivers to permit information sharing between the Commission and the DOJ. Such waivers are standard practice and are generally expected by both agencies; failure to authorize waivers could create an adverse inference and impede productive engagement with either authority. At the same time, the waivers should be carefully drafted to maintain Halcyon's strategic control over the narrative presented to each agency. We recommend that the waivers authorize the sharing of factual information and economic data, but expressly exclude the sharing of Halcyon's privileged legal analyses, strategic assessments, and settlement positions.
A significant risk in parallel proceedings is that inconsistent arguments or market definitions presented to the two agencies could be identified and exploited by either authority. For example, if Halcyon argues to the DOJ that the relevant market is broader (encompassing all silicon photonics transceivers) while simultaneously arguing to the Commission that the relevant market is broader still (encompassing all optical interconnect solutions), the Commission may seize upon the narrower DOJ market definition as evidence that even Halcyon acknowledges a product market narrower than the one it advocates before the Commission.
The divergence in market definitions between the two agencies creates a particular need for careful messaging. As noted above, the DOJ's focus is on "silicon photonics transceiver modules for hyperscale data center interconnects" (combined U.S. share of approximately 47%), while the Commission's focus is on "co-packaged optics chiplets for data center interconnect applications" (combined EEA share of approximately 38%). These markets are related—CPO chiplets are a subset of the broader silicon photonics transceiver category—but they are not identical. Halcyon's arguments on market definition should be crafted to maintain internal consistency while addressing the specific analytical frameworks and precedents of each jurisdiction.
B. Sequencing Considerations
The DOJ and Commission proceedings are proceeding on overlapping but not identical timelines. The following sequencing considerations warrant attention:
DOJ Second Request Compliance. Halcyon's compliance with the DOJ's Second Request is ongoing, with significant document collection and production activity currently underway. Based on current projections, Halcyon anticipates certifying substantial compliance with the Second Request no earlier than January 2024. Following certification, the DOJ has a further 30-day period in which it may either: (i) permit the HSR waiting period to expire, clearing the way for closing; (ii) negotiate a consent decree with the parties (potentially involving divestitures or other remedies); or (iii) file a civil antitrust complaint in federal court seeking to enjoin the merger.
Risk of DOJ Litigation. As of the date of this memorandum, the DOJ has not filed a civil complaint, but the risk is material. The DOJ's combined U.S. market share estimate of 47% is significantly higher than the Commission's EEA share estimate of 38%, and the DOJ has been notably aggressive in its enforcement posture under the current administration. If the DOJ files suit to block the transaction, this would have significant spillover effects on the Commission's assessment. The Commission would likely view DOJ litigation as strong evidence of the seriousness of the competitive concerns and would be more inclined to require stringent remedies or to prohibit the concentration outright.
Sequencing Strategy. Conversely, if Halcyon is able to successfully resolve the DOJ's concerns through a negotiated consent decree involving targeted divestitures, this could positively influence the Commission's posture. The Commission has historically shown a willingness to accept remedies that are consistent with—or build upon—remedies accepted by the DOJ or other international competition authorities. A DOJ consent decree would demonstrate that the competitive concerns can be addressed through proportionate remedies without prohibiting the transaction.
Our strategic recommendation is to pursue coordinated remedy discussions with both agencies simultaneously, while preparing for the possibility that the DOJ may not engage constructively on remedies and may instead elect to litigate. The timing of the DOJ's decision on whether to litigate is uncertain but could occur as early as February 2024 (following Halcyon's certification of substantial compliance) or could be delayed further.
C. Impact on Ticking Fee and Financing
The extended timeline resulting from the Phase II investigation has direct financial implications for the transaction's financing structure. The acquisition is being financed in part through a $500,000,000 senior secured term loan facility committed by Meridian Atlantic Bank, N.A. pursuant to a commitment letter dated August 8, 2023 (the "Commitment Letter"). The Commitment Letter provides for a ticking fee of 20 basis points per annum on the undrawn committed amount, commencing 90 days after the date of signing of the Merger Agreement.
The ticking fee commences on November 8, 2023 (90 days after the August 10, 2023 signing date). At 20 basis points on $500 million, the ticking fee amounts to approximately $1,000,000 per annum, or approximately $83,333 per month. If the Phase II process extends through the end of February 2024 (the statutory deadline), total ticking fees from November 8, 2023 through February 28, 2024 would be approximately $305,000. If the process extends further—through the Extended Outside Date of June 10, 2024, for example—total ticking fees could reach approximately $583,000. While these amounts are not individually material in the context of an $800 million transaction, they represent an ongoing cost that compounds the urgency of resolving the regulatory proceedings.
Additionally, the interest rate on the committed term loan facility is Term SOFR plus 225 basis points. In the current interest rate environment—with Term SOFR at approximately 5.30% as of the date of this memorandum—the all-in borrowing cost would be approximately 7.55%. If the Federal Reserve maintains or increases rates during the extended timeline, Halcyon's financing costs could increase further. The Commitment Letter provides for certain "market flex" provisions that could also affect pricing. We recommend that Halcyon's treasury team and Markus Ellinger (CFO) monitor the rate environment closely and consider whether any hedging strategies are appropriate.
VIII. Recommended Strategy
Based on the foregoing analysis, we recommend the following three-phase strategy for navigating the Commission's Phase II investigation and its interaction with the parallel DOJ proceeding.
A. Immediate Actions (Next 2–4 Weeks)
1. Prepare for RFIs. Halcyon should immediately assemble an internal response team, coordinated by Dr. Luisa Hartmann (General Counsel), to gather EEA-specific sales data, internal strategic documents, and competitive analyses that will be responsive to the Commission's anticipated information requests. This effort should leverage the document collection work already underway for the DOJ Second Request to the maximum extent possible. Calderwood & Harkness's antitrust team will provide detailed custodian lists, search term protocols, and production specifications to guide the collection effort.
2. Engage with the Commission Case Team. We recommend requesting a "state-of-play" meeting with the Commission's case team at the earliest available date, ideally within the next two weeks. The purpose of this meeting would be to: (i) understand the Commission's specific concerns in greater detail; (ii) identify the scope and timing of anticipated information requests; (iii) signal Halcyon's willingness to engage constructively and, if appropriate, to explore remedies at an early stage of the Phase II process; and (iv) establish a productive working relationship with the case team. This meeting should be attended by Howard Bellamy (Calderwood & Harkness, Washington) and our Brussels-based co-counsel at Brennan & Tanaka LLP.
3. Coordinate with Vectris Counsel. Calderwood & Harkness should promptly liaise with Whitfield, Prager & Loomis LLP—specifically Douglas Prager, the antitrust partner leading Vectris's regulatory workstream—regarding Vectris's response obligations under the Phase II investigation and the need to ensure consistency between Halcyon's and Vectris's submissions to the Commission. A coordination protocol should be established to govern information sharing between the parties' respective counsel teams, subject to appropriate clean team and confidentiality provisions.
4. Commission Confidentiality Waivers. Calderwood & Harkness will prepare and circulate draft confidentiality waivers authorizing the Commission to share information with the DOJ (and vice versa) in connection with their respective merger investigations. As noted above, the waivers should authorize the sharing of factual information and economic data but should contain appropriate carve-outs to protect privileged legal analyses and strategic assessments.
5. Economic Expert Engagement. If not already engaged, Halcyon should retain a leading economic consultancy with experience before the European Commission to prepare quantitative analyses of competitive effects in the EEA, including diversion ratio analysis, GUPPI calculations, merger simulation modeling, and entry/expansion analysis. We recommend retaining Ridgeline Management Consulting or Ridgeline Advisors for this engagement, given their depth of experience with DG COMP proceedings. The economic experts should begin work immediately, using available sales data and public information, with the understanding that the analysis will be refined as additional data becomes available through the RFI response process.
B. Medium-Term Strategy (4–10 Weeks)
1. Remedy Design. Halcyon's management team, in consultation with Calderwood & Harkness and our economic experts, should develop a comprehensive remedy proposal that could credibly address competitive concerns in both the EEA and the United States. The principal options to be evaluated include: (i) a global divestiture of Halcyon's existing photonics product line (spanning both EEA and U.S. operations); (ii) an EEA-specific divestiture of Halcyon's CPO chiplet business unit, including the relevant technology, personnel, customer contracts, and intellectual property; and (iii) a combination of a targeted structural divestiture supplemented by behavioral commitments (such as FRAND patent licensing and customer supply commitments). The remedy proposal should be designed to preserve the core strategic rationale for the acquisition—Vectris's cutting-edge design expertise—while addressing the competitive overlap that has been identified by regulators.
2. Customer Outreach. Halcyon's commercial team should be coordinated to ensure that key European cloud operator customers are prepared to respond to Commission questionnaires in a manner that is factually accurate and, where appropriate, supportive of the transaction. This outreach should not involve any improper coaching of customer responses—which would be a serious violation of EU merger control rules and could expose Halcyon to sanctions—but should focus on ensuring that customers understand the commercial benefits of the transaction (including improved product quality, broader product portfolio, and enhanced supply chain resilience) and can articulate those benefits when responding to the Commission's inquiries.
3. Third-Party Advocacy. We should identify industry participants, trade associations, and academic experts who may be willing to submit supportive views to the Commission, either in response to Commission questionnaires or through unsolicited submissions. Potential advocates might include downstream customers who stand to benefit from the mer