1032-00005 · Whitfield, Prager & Loomis LLP · Regulatory/Antitrust

letter-doj-proposed-remedies.docx DOCUMENT M&A / Corporate

19 / 36 ← → ✕

Contract analysis Extract to table

PRIVILEGED & CONFIDENTIAL

CALDERWOOD & HARKNESS LLP Attorneys at Law

1333 New Hampshire Avenue NW, Suite 700 Washington, DC 20036

Telephone: (202) 448-7200 Facsimile: (202) 448-7201 www.calderwoodharkness.com

Howard Bellamy Direct Dial: (202) 448-7234

Email: hbellamy@calderwoodharkness.com

October 20, 2023

Via Hand Delivery and Electronic Transmission

Eric J. Dreiband, Esq. Chief, Technology and Digital Platforms Section Antitrust Division United States Department of Justice 450 Fifth Street NW, Suite 7100 Washington, DC 20530

Re: Proposed Acquisition of Vectris Photonics, Inc. by Halcyon Semiconductor Aktiengesellschaft — Hart-Scott-Rodino Filing dated August 18, 2023; Second Request (Civil Investigative Demand) issued September 15, 2023

Dear Mr. Dreiband:

This letter is submitted on behalf of our client, Halcyon Semiconductor Aktiengesellschaft ("Halcyon," "HSAG," or the "Company"), in connection with the above-referenced matter.

1. Introduction and Purpose

I am a Partner in the Antitrust and Competition Practice Group at Calderwood & Harkness LLP, and I write on behalf of Halcyon Semiconductor Aktiengesellschaft in connection with Halcyon's proposed acquisition (the "Transaction") of Vectris Photonics, Inc. ("Vectris"), a Delaware corporation headquartered at 4750 Ridgepoint Drive, Suite 300, San Jose, California 95134. The Transaction is being effected pursuant to the Agreement and Plan of Merger, dated as of August 10, 2023 (the "Merger Agreement"), by and among Halcyon, Halcyon Acquisition Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Halcyon formed for the purpose of consummating the Transaction, and Vectris.

The Transaction is structured as an all-cash reverse triangular merger in which Merger Sub will merge with and into Vectris, with Vectris surviving as a wholly owned subsidiary of Halcyon. The aggregate equity consideration payable to Vectris stockholders is $800,000,000 in cash, without interest, subject to customary adjustments for closing indebtedness, working capital, and transaction expenses as set forth in the Merger Agreement.

The purpose of this letter is to present a proposed structural remedy — specifically, a comprehensive divestiture package — that has been designed to resolve the competitive concerns that the Antitrust Division (the "Division") has identified during its review of the Transaction, including through the Division's staff investigation and in connection with the Second Request (Civil Investigative Demand) issued to Halcyon on September 15, 2023 (the "Second Request"). Halcyon has devoted substantial time and resources to developing a remedy proposal that would fully and effectively address the Division's concerns while preserving the significant pro-competitive benefits of the Transaction.

Halcyon wishes to convey, in the strongest possible terms, its desire to work cooperatively with the Division to achieve timely clearance of the Transaction. Halcyon is committed to addressing competition concerns proactively and in good faith, and the Company views this submission as the beginning of a constructive dialogue with the Division's staff regarding the appropriate scope and terms of any remedy.

We note that this proposal is submitted without prejudice to Halcyon's position — as set forth in detail in Halcyon's White Paper submitted to the Division on October 10, 2023 — that the Transaction as proposed would not substantially lessen competition in any relevant market within the meaning of Section 7 of the Clayton Act, 15 U.S.C. § 18. Halcyon continues to believe that the Division's market definition is unduly narrow and that the Division's competitive effects analysis does not adequately account for the dynamic competitive conditions prevailing in the silicon photonics industry, including rapid technological change, ongoing market entry, and significant countervailing buyer power. Nevertheless, in recognition of the Division's concerns and in the interest of achieving a consensual resolution that permits the Transaction to proceed on a timely basis, Halcyon is prepared to offer the meaningful structural remedy described herein.

2. Background on the Transaction and the Parties

2.1 Halcyon Semiconductor AG

Halcyon Semiconductor Aktiengesellschaft is a publicly traded German stock corporation (Aktiengesellschaft) organized under the laws of the Federal Republic of Germany. The Company is registered in the commercial register (Handelsregister) of the Local Court (Amtsgericht) of Munich under registration number HRB 178254. Halcyon's ordinary shares are listed and traded on the Frankfurt Stock Exchange (ticker symbol: HSAG), and the Company maintains an American Depositary Receipt program with shares traded on the Nasdaq Stock Market (ticker symbol: HCYN).

Halcyon's principal executive offices are located at Halcyon-Platz 1, 81739 München, Germany. The Company's Chief Executive Officer is Dr. Katarina Breuer; its Chief Financial Officer is Markus Ellinger; and its General Counsel is Dr. Luisa Hartmann.

For the fiscal year ended December 31, 2022, Halcyon reported consolidated revenues of approximately €6.8 billion. As of the date of execution of the Merger Agreement, Halcyon's approximate market capitalization was €22.4 billion (based on the closing price of HSAG ordinary shares on the Frankfurt Stock Exchange on August 9, 2023).

Halcyon's core business consists of the design, manufacture, and sale of advanced analog and mixed-signal semiconductors, power management integrated circuits, and radio-frequency components. These products serve a broad range of end markets, including automotive, industrial, telecommunications, and data center infrastructure. Halcyon operates three semiconductor fabrication facilities: two in Germany (Munich and Dresden) and one in Singapore. The Company employs approximately 24,000 people worldwide.

Of particular relevance to the Division's review, Halcyon maintains an existing but relatively smaller U.S. silicon photonics product line. This product line, which Halcyon developed through organic R&D investment beginning in approximately 2017, designs and markets silicon photonics transceiver modules for hyperscale data center interconnect applications. Based on the market definition that the Division has employed during its investigation — namely, the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects — Halcyon estimates that its silicon photonics product line accounts for approximately 19% of that market.

2.2 Vectris Photonics, Inc.

Vectris Photonics, Inc. is a Delaware C-corporation, with the Delaware Secretary of State file number 5918437. Vectris was incorporated in 2013 and is headquartered at 4750 Ridgepoint Drive, Suite 300, San Jose, California 95134.

Vectris was founded by, and continues to be led by, Dr. Anand Raghavan, who serves as the company's Chief Executive Officer. The company's other senior executives include Margaret Sørensen, President and Chief Operating Officer; Julian Tate, Chief Financial Officer; and Rebecca Lau, General Counsel and Secretary.

Vectris is a fabless designer of silicon photonics transceivers and co-packaged optics chiplets for hyperscale data center interconnects. The company does not operate its own fabrication facilities; rather, Vectris contracts with third-party foundries for the manufacture of its photonic integrated circuits and relies on outsourced semiconductor assembly and test providers for packaging and final test. Vectris's competitive strength lies in its cutting-edge silicon photonics design capabilities, its deep relationships with hyperscale cloud operators, and its extensive and growing intellectual property portfolio.

For the fiscal year ended December 31, 2022, Vectris reported revenue of $312 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of $74 million. The company employs approximately 1,450 people, the majority of whom are engaged in research and development, product engineering, and applications support.

Vectris holds 187 issued U.S. patents and has 43 patent applications currently pending before the United States Patent and Trademark Office. This intellectual property covers key innovations in silicon photonics transceiver architecture, optical modulator design, photodetector integration, co-packaged optics chiplet interfaces, and related areas.

Vectris's key customers include three of the top five U.S. hyperscale cloud operators by revenue. Under the Division's market definition, Vectris is estimated to hold approximately 28% of the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects.

2.3 Strategic Rationale for the Transaction

Halcyon's proposed acquisition of Vectris is driven by a compelling strategic logic that would generate substantial pro-competitive benefits. Halcyon brings world-class expertise in analog and mixed-signal semiconductor design, deep fabrication process know-how, and significant manufacturing scale. Vectris, in turn, possesses leading-edge silicon photonics design capabilities and an innovative co-packaged optics development roadmap. The combination of these complementary capabilities would create a vertically integrated platform uniquely positioned to accelerate innovation in the rapidly growing data center interconnect market.

Specifically, the combined entity would be able to integrate Vectris's advanced photonic integrated circuit designs with Halcyon's high-performance analog driver and transimpedance amplifier ICs, resulting in a co-optimized solution that no standalone competitor can match today. This integration would accelerate the development and commercialization of next-generation co-packaged optics, delivering significant performance improvements, power savings, and cost reductions to hyperscale customers. These benefits would inure directly to end consumers in the form of more efficient, higher-bandwidth cloud infrastructure at lower cost.

3. Summary of Competitive Concerns Identified by the Division

Halcyon acknowledges the Division's ongoing investigation of the Transaction and the issuance of the Second Request on September 15, 2023. Through its investigation — including depositions, document productions, third-party interviews with customers and competitors, and the Second Request specifications — the Division has communicated its preliminary competitive concerns to counsel for Halcyon.

Based on Halcyon's understanding of the Division's investigation, the relevant product and geographic market at issue is the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects. Under this market definition, the Division's concern centers on the horizontal overlap created by the combination of Halcyon's and Vectris's competing silicon photonics transceiver module businesses. The parties' combined market share under the Division's theory would be approximately 47%, comprised of Halcyon's estimated 19% share and Vectris's estimated 28% share. The Herfindahl-Hirschman Index ("HHI") increase resulting from the Transaction, under the Division's market definition, would exceed the thresholds that the Division's Merger Guidelines identify as potentially raising significant competitive concerns.

The Division has also indicated a focus on the emerging segment for co-packaged optics chiplets, in which both Halcyon and Vectris are developing next-generation products. Although this segment is nascent and subject to significant ongoing technological development, the Division has expressed concern that the Transaction could reduce the number of future competitors in co-packaged optics and potentially entrench the combined entity's position in that segment.

While Halcyon disagrees with certain material aspects of the Division's market definition and competitive effects analysis — as described at length in Halcyon's White Paper submitted on October 10, 2023 — Halcyon recognizes the seriousness of the Division's concerns and is prepared to offer a meaningful structural remedy to resolve those concerns and facilitate clearance of the Transaction. Halcyon believes the remedy proposal set forth below is fully responsive to the competitive overlap that the Division has identified and is consistent with the Division's longstanding principles governing merger remedies.

4. Proposed Structural Remedy: Divestiture of Halcyon's U.S. Silicon Photonics Product Line

4.1 Overview of the Proposed Divestiture

In order to resolve the Division's competitive concerns, Halcyon proposes to divest its entire existing U.S. silicon photonics product line (hereinafter, the "Divestiture Business") to a purchaser (the "Approved Purchaser") that is acceptable to, and approved by, the Division in advance of the divestiture's consummation.

The proposed divestiture would eliminate in full the horizontal overlap between Halcyon and Vectris that forms the basis of the Division's competitive concerns. Specifically, as a result of the divestiture, the combined Halcyon/Vectris entity would no longer hold Halcyon's pre-merger approximately 19% share of the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects. Following the divestiture, the combined entity would hold only Vectris's pre-existing approximately 28% share — a market position that is unchanged from the pre-merger competitive landscape and that raises no independent competitive concern. At the same time, the Divestiture Business, in the hands of the Approved Purchaser, would continue to operate as an independent competitive force in the market, preserving the pre-merger competitive structure.

This remedy constitutes a "clean sweep" divestiture of the overlapping Halcyon product line. It preserves Vectris's operations entirely intact within the combined entity as Halcyon's go-forward silicon photonics platform, while ensuring that Halcyon's existing silicon photonics business continues to compete effectively under new, independent ownership. This approach is fully consistent with the Division's Merger Remedies Manual and the Division's well-established preference for clean, structural divestitures that restore the competitive conditions that would have existed absent the transaction.

4.2 Scope and Assets Included in the Divestiture Package

The Divestiture Business would consist of all tangible and intangible assets that relate to, or are used or held for use in connection with, Halcyon's U.S. silicon photonics transceiver product line. The specific assets to be included in the Divestiture Business are described below. A preliminary, detailed schedule of these assets is being prepared and will be provided to the Division as Enclosure A under separate cover.

The Divestiture Business would include the following categories of assets:

(a) Product Designs, Specifications, and Technical Documentation. All product designs, specifications, technical documentation, engineering data, design files (including GDSII tape-out files, simulation models, and layout databases), bills of materials, manufacturing process specifications, assembly and test procedures, quality assurance documentation, and related technical information pertaining to Halcyon's silicon photonics transceiver modules and co-packaged optics development programs.

(b) intellectual Property. All patents, patent applications (including provisional applications), trade secrets, proprietary know-how, copyrights, mask work rights, and other intellectual property rights that are exclusively or primarily related to Halcyon's silicon photonics product line. These assets will be identified and carved out from Halcyon's broader intellectual property portfolio pursuant to a detailed schedule to be negotiated with the Division. To the extent any intellectual property is shared between the Divestiture Business and Halcyon's retained businesses (e.g., background analog/mixed-signal IP that is also used in the silicon photonics transceiver product line), Halcyon is prepared to grant the Approved Purchaser a perpetual, irrevocable, royalty-free license to such shared intellectual property, on terms to be agreed with the Division.

(c) Customer Contracts and Relationships. All customer contracts, purchase orders, supply agreements, framework agreements, and customer relationships specific to the silicon photonics product line, including all rights and obligations under such contracts. Halcyon would use commercially reasonable efforts to obtain any necessary consents to assignment of such contracts.

(d) Existing Inventory. All existing inventory of silicon photonics transceiver modules, including finished goods, work-in-process, and raw materials and components dedicated to or allocable to the Divestiture Business, wherever located.

(e) Equipment, Tools, and Test Infrastructure. All equipment, tools, test fixtures, automated test equipment (ATE), laboratory instruments, and other tangible personal property that is dedicated to or primarily used in connection with the Divestiture Business.

(f) Books and Records. All books, records, files, data, correspondence, and documentation pertaining to the Divestiture Business, including financial records, sales records, marketing materials, customer lists, vendor and supplier files, regulatory filings, and product certification records.

Key Personnel. In addition to the foregoing tangible and intangible assets, Halcyon recognizes that the ongoing competitive viability of the Divestiture Business depends in substantial part on the retention of experienced and knowledgeable personnel. Accordingly, Halcyon will identify and make available for transfer to the Approved Purchaser key research and development engineers, sales and business development personnel, product marketing staff, and operational personnel who are associated with the Divestiture Business and whose skills and knowledge are critical to its continued operation. A preliminary list of such key personnel is being prepared and will be provided to the Division as Enclosure B under separate cover. Halcyon is prepared to implement appropriate incentive arrangements — including retention bonuses, stay packages, and assistance with relocation — to encourage the continued employment of such key personnel through the transition and into their employment with the Approved Purchaser.

Transitional Services. Halcyon recognizes that, depending on the identity and existing capabilities of the Approved Purchaser, a period of transitional support may be necessary to ensure that the Divestiture Business can be operated on a standalone basis without disruption to its competitive position. Accordingly, Halcyon is prepared to offer transitional services agreements ("TSAs") providing the Approved Purchaser with manufacturing support (including continued fabrication of silicon photonics components at Halcyon's facilities on a contract basis), information technology and data migration support, and supply chain and procurement assistance, for a period of up to eighteen (18) months following the closing of the divestiture. Such TSAs would be provided at cost and on arms-length terms, and would be structured to facilitate the Approved Purchaser's transition to full independence within the TSA period.

4.3 Excluded Assets

For the avoidance of doubt, the following categories of assets are expressly excluded from the Divestiture Business:

(a) All assets, intellectual property, personnel, and customer relationships of Vectris Photonics, Inc. Vectris's entire business will be retained by the combined entity as Halcyon's go-forward silicon photonics platform.

(b) Halcyon's non-silicon-photonics semiconductor businesses, including without limitation its analog and mixed-signal semiconductor product lines, its power management integrated circuit product lines, and its radio-frequency component product lines, as well as all associated intellectual property, customer relationships, and personnel.

(c) Halcyon's semiconductor fabrication facilities in Munich, Dresden, and Singapore, including all real property, capital equipment, and operational infrastructure associated therewith.

(d) Halcyon's corporate headquarters, shared corporate functions (finance, human resources, legal, investor relations), and general-purpose IT infrastructure.

Halcyon submits that the Divestiture Business is operationally separable from Halcyon's broader semiconductor operations and can be transferred to the Approved Purchaser as a viable, standalone competitive unit. While the Divestiture Business has historically been managed as a product line within Halcyon's Photonics Division, it possesses a dedicated design team, distinct products, an identifiable customer base, and a discrete intellectual property portfolio. With the transitional support described above, the Approved Purchaser would be fully equipped to operate and compete with the Divestiture Business from day one.

5. Requirements for the Approved Purchaser

Consistent with the Division's Merger Remedies Manual and the Division's established practice, Halcyon proposes that the identity of the Approved Purchaser be subject to the Division's prior written approval. The Division's approval should not be unreasonably withheld, and Halcyon commits to working collaboratively with the Division to identify a purchaser that satisfies the Division's requirements.

Halcyon proposes the following criteria for the Approved Purchaser, which are intended to ensure that the Divestiture Business will remain a viable, effective competitor in the relevant market:

(a) Financial Capacity. The Approved Purchaser must possess, or have demonstrable access to, the financial capacity and resources necessary to acquire the Divestiture Business, to invest in its continued development and growth, and to sustain the Divestiture Business through the transition period and beyond. This includes the ability to fund ongoing research and development, working capital requirements, and any capital expenditures necessary to scale the Divestiture Business.

(b) Technical Capability. The Approved Purchaser must possess existing technical capability in the semiconductor or photonics industries, or must present a credible and detailed plan to acquire such capability through the hiring of experienced personnel, engagement of technical consultants, or other means. The Approved Purchaser must be able to demonstrate that it can effectively operate the Divestiture Business and bring its products to market without undue reliance on Halcyon beyond the transitional services period.

(c) No Recreated Competitive Concerns. The Approved Purchaser's own market position and business activities must not be such that the acquisition of the Divestiture Business by the Approved Purchaser would itself create competitive concerns that would replicate or substitute for the anticompetitive effects that the divestiture remedy is designed to address. In other words, the Approved Purchaser should not already hold a market position in silicon photonics transceiver modules that, when combined with the Divestiture Business, would raise concerns analogous to those identified by the Division in the Halcyon/Vectris Transaction.

(d) Independence. The Approved Purchaser must be fully independent of both Halcyon and Vectris. There must be no ongoing affiliation, equity interest, management relationship, financing arrangement, or other control relationship between the Approved Purchaser and either Halcyon or Vectris (or the combined entity) that could compromise the Approved Purchaser's independence or incentives as a competitor.

Halcyon commits to undertake a good-faith process to identify and propose one or more potential Approved Purchasers within a defined time frame. Halcyon proposes that this period be set at ninety (90) days from the execution of a consent decree or other agreement in principle with the Division regarding the remedy. Halcyon has already begun to consider potential purchasers on a preliminary basis and believes there are multiple credible candidates that would satisfy the foregoing criteria.

6. Proposed Timing and Process

Halcyon proposes the following timeline and process for implementation of the divestiture:

(a) Execution of Definitive Divestiture Agreement. Halcyon proposes to identify, propose, and obtain Division approval of an Approved Purchaser, and to negotiate and execute a definitive divestiture agreement (the "Divestiture Agreement") with the Approved Purchaser, within ninety (90) days of the date of any consent decree entered by the Court, or the date of any binding agreement in principle with the Division, whichever is earlier (the "Initial Divestiture Period").

(b) Divestiture Trustee. In the event that Halcyon fails to execute a Divestiture Agreement with a Division-approved purchaser and to complete the divestiture within the Initial Divestiture Period, Halcyon agrees that the Division may appoint a divestiture trustee (the "Divestiture Trustee"), at Halcyon's expense, with the authority and obligation to sell the Divestiture Business to a Division-approved purchaser within an additional sixty (60) days (the "Trustee Divestiture Period"), at no minimum price, subject only to the Division's prior approval of the purchaser. The Divestiture Trustee would have full authority to manage the sale process and to negotiate and execute a Divestiture Agreement on behalf of Halcyon.

(c) Coordination with Merger Closing. The closing of the divestiture would be structured as a condition to, or would occur concurrently with, the closing of the Halcyon/Vectris Merger. This structure ensures that at no point will the combined entity hold both the Vectris business and the Divestiture Business simultaneously in a manner that is inconsistent with the competitive objectives of the remedy.

(d) Merger Agreement Timeline. The Merger Agreement provides for an outside date for the closing of the Halcyon/Vectris Merger of March 10, 2024 (i.e., 180 days from the date of signing on August 10, 2023), with one automatic ninety (90) day extension to June 10, 2024 in the event that antitrust regulatory approvals are the sole unsatisfied condition to closing. This contractual timeline provides ample runway for the completion of the remedy process described herein. Halcyon is confident that, working cooperatively with the Division, the divestiture can be identified, approved, negotiated, and consummated well within this period.

Halcyon is prepared to hold the Divestiture Business separate from the Vectris operations pending completion of the divestiture and to preserve the competitive viability of the Divestiture Business through appropriate hold-separate commitments, as described in Section 7 below.

7. Hold-Separate and Preservation Commitments

Pending the completion of the divestiture to the Approved Purchaser, Halcyon commits to maintain and preserve the Divestiture Business as a viable, competitive, and ongoing enterprise. Specifically, Halcyon proposes the following hold-separate and preservation commitments:

(a) Maintenance as a Going Concern. Halcyon will maintain the Divestiture Business as a going concern, operating it in the ordinary course of business consistent with past practice. Halcyon will use commercially reasonable efforts to maintain the Divestiture Business's competitive position, customer relationships, workforce, and product development roadmap.

(b) No Diminution of Assets. Halcyon will not transfer, sell, encumber, pledge, hypothecate, or otherwise diminish or dispose of any of the assets of the Divestiture Business, except in the ordinary course of business (e.g., sales of inventory to customers in the normal course), without the prior written consent of the Division.

(c) Customer Preservation. Halcyon will take no action, directly or indirectly, to discourage, deter, or prevent customers from continuing to purchase products from, or otherwise do business with, the Divestiture Business. Halcyon will not solicit or encourage customers of the Divestiture Business to transfer their business to the Vectris product line or any other Halcyon product line.

(d) Personnel Preservation. Halcyon will refrain from soliciting, recruiting, or hiring any key personnel of the Divestiture Business to other positions within Halcyon or Vectris. Halcyon will take commercially reasonable steps to retain key personnel of the Divestiture Business and to maintain employee morale and engagement during the hold-separate period.

(e) Hold-Separate Manager. Halcyon will appoint an internal hold-separate manager (the "Hold-Separate Manager"), subject to the Division's approval, who will be responsible for the day-to-day management and oversight of the Divestiture Business during the hold-separate period. The Hold-Separate Manager will report directly to Halcyon's General Counsel (or such other senior officer as the Division may approve) and will be responsible for ensuring that there is no commingling of confidential business information between the Divestiture Business and the retained Halcyon/Vectris operations. The Hold-Separate Manager will implement appropriate informational firewalls and access controls to prevent the unauthorized flow of competitively sensitive information.

(f) Reporting. Halcyon will provide the Division with periodic reports (at intervals to be agreed) on the status and performance of the Divestiture Business during the hold-separate period, including financial results, personnel changes, customer activity, and any material developments.

Halcyon is prepared to discuss the form and terms of a proposed hold-separate stipulation and order with the Division's staff. A proposed form of such stipulation is referenced as Enclosure C hereto and will be provided to the Division for discussion at the appropriate time.

8. Sufficiency of the Proposed Remedy

Halcyon respectfully submits that the proposed divestiture fully and effectively addresses the competitive overlap that constitutes the basis of the Division's concerns regarding the Transaction. The remedy satisfies the Division's established principles for merger remedies in several important respects.

First, the divestiture eliminates the entirety of the horizontal overlap between Halcyon and Vectris in the relevant market. Following consummation of the remedy, the combined Halcyon/Vectris entity would hold only Vectris's pre-existing approximately 28% share of the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects. This share is identical to Vectris's pre-merger competitive position and is not increased or enhanced in any way by the Transaction. The Transaction, as remedied, does not increase concentration in the relevant market.

Second, the divestiture ensures that the Approved Purchaser steps directly into Halcyon's pre-merger approximately 19% market position, maintaining — and potentially strengthening — a competitive alternative in the market. Because the Divestiture Business includes all of the assets, intellectual property, customer relationships, key personnel, and operational capabilities necessary to compete effectively, the Approved Purchaser would be positioned from the outset to continue serving customers and developing new products without interruption.

Third, the relevant market would remain at least as competitive post-Transaction (with the remedy) as it is pre-Transaction. The same number of significant competitors would be present in the market, and the competitive dynamics would be preserved. Indeed, depending on the identity and resources of the Approved Purchaser, the Divestiture Business could become an even more effective competitor under new ownership, particularly if the Approved Purchaser brings complementary resources, distribution capabilities, or manufacturing capacity.

Fourth, the proposed remedy is structural, not behavioral, in nature. The Division has consistently and correctly expressed a strong preference for structural remedies in horizontal merger cases, recognizing that structural remedies are self-executing, do not require ongoing government monitoring or enforcement, and restore competitive market conditions in a durable manner. The proposed divestiture is fully consistent with this principle.

Fifth, the dynamic and rapidly growing nature of the silicon photonics market further supports the sufficiency of the proposed remedy. The silicon photonics industry is characterized by rapid technological innovation, frequent product generation transitions, ongoing entry by well-financed competitors (including established semiconductor companies and well-funded startups), and the exercise of significant buyer power by sophisticated hyperscale purchasers. These market dynamics provide additional competitive discipline and further reduce the likelihood that the remedied Transaction would result in any anticompetitive effects.

Finally, we respectfully direct the Division's attention to the pro-competitive efficiency arguments presented in Halcyon's White Paper submitted on October 10, 2023. As detailed therein, the Transaction would generate substantial, verifiable, merger-specific efficiencies in research and development (through the integration of Vectris's photonic design expertise with Halcyon's analog/mixed-signal capabilities), in manufacturing (through the insourcing of Vectris's production to Halcyon's fabrication facilities, yielding significant cost savings and improved supply chain security), and in product development (through the acceleration of next-generation co-packaged optics programs). All of these efficiency benefits would be fully preserved following the proposed divestiture, as they arise from the combination of Vectris's business with Halcyon's retained operations, not from the Divestiture Business.

9. Coordination with European Commission Proceedings

Halcyon wishes to inform the Division that a parallel merger control notification was filed with the European Commission on August 25, 2023 pursuant to the EU Merger Regulation (Council Regulation (EC) No 139/2004) (Case M.11247 — Halcyon Semiconductor / Vectris Photonics). On October 6, 2023, the European Commission announced its decision to open a Phase II in-depth investigation into the Transaction, citing preliminary concerns regarding the combined entity's market position in co-packaged optics chiplets in the European Economic Area, where the parties' combined share is estimated at approximately 38%.

Halcyon is prepared to coordinate its remedy proposals across jurisdictions to ensure consistency, workability, and mutual reinforcement. The global nature of the Divestiture Business's operations — including its customer relationships, intellectual property, and product development programs — means that the proposed U.S. divestiture package may address, or at a minimum partially address, the European Commission's concerns as well. Halcyon will keep the Division informed of developments in the EC proceedings and will work to ensure that the respective remedy proposals are compatible and do not create operational conflicts or inconsistencies.

Halcyon's European counsel, Vogel & Partner (Munich), is coordinating closely with Calderwood & Harkness to ensure alignment across jurisdictions. Halcyon is committed to a cooperative, multi-jurisdictional approach to remedy design and welcomes any opportunity for coordination between the Division's staff and the Commission's case team.

10. Confidentiality

Halcyon respectfully requests that this letter, and any information provided by Halcyon in connection with the proposed remedy, be treated as confidential and maintained in accordance with the Division's procedures for the protection of confidential business information. This submission contains sensitive commercial and financial information, proprietary business strategies, and trade secrets of Halcyon and Vectris that, if disclosed, could cause significant competitive harm to both companies.

Halcyon further requests that this submission be treated as exempt from disclosure under the Freedom of Information Act, 5 U.S.C. § 552, under Exemption 4 (confidential commercial or financial information obtained from a person), and Exemption 7(A) (records or information compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement proceedings), to the extent applicable.

In the event that the Division determines not to pursue the remedy approach described herein, Halcyon requests the return or destruction of all confidential materials provided in connection with this submission, to the extent permitted by applicable law and the Division's document retention policies.

11. Conclusion and Request for Meeting

In summary, Halcyon has a strong and genuine interest in resolving the Division's competitive concerns through a negotiated remedy, and the Company believes the comprehensive divestiture package described in this letter provides a fully effective, structural solution. Halcyon is firmly committed to achieving a consensual resolution that permits the Transaction to proceed while preserving the competitive conditions in the relevant market.

Halcyon stands ready to provide any additional information, documents, data, or economic analysis that the Division may require to evaluate the proposed divestiture, including additional detail regarding the scope of the Divestiture Business, the identities of potential Approved Purchasers, the operational separability of the Divestiture Business, and the competitive dynamics of the relevant market.

We respectfully request an in-person meeting with the Division's staff at the earliest convenient date to discuss this proposal in detail and to receive the Division's preliminary feedback. We believe a face-to-face discussion would be the most productive means of advancing the dialogue and identifying any areas in which the proposal may need to be refined or supplemented.

In connection with such a meeting, Halcyon is prepared to make available members of its business leadership team, including Dr. Katarina Breuer, Chief Executive Officer, and Markus Ellinger, Chief Financial Officer, to present on the operational and strategic aspects of the Divestiture Business and to answer any questions the Division's staff may have. In addition, Halcyon's financial advisor, Ridgeline Partners (represented by Nathaniel Cross, Managing Director), is available to present on the financial characteristics of the Divestiture Business, its valuation, and the anticipated market interest from potential purchasers.

I may be reached directly at (202) 448-7234 or by email at hbellamy@calderwoodharkness.com. My colleague Oliver Mackenzie, a Partner in our New York office (599 Lexington Avenue, 38th Floor, New York, NY 10022; direct dial: (212) 530-4100; email: omackenzie@calderwoodharkness.com), is available as an alternative point of contact. The Calderwood & Harkness Washington, DC office may be reached at (202) 448-7200 during normal business hours.

We thank the Division for its consideration of this proposal and look forward to a productive dialogue.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Bellamy Partner, Antitrust & Competition Practice Calderwood & Harkness LLP 1333 New Hampshire Avenue NW, Suite 700 Washington, DC 20036 Telephone: (202) 448-7234

Email: hbellamy@calderwoodharkness.com

On behalf of Halcyon Semiconductor Aktiengesellschaft

cc: (via email)

Dr. Luisa Hartmann, General Counsel, Halcyon Semiconductor Aktiengesellschaft

Dr. Katarina Breuer, Chief Executive Officer, Halcyon Semiconductor Aktiengesellschaft

Oliver Mackenzie, Partner, Calderwood & Harkness LLP, 599 Lexington Avenue, 38th Floor, New York, NY 10022

Derek Okonkwo, Associate, Calderwood & Harkness LLP, 1333 New Hampshire Avenue NW, Suite 700, Washington, DC 20036

Enclosures (referenced herein; to be provided under separate cover):

Enclosure A: Preliminary List of Assets Comprising the Divestiture Business

Enclosure B: List of Key Personnel Associated with the Divestiture Business

Enclosure C: Proposed Form of Hold-Separate Stipulation and Order

PRIVILEGED & CONFIDENTIAL
CALDERWOOD & HARKNESS LLP Attorneys at Law
1333 New Hampshire Avenue NW, Suite 700 Washington, DC 20036
Telephone: (202) 448-7200 Facsimile: (202) 448-7201 www.calderwoodharkness.com
Howard Bellamy Direct Dial: (202) 448-7234
Email: hbellamy@calderwoodharkness.com
October 20, 2023
Via Hand Delivery and Electronic Transmission
Eric J. Dreiband, Esq. Chief, Technology and Digital Platforms Section Antitrust Division United States Department of Justice 450 Fifth Street NW, Suite 7100 Washington, DC 20530
Re: Proposed Acquisition of Vectris Photonics, Inc. by Halcyon Semiconductor Aktiengesellschaft — Hart-Scott-Rodino Filing dated August 18, 2023; Second Request (Civil Investigative Demand) issued September 15, 2023
Dear Mr. Dreiband:
This letter is submitted on behalf of our client, Halcyon Semiconductor Aktiengesellschaft ("Halcyon," "HSAG," or the "Company"), in connection with the above-referenced matter.
1. Introduction and Purpose
I am a Partner in the Antitrust and Competition Practice Group at Calderwood & Harkness LLP, and I write on behalf of Halcyon Semiconductor Aktiengesellschaft in connection with Halcyon's proposed acquisition (the "Transaction") of Vectris Photonics, Inc. ("Vectris"), a Delaware corporation headquartered at 4750 Ridgepoint Drive, Suite 300, San Jose, California 95134. The Transaction is being effected pursuant to the Agreement and Plan of Merger, dated as of August 10, 2023 (the "Merger Agreement"), by and among Halcyon, Halcyon Acquisition Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Halcyon formed for the purpose of consummating the Transaction, and Vectris.
The Transaction is structured as an all-cash reverse triangular merger in which Merger Sub will merge with and into Vectris, with Vectris surviving as a wholly owned subsidiary of Halcyon. The aggregate equity consideration payable to Vectris stockholders is $800,000,000 in cash, without interest, subject to customary adjustments for closing indebtedness, working capital, and transaction expenses as set forth in the Merger Agreement.
The purpose of this letter is to present a proposed structural remedy — specifically, a comprehensive divestiture package — that has been designed to resolve the competitive concerns that the Antitrust Division (the "Division") has identified during its review of the Transaction, including through the Division's staff investigation and in connection with the Second Request (Civil Investigative Demand) issued to Halcyon on September 15, 2023 (the "Second Request"). Halcyon has devoted substantial time and resources to developing a remedy proposal that would fully and effectively address the Division's concerns while preserving the significant pro-competitive benefits of the Transaction.
Halcyon wishes to convey, in the strongest possible terms, its desire to work cooperatively with the Division to achieve timely clearance of the Transaction. Halcyon is committed to addressing competition concerns proactively and in good faith, and the Company views this submission as the beginning of a constructive dialogue with the Division's staff regarding the appropriate scope and terms of any remedy.
We note that this proposal is submitted without prejudice to Halcyon's position — as set forth in detail in Halcyon's White Paper submitted to the Division on October 10, 2023 — that the Transaction as proposed would not substantially lessen competition in any relevant market within the meaning of Section 7 of the Clayton Act, 15 U.S.C. § 18. Halcyon continues to believe that the Division's market definition is unduly narrow and that the Division's competitive effects analysis does not adequately account for the dynamic competitive conditions prevailing in the silicon photonics industry, including rapid technological change, ongoing market entry, and significant countervailing buyer power. Nevertheless, in recognition of the Division's concerns and in the interest of achieving a consensual resolution that permits the Transaction to proceed on a timely basis, Halcyon is prepared to offer the meaningful structural remedy described herein.
2. Background on the Transaction and the Parties
2.1 Halcyon Semiconductor AG
Halcyon Semiconductor Aktiengesellschaft is a publicly traded German stock corporation (Aktiengesellschaft) organized under the laws of the Federal Republic of Germany. The Company is registered in the commercial register (Handelsregister) of the Local Court (Amtsgericht) of Munich under registration number HRB 178254. Halcyon's ordinary shares are listed and traded on the Frankfurt Stock Exchange (ticker symbol: HSAG), and the Company maintains an American Depositary Receipt program with shares traded on the Nasdaq Stock Market (ticker symbol: HCYN).
Halcyon's principal executive offices are located at Halcyon-Platz 1, 81739 München, Germany. The Company's Chief Executive Officer is Dr. Katarina Breuer; its Chief Financial Officer is Markus Ellinger; and its General Counsel is Dr. Luisa Hartmann.
For the fiscal year ended December 31, 2022, Halcyon reported consolidated revenues of approximately €6.8 billion. As of the date of execution of the Merger Agreement, Halcyon's approximate market capitalization was €22.4 billion (based on the closing price of HSAG ordinary shares on the Frankfurt Stock Exchange on August 9, 2023).
Halcyon's core business consists of the design, manufacture, and sale of advanced analog and mixed-signal semiconductors, power management integrated circuits, and radio-frequency components. These products serve a broad range of end markets, including automotive, industrial, telecommunications, and data center infrastructure. Halcyon operates three semiconductor fabrication facilities: two in Germany (Munich and Dresden) and one in Singapore. The Company employs approximately 24,000 people worldwide.
Of particular relevance to the Division's review, Halcyon maintains an existing but relatively smaller U.S. silicon photonics product line. This product line, which Halcyon developed through organic R&D investment beginning in approximately 2017, designs and markets silicon photonics transceiver modules for hyperscale data center interconnect applications. Based on the market definition that the Division has employed during its investigation — namely, the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects — Halcyon estimates that its silicon photonics product line accounts for approximately 19% of that market.
2.2 Vectris Photonics, Inc.
Vectris Photonics, Inc. is a Delaware C-corporation, with the Delaware Secretary of State file number 5918437. Vectris was incorporated in 2013 and is headquartered at 4750 Ridgepoint Drive, Suite 300, San Jose, California 95134.
Vectris was founded by, and continues to be led by, Dr. Anand Raghavan, who serves as the company's Chief Executive Officer. The company's other senior executives include Margaret Sørensen, President and Chief Operating Officer; Julian Tate, Chief Financial Officer; and Rebecca Lau, General Counsel and Secretary.
Vectris is a fabless designer of silicon photonics transceivers and co-packaged optics chiplets for hyperscale data center interconnects. The company does not operate its own fabrication facilities; rather, Vectris contracts with third-party foundries for the manufacture of its photonic integrated circuits and relies on outsourced semiconductor assembly and test providers for packaging and final test. Vectris's competitive strength lies in its cutting-edge silicon photonics design capabilities, its deep relationships with hyperscale cloud operators, and its extensive and growing intellectual property portfolio.
For the fiscal year ended December 31, 2022, Vectris reported revenue of $312 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of $74 million. The company employs approximately 1,450 people, the majority of whom are engaged in research and development, product engineering, and applications support.
Vectris holds 187 issued U.S. patents and has 43 patent applications currently pending before the United States Patent and Trademark Office. This intellectual property covers key innovations in silicon photonics transceiver architecture, optical modulator design, photodetector integration, co-packaged optics chiplet interfaces, and related areas.
Vectris's key customers include three of the top five U.S. hyperscale cloud operators by revenue. Under the Division's market definition, Vectris is estimated to hold approximately 28% of the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects.
2.3 Strategic Rationale for the Transaction
Halcyon's proposed acquisition of Vectris is driven by a compelling strategic logic that would generate substantial pro-competitive benefits. Halcyon brings world-class expertise in analog and mixed-signal semiconductor design, deep fabrication process know-how, and significant manufacturing scale. Vectris, in turn, possesses leading-edge silicon photonics design capabilities and an innovative co-packaged optics development roadmap. The combination of these complementary capabilities would create a vertically integrated platform uniquely positioned to accelerate innovation in the rapidly growing data center interconnect market.
Specifically, the combined entity would be able to integrate Vectris's advanced photonic integrated circuit designs with Halcyon's high-performance analog driver and transimpedance amplifier ICs, resulting in a co-optimized solution that no standalone competitor can match today. This integration would accelerate the development and commercialization of next-generation co-packaged optics, delivering significant performance improvements, power savings, and cost reductions to hyperscale customers. These benefits would inure directly to end consumers in the form of more efficient, higher-bandwidth cloud infrastructure at lower cost.
3. Summary of Competitive Concerns Identified by the Division
Halcyon acknowledges the Division's ongoing investigation of the Transaction and the issuance of the Second Request on September 15, 2023. Through its investigation — including depositions, document productions, third-party interviews with customers and competitors, and the Second Request specifications — the Division has communicated its preliminary competitive concerns to counsel for Halcyon.
Based on Halcyon's understanding of the Division's investigation, the relevant product and geographic market at issue is the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects. Under this market definition, the Division's concern centers on the horizontal overlap created by the combination of Halcyon's and Vectris's competing silicon photonics transceiver module businesses. The parties' combined market share under the Division's theory would be approximately 47%, comprised of Halcyon's estimated 19% share and Vectris's estimated 28% share. The Herfindahl-Hirschman Index ("HHI") increase resulting from the Transaction, under the Division's market definition, would exceed the thresholds that the Division's Merger Guidelines identify as potentially raising significant competitive concerns.
The Division has also indicated a focus on the emerging segment for co-packaged optics chiplets, in which both Halcyon and Vectris are developing next-generation products. Although this segment is nascent and subject to significant ongoing technological development, the Division has expressed concern that the Transaction could reduce the number of future competitors in co-packaged optics and potentially entrench the combined entity's position in that segment.
While Halcyon disagrees with certain material aspects of the Division's market definition and competitive effects analysis — as described at length in Halcyon's White Paper submitted on October 10, 2023 — Halcyon recognizes the seriousness of the Division's concerns and is prepared to offer a meaningful structural remedy to resolve those concerns and facilitate clearance of the Transaction. Halcyon believes the remedy proposal set forth below is fully responsive to the competitive overlap that the Division has identified and is consistent with the Division's longstanding principles governing merger remedies.
4. Proposed Structural Remedy: Divestiture of Halcyon's U.S. Silicon Photonics Product Line
4.1 Overview of the Proposed Divestiture
In order to resolve the Division's competitive concerns, Halcyon proposes to divest its entire existing U.S. silicon photonics product line (hereinafter, the "Divestiture Business") to a purchaser (the "Approved Purchaser") that is acceptable to, and approved by, the Division in advance of the divestiture's consummation.
The proposed divestiture would eliminate in full the horizontal overlap between Halcyon and Vectris that forms the basis of the Division's competitive concerns. Specifically, as a result of the divestiture, the combined Halcyon/Vectris entity would no longer hold Halcyon's pre-merger approximately 19% share of the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects. Following the divestiture, the combined entity would hold only Vectris's pre-existing approximately 28% share — a market position that is unchanged from the pre-merger competitive landscape and that raises no independent competitive concern. At the same time, the Divestiture Business, in the hands of the Approved Purchaser, would continue to operate as an independent competitive force in the market, preserving the pre-merger competitive structure.
This remedy constitutes a "clean sweep" divestiture of the overlapping Halcyon product line. It preserves Vectris's operations entirely intact within the combined entity as Halcyon's go-forward silicon photonics platform, while ensuring that Halcyon's existing silicon photonics business continues to compete effectively under new, independent ownership. This approach is fully consistent with the Division's Merger Remedies Manual and the Division's well-established preference for clean, structural divestitures that restore the competitive conditions that would have existed absent the transaction.
4.2 Scope and Assets Included in the Divestiture Package
The Divestiture Business would consist of all tangible and intangible assets that relate to, or are used or held for use in connection with, Halcyon's U.S. silicon photonics transceiver product line. The specific assets to be included in the Divestiture Business are described below. A preliminary, detailed schedule of these assets is being prepared and will be provided to the Division as Enclosure A under separate cover.
The Divestiture Business would include the following categories of assets:
(a) Product Designs, Specifications, and Technical Documentation. All product designs, specifications, technical documentation, engineering data, design files (including GDSII tape-out files, simulation models, and layout databases), bills of materials, manufacturing process specifications, assembly and test procedures, quality assurance documentation, and related technical information pertaining to Halcyon's silicon photonics transceiver modules and co-packaged optics development programs.
(b) intellectual Property. All patents, patent applications (including provisional applications), trade secrets, proprietary know-how, copyrights, mask work rights, and other intellectual property rights that are exclusively or primarily related to Halcyon's silicon photonics product line. These assets will be identified and carved out from Halcyon's broader intellectual property portfolio pursuant to a detailed schedule to be negotiated with the Division. To the extent any intellectual property is shared between the Divestiture Business and Halcyon's retained businesses (e.g., background analog/mixed-signal IP that is also used in the silicon photonics transceiver product line), Halcyon is prepared to grant the Approved Purchaser a perpetual, irrevocable, royalty-free license to such shared intellectual property, on terms to be agreed with the Division.
(c) Customer Contracts and Relationships. All customer contracts, purchase orders, supply agreements, framework agreements, and customer relationships specific to the silicon photonics product line, including all rights and obligations under such contracts. Halcyon would use commercially reasonable efforts to obtain any necessary consents to assignment of such contracts.
(d) Existing Inventory. All existing inventory of silicon photonics transceiver modules, including finished goods, work-in-process, and raw materials and components dedicated to or allocable to the Divestiture Business, wherever located.
(e) Equipment, Tools, and Test Infrastructure. All equipment, tools, test fixtures, automated test equipment (ATE), laboratory instruments, and other tangible personal property that is dedicated to or primarily used in connection with the Divestiture Business.
(f) Books and Records. All books, records, files, data, correspondence, and documentation pertaining to the Divestiture Business, including financial records, sales records, marketing materials, customer lists, vendor and supplier files, regulatory filings, and product certification records.
Key Personnel. In addition to the foregoing tangible and intangible assets, Halcyon recognizes that the ongoing competitive viability of the Divestiture Business depends in substantial part on the retention of experienced and knowledgeable personnel. Accordingly, Halcyon will identify and make available for transfer to the Approved Purchaser key research and development engineers, sales and business development personnel, product marketing staff, and operational personnel who are associated with the Divestiture Business and whose skills and knowledge are critical to its continued operation. A preliminary list of such key personnel is being prepared and will be provided to the Division as Enclosure B under separate cover. Halcyon is prepared to implement appropriate incentive arrangements — including retention bonuses, stay packages, and assistance with relocation — to encourage the continued employment of such key personnel through the transition and into their employment with the Approved Purchaser.
Transitional Services. Halcyon recognizes that, depending on the identity and existing capabilities of the Approved Purchaser, a period of transitional support may be necessary to ensure that the Divestiture Business can be operated on a standalone basis without disruption to its competitive position. Accordingly, Halcyon is prepared to offer transitional services agreements ("TSAs") providing the Approved Purchaser with manufacturing support (including continued fabrication of silicon photonics components at Halcyon's facilities on a contract basis), information technology and data migration support, and supply chain and procurement assistance, for a period of up to eighteen (18) months following the closing of the divestiture. Such TSAs would be provided at cost and on arms-length terms, and would be structured to facilitate the Approved Purchaser's transition to full independence within the TSA period.
4.3 Excluded Assets
For the avoidance of doubt, the following categories of assets are expressly excluded from the Divestiture Business:
(a) All assets, intellectual property, personnel, and customer relationships of Vectris Photonics, Inc. Vectris's entire business will be retained by the combined entity as Halcyon's go-forward silicon photonics platform.
(b) Halcyon's non-silicon-photonics semiconductor businesses, including without limitation its analog and mixed-signal semiconductor product lines, its power management integrated circuit product lines, and its radio-frequency component product lines, as well as all associated intellectual property, customer relationships, and personnel.
(c) Halcyon's semiconductor fabrication facilities in Munich, Dresden, and Singapore, including all real property, capital equipment, and operational infrastructure associated therewith.
(d) Halcyon's corporate headquarters, shared corporate functions (finance, human resources, legal, investor relations), and general-purpose IT infrastructure.
Halcyon submits that the Divestiture Business is operationally separable from Halcyon's broader semiconductor operations and can be transferred to the Approved Purchaser as a viable, standalone competitive unit. While the Divestiture Business has historically been managed as a product line within Halcyon's Photonics Division, it possesses a dedicated design team, distinct products, an identifiable customer base, and a discrete intellectual property portfolio. With the transitional support described above, the Approved Purchaser would be fully equipped to operate and compete with the Divestiture Business from day one.
5. Requirements for the Approved Purchaser
Consistent with the Division's Merger Remedies Manual and the Division's established practice, Halcyon proposes that the identity of the Approved Purchaser be subject to the Division's prior written approval. The Division's approval should not be unreasonably withheld, and Halcyon commits to working collaboratively with the Division to identify a purchaser that satisfies the Division's requirements.
Halcyon proposes the following criteria for the Approved Purchaser, which are intended to ensure that the Divestiture Business will remain a viable, effective competitor in the relevant market:
(a) Financial Capacity. The Approved Purchaser must possess, or have demonstrable access to, the financial capacity and resources necessary to acquire the Divestiture Business, to invest in its continued development and growth, and to sustain the Divestiture Business through the transition period and beyond. This includes the ability to fund ongoing research and development, working capital requirements, and any capital expenditures necessary to scale the Divestiture Business.
(b) Technical Capability. The Approved Purchaser must possess existing technical capability in the semiconductor or photonics industries, or must present a credible and detailed plan to acquire such capability through the hiring of experienced personnel, engagement of technical consultants, or other means. The Approved Purchaser must be able to demonstrate that it can effectively operate the Divestiture Business and bring its products to market without undue reliance on Halcyon beyond the transitional services period.
(c) No Recreated Competitive Concerns. The Approved Purchaser's own market position and business activities must not be such that the acquisition of the Divestiture Business by the Approved Purchaser would itself create competitive concerns that would replicate or substitute for the anticompetitive effects that the divestiture remedy is designed to address. In other words, the Approved Purchaser should not already hold a market position in silicon photonics transceiver modules that, when combined with the Divestiture Business, would raise concerns analogous to those identified by the Division in the Halcyon/Vectris Transaction.
(d) Independence. The Approved Purchaser must be fully independent of both Halcyon and Vectris. There must be no ongoing affiliation, equity interest, management relationship, financing arrangement, or other control relationship between the Approved Purchaser and either Halcyon or Vectris (or the combined entity) that could compromise the Approved Purchaser's independence or incentives as a competitor.
Halcyon commits to undertake a good-faith process to identify and propose one or more potential Approved Purchasers within a defined time frame. Halcyon proposes that this period be set at ninety (90) days from the execution of a consent decree or other agreement in principle with the Division regarding the remedy. Halcyon has already begun to consider potential purchasers on a preliminary basis and believes there are multiple credible candidates that would satisfy the foregoing criteria.
6. Proposed Timing and Process
Halcyon proposes the following timeline and process for implementation of the divestiture:
(a) Execution of Definitive Divestiture Agreement. Halcyon proposes to identify, propose, and obtain Division approval of an Approved Purchaser, and to negotiate and execute a definitive divestiture agreement (the "Divestiture Agreement") with the Approved Purchaser, within ninety (90) days of the date of any consent decree entered by the Court, or the date of any binding agreement in principle with the Division, whichever is earlier (the "Initial Divestiture Period").
(b) Divestiture Trustee. In the event that Halcyon fails to execute a Divestiture Agreement with a Division-approved purchaser and to complete the divestiture within the Initial Divestiture Period, Halcyon agrees that the Division may appoint a divestiture trustee (the "Divestiture Trustee"), at Halcyon's expense, with the authority and obligation to sell the Divestiture Business to a Division-approved purchaser within an additional sixty (60) days (the "Trustee Divestiture Period"), at no minimum price, subject only to the Division's prior approval of the purchaser. The Divestiture Trustee would have full authority to manage the sale process and to negotiate and execute a Divestiture Agreement on behalf of Halcyon.
(c) Coordination with Merger Closing. The closing of the divestiture would be structured as a condition to, or would occur concurrently with, the closing of the Halcyon/Vectris Merger. This structure ensures that at no point will the combined entity hold both the Vectris business and the Divestiture Business simultaneously in a manner that is inconsistent with the competitive objectives of the remedy.
(d) Merger Agreement Timeline. The Merger Agreement provides for an outside date for the closing of the Halcyon/Vectris Merger of March 10, 2024 (i.e., 180 days from the date of signing on August 10, 2023), with one automatic ninety (90) day extension to June 10, 2024 in the event that antitrust regulatory approvals are the sole unsatisfied condition to closing. This contractual timeline provides ample runway for the completion of the remedy process described herein. Halcyon is confident that, working cooperatively with the Division, the divestiture can be identified, approved, negotiated, and consummated well within this period.
Halcyon is prepared to hold the Divestiture Business separate from the Vectris operations pending completion of the divestiture and to preserve the competitive viability of the Divestiture Business through appropriate hold-separate commitments, as described in Section 7 below.
7. Hold-Separate and Preservation Commitments
Pending the completion of the divestiture to the Approved Purchaser, Halcyon commits to maintain and preserve the Divestiture Business as a viable, competitive, and ongoing enterprise. Specifically, Halcyon proposes the following hold-separate and preservation commitments:
(a) Maintenance as a Going Concern. Halcyon will maintain the Divestiture Business as a going concern, operating it in the ordinary course of business consistent with past practice. Halcyon will use commercially reasonable efforts to maintain the Divestiture Business's competitive position, customer relationships, workforce, and product development roadmap.
(b) No Diminution of Assets. Halcyon will not transfer, sell, encumber, pledge, hypothecate, or otherwise diminish or dispose of any of the assets of the Divestiture Business, except in the ordinary course of business (e.g., sales of inventory to customers in the normal course), without the prior written consent of the Division.
(c) Customer Preservation. Halcyon will take no action, directly or indirectly, to discourage, deter, or prevent customers from continuing to purchase products from, or otherwise do business with, the Divestiture Business. Halcyon will not solicit or encourage customers of the Divestiture Business to transfer their business to the Vectris product line or any other Halcyon product line.
(d) Personnel Preservation. Halcyon will refrain from soliciting, recruiting, or hiring any key personnel of the Divestiture Business to other positions within Halcyon or Vectris. Halcyon will take commercially reasonable steps to retain key personnel of the Divestiture Business and to maintain employee morale and engagement during the hold-separate period.
(e) Hold-Separate Manager. Halcyon will appoint an internal hold-separate manager (the "Hold-Separate Manager"), subject to the Division's approval, who will be responsible for the day-to-day management and oversight of the Divestiture Business during the hold-separate period. The Hold-Separate Manager will report directly to Halcyon's General Counsel (or such other senior officer as the Division may approve) and will be responsible for ensuring that there is no commingling of confidential business information between the Divestiture Business and the retained Halcyon/Vectris operations. The Hold-Separate Manager will implement appropriate informational firewalls and access controls to prevent the unauthorized flow of competitively sensitive information.
(f) Reporting. Halcyon will provide the Division with periodic reports (at intervals to be agreed) on the status and performance of the Divestiture Business during the hold-separate period, including financial results, personnel changes, customer activity, and any material developments.
Halcyon is prepared to discuss the form and terms of a proposed hold-separate stipulation and order with the Division's staff. A proposed form of such stipulation is referenced as Enclosure C hereto and will be provided to the Division for discussion at the appropriate time.
8. Sufficiency of the Proposed Remedy
Halcyon respectfully submits that the proposed divestiture fully and effectively addresses the competitive overlap that constitutes the basis of the Division's concerns regarding the Transaction. The remedy satisfies the Division's established principles for merger remedies in several important respects.
First, the divestiture eliminates the entirety of the horizontal overlap between Halcyon and Vectris in the relevant market. Following consummation of the remedy, the combined Halcyon/Vectris entity would hold only Vectris's pre-existing approximately 28% share of the U.S. market for silicon photonics transceiver modules for hyperscale data center interconnects. This share is identical to Vectris's pre-merger competitive position and is not increased or enhanced in any way by the Transaction. The Transaction, as remedied, does not increase concentration in the relevant market.
Second, the divestiture ensures that the Approved Purchaser steps directly into Halcyon's pre-merger approximately 19% market position, maintaining — and potentially strengthening — a competitive alternative in the market. Because the Divestiture Business includes all of the assets, intellectual property, customer relationships, key personnel, and operational capabilities necessary to compete effectively, the Approved Purchaser would be positioned from the outset to continue serving customers and developing new products without interruption.
Third, the relevant market would remain at least as competitive post-Transaction (with the remedy) as it is pre-Transaction. The same number of significant competitors would be present in the market, and the competitive dynamics would be preserved. Indeed, depending on the identity and resources of the Approved Purchaser, the Divestiture Business could become an even more effective competitor under new ownership, particularly if the Approved Purchaser brings complementary resources, distribution capabilities, or manufacturing capacity.
Fourth, the proposed remedy is structural, not behavioral, in nature. The Division has consistently and correctly expressed a strong preference for structural remedies in horizontal merger cases, recognizing that structural remedies are self-executing, do not require ongoing government monitoring or enforcement, and restore competitive market conditions in a durable manner. The proposed divestiture is fully consistent with this principle.
Fifth, the dynamic and rapidly growing nature of the silicon photonics market further supports the sufficiency of the proposed remedy. The silicon photonics industry is characterized by rapid technological innovation, frequent product generation transitions, ongoing entry by well-financed competitors (including established semiconductor companies and well-funded startups), and the exercise of significant buyer power by sophisticated hyperscale purchasers. These market dynamics provide additional competitive discipline and further reduce the likelihood that the remedied Transaction would result in any anticompetitive effects.
Finally, we respectfully direct the Division's attention to the pro-competitive efficiency arguments presented in Halcyon's White Paper submitted on October 10, 2023. As detailed therein, the Transaction would generate substantial, verifiable, merger-specific efficiencies in research and development (through the integration of Vectris's photonic design expertise with Halcyon's analog/mixed-signal capabilities), in manufacturing (through the insourcing of Vectris's production to Halcyon's fabrication facilities, yielding significant cost savings and improved supply chain security), and in product development (through the acceleration of next-generation co-packaged optics programs). All of these efficiency benefits would be fully preserved following the proposed divestiture, as they arise from the combination of Vectris's business with Halcyon's retained operations, not from the Divestiture Business.
9. Coordination with European Commission Proceedings
Halcyon wishes to inform the Division that a parallel merger control notification was filed with the European Commission on August 25, 2023 pursuant to the EU Merger Regulation (Council Regulation (EC) No 139/2004) (Case M.11247 — Halcyon Semiconductor / Vectris Photonics). On October 6, 2023, the European Commission announced its decision to open a Phase II in-depth investigation into the Transaction, citing preliminary concerns regarding the combined entity's market position in co-packaged optics chiplets in the European Economic Area, where the parties' combined share is estimated at approximately 38%.
Halcyon is prepared to coordinate its remedy proposals across jurisdictions to ensure consistency, workability, and mutual reinforcement. The global nature of the Divestiture Business's operations — including its customer relationships, intellectual property, and product development programs — means that the proposed U.S. divestiture package may address, or at a minimum partially address, the European Commission's concerns as well. Halcyon will keep the Division informed of developments in the EC proceedings and will work to ensure that the respective remedy proposals are compatible and do not create operational conflicts or inconsistencies.
Halcyon's European counsel, Vogel & Partner (Munich), is coordinating closely with Calderwood & Harkness to ensure alignment across jurisdictions. Halcyon is committed to a cooperative, multi-jurisdictional approach to remedy design and welcomes any opportunity for coordination between the Division's staff and the Commission's case team.
10. Confidentiality
Halcyon respectfully requests that this letter, and any information provided by Halcyon in connection with the proposed remedy, be treated as confidential and maintained in accordance with the Division's procedures for the protection of confidential business information. This submission contains sensitive commercial and financial information, proprietary business strategies, and trade secrets of Halcyon and Vectris that, if disclosed, could cause significant competitive harm to both companies.
Halcyon further requests that this submission be treated as exempt from disclosure under the Freedom of Information Act, 5 U.S.C. § 552, under Exemption 4 (confidential commercial or financial information obtained from a person), and Exemption 7(A) (records or information compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement proceedings), to the extent applicable.
In the event that the Division determines not to pursue the remedy approach described herein, Halcyon requests the return or destruction of all confidential materials provided in connection with this submission, to the extent permitted by applicable law and the Division's document retention policies.
11. Conclusion and Request for Meeting
In summary, Halcyon has a strong and genuine interest in resolving the Division's competitive concerns through a negotiated remedy, and the Company believes the comprehensive divestiture package described in this letter provides a fully effective, structural solution. Halcyon is firmly committed to achieving a consensual resolution that permits the Transaction to proceed while preserving the competitive conditions in the relevant market.
Halcyon stands ready to provide any additional information, documents, data, or economic analysis that the Division may require to evaluate the proposed divestiture, including additional detail regarding the scope of the Divestiture Business, the identities of potential Approved Purchasers, the operational separability of the Divestiture Business, and the competitive dynamics of the relevant market.
We respectfully request an in-person meeting with the Division's staff at the earliest convenient date to discuss this proposal in detail and to receive the Division's preliminary feedback. We believe a face-to-face discussion would be the most productive means of advancing the dialogue and identifying any areas in which the proposal may need to be refined or supplemented.
In connection with such a meeting, Halcyon is prepared to make available members of its business leadership team, including Dr. Katarina Breuer, Chief Executive Officer, and Markus Ellinger, Chief Financial Officer, to present on the operational and strategic aspects of the Divestiture Business and to answer any questions the Division's staff may have. In addition, Halcyon's financial advisor, Ridgeline Partners (represented by Nathaniel Cross, Managing Director), is available to present on the financial characteristics of the Divestiture Business, its valuation, and the anticipated market interest from potential purchasers.
I may be reached directly at (202) 448-7234 or by email at hbellamy@calderwoodharkness.com. My colleague Oliver Mackenzie, a Partner in our New York office (599 Lexington Avenue, 38th Floor, New York, NY 10022; direct dial: (212) 530-4100; email: omackenzie@calderwoodharkness.com), is available as an alternative point of contact. The Calderwood & Harkness Washington, DC office may be reached at (202) 448-7200 during normal business hours.
We thank the Division for its consideration of this proposal and look forward to a productive dialogue.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Bellamy Partner, Antitrust & Competition Practice Calderwood & Harkness LLP 1333 New Hampshire Avenue NW, Suite 700 Washington, DC 20036 Telephone: (202) 448-7234
Email: hbellamy@calderwoodharkness.com
On behalf of Halcyon Semiconductor Aktiengesellschaft
cc: (via email)
Dr. Luisa Hartmann, General Counsel, Halcyon Semiconductor Aktiengesellschaft
Dr. Katarina Breuer, Chief Executive Officer, Halcyon Semiconductor Aktiengesellschaft
Oliver Mackenzie, Partner, Calderwood & Harkness LLP, 599 Lexington Avenue, 38th Floor, New York, NY 10022
Derek Okonkwo, Associate, Calderwood & Harkness LLP, 1333 New Hampshire Avenue NW, Suite 700, Washington, DC 20036
Enclosures (referenced herein; to be provided under separate cover):
Enclosure A: Preliminary List of Assets Comprising the Divestiture Business
Enclosure B: List of Key Personnel Associated with the Divestiture Business
Enclosure C: Proposed Form of Hold-Separate Stipulation and Order

PRIVILEGED & CONFIDENTIAL

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts