PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Counselors at Law
599 Lexington Avenue, 38th Floor New York, New York 10022
Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
November 15, 2023
MEMORANDUM
This memorandum is protected by the attorney-client privilege and constitutes attorney work product. It is intended solely for the use of the addressees identified above and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and the General Counsel of Halcyon Semiconductor Aktiengesellschaft.
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I. Executive Summary
The purpose of this memorandum is to provide the Vorstand and the Aufsichtsrat of Halcyon Semiconductor Aktiengesellschaft ("Halcyon" or the "Company") with a comprehensive analysis of the options available to Halcyon in light of two significant adverse regulatory developments relating to its pending acquisition of Vectris Photonics, Inc. ("Vectris"): (i) the civil antitrust complaint filed by the United States Department of Justice, Antitrust Division (the "DOJ") on October 30, 2023, in the United States District Court for the District of Columbia (Case No. 1:23-cv-03187) (the "DOJ Action"), seeking to enjoin the proposed merger; and (ii) the European Commission's (the "EC") opening of a Phase II in-depth investigation on October 6, 2023 (Case M.11247) (the "EC Phase II Investigation" and, together with the DOJ Action, the "Regulatory Proceedings").
This memorandum presents and evaluates three options available to Halcyon:
(a) Option A — Litigate Through Trial. Contest the DOJ Action through trial on the merits and continue to engage with the EC Phase II Investigation with the objective of obtaining the required antitrust clearances.
(b) Option B — Negotiate Further Remedies. Attempt to negotiate additional structural or behavioral remedies with the DOJ and the EC beyond those already proposed, with the aim of resolving the regulatory objections to the transaction without litigation.
(c) Option C — Terminate Under Section 8.1(d). Exercise the Antitrust Termination Right set forth in Section 8.1(d) of the Agreement and Plan of Merger dated August 10, 2023 (the "Merger Agreement"), terminate the Merger Agreement, and pay the contractual reverse break-up fee to Vectris.
Recommendation. Following a thorough analysis of each option, Calderwood & Harkness LLP ("C&H" or the "Firm") recommends that the Vorstand and the Aufsichtsrat authorize the termination of the Merger Agreement pursuant to Section 8.1(d), the Antitrust Termination Right, and direct the payment of the contractual reverse break-up fee of $28,000,000 (representing 3.5% of the $800,000,000 aggregate deal value) to Vectris Photonics, Inc. We believe this course of action represents the most prudent path for Halcyon, as it provides certainty, limits the Company's financial exposure to a known and contained amount, avoids extended and costly litigation with a low probability of success, and preserves Halcyon's management bandwidth and strategic flexibility for alternative growth opportunities.
In preparing this analysis, C&H has consulted extensively with Howard Bellamy, Specialist Partner in C&H's Antitrust & Competition Practice, who has led the Firm's antitrust workstream on this transaction from the outset. The broader deal team, including Harrison Wexford (Billing Partner, M&A), Derek Okonkwo (Senior Associate, M&A), and Tiffany Rosenthal (Senior Associate, Antitrust), has also contributed to the preparation of this memorandum. In addition, C&H has consulted with Nathaniel Cross, Managing Director at Ridgeline Partners LLC ("Ridgeline"), the Company's financial advisor, regarding the economic implications of each option and the impact of termination on the Company's financial position and strategic alternatives.
This memorandum should be read in conjunction with the appendices referenced herein, including Howard Bellamy's November 1, 2023 analysis of the DOJ complaint (Appendix D) and the cost comparison table set forth in Appendix E.
II. Background and Current Status of the Transaction
A. Transaction Overview
On August 10, 2023, Halcyon Semiconductor Aktiengesellschaft, a stock corporation organized under the laws of the Federal Republic of Germany, entered into the Agreement and Plan of Merger with Halcyon Acquisition Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Halcyon formed solely for purposes of the transaction, and Vectris Photonics, Inc. ("Vectris"), a Delaware corporation headquartered in San Jose, California.
The transaction is structured as an all-cash reverse triangular merger under the Delaware General Corporation Law (Title 8 of the Delaware Code). Pursuant to the Merger Agreement, at the effective time of the merger, Merger Sub would merge with and into Vectris, with Vectris surviving the merger as a wholly owned subsidiary of Halcyon. The stockholders of Vectris would receive the merger consideration in cash in exchange for the cancellation of their shares of Vectris common stock.
The aggregate cash consideration payable to Vectris stockholders is $800,000,000, representing approximately $13.70 per fully diluted share of Vectris common stock. This per-share figure is calculated based on 58,394,160 fully diluted shares, consisting of 51,200,000 basic shares of Vectris common stock outstanding as of the signing date, plus 7,194,160 shares subject to in-the-money stock options and restricted stock units ("RSUs") that would vest or be cancelled for cash consideration at the effective time of the merger. The per-share merger consideration represents a premium of approximately 39.5% over the unaffected closing price of Vectris common stock of $9.82 on May 19, 2023, the last trading day prior to Westmark Services Inc. reports of market speculation regarding a potential transaction.
The strategic rationale for the acquisition is grounded in Halcyon's desire to acquire Vectris's leading silicon photonics transceiver and co-packaged optics ("CPO") chiplet technology, which addresses the rapidly growing market for hyperscale data center interconnects. Vectris's intellectual property portfolio is extensive, comprising 187 issued United States patents and 43 pending patent applications covering core aspects of silicon photonics design, manufacturing processes, and system integration. As of the signing date, Vectris employed approximately 1,450 employees, primarily engineers and technical staff, across facilities in San Jose, California; Austin, Texas; and Portland, Oregon.
Vectris reported fiscal year 2022 revenue of approximately $312 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $74 million. The transaction implies valuation multiples of approximately 2.6× enterprise value to revenue ("EV/Revenue") and approximately 10.8× enterprise value to EBITDA ("EV/EBITDA"), which are within the range of comparable transactions in the semiconductor and photonics sectors, as analyzed by Ridgeline Partners in its fairness analysis provided to the Halcyon Board prior to signing.
B. Financing
The acquisition is to be financed through a combination of committed debt financing and available cash on Halcyon's balance sheet. The debt component consists of a $500,000,000 senior secured term loan commitment from Meridian Atlantic Bank, N.A. ("Meridian Atlantic"), pursuant to a commitment letter dated August 8, 2023 (the "Commitment Letter"). The term loan bears interest at Term SOFR plus 225 basis points, with a maturity structure consisting of a 364-day bridge facility with a mandatory refinancing obligation. Financing counsel for Meridian Atlantic is Kalder & Eames LLP, with Philip Strand serving as lead partner on the engagement.
The remaining $300,000,000 of the aggregate consideration is to be funded from Halcyon's existing cash on hand and available liquidity. As of the most recent quarter-end, Halcyon maintained cash and cash equivalents of approximately $485 million, providing ample capacity for the equity component of the financing.
Notably, a ticking fee of 20 basis points per annum on the undrawn commitment amount commenced on November 8, 2023, representing the 90th day following the signing of the Merger Agreement. This ticking fee is accruing and will continue to accrue for so long as the Commitment Letter remains in effect. At the current undrawn amount of $500,000,000, the ticking fee represents an annualized cost of approximately $1,000,000, or approximately $83,333 per month. While not individually material, this ongoing cost is indicative of the incremental financial burden associated with maintaining the transaction in its current state of uncertainty. Should Halcyon elect to pursue Option A (litigation), the Commitment Letter would need to remain in effect—or be renegotiated—for the duration of the proceedings, as the financing remains a condition precedent to closing.
C. Key Deal Protections
The Merger Agreement contains a comprehensive set of deal protections, risk allocation mechanisms, and ancillary agreements, which are summarized below for reference:
Indemnification. The Merger Agreement provides for post-closing indemnification by Vectris stockholders (through a representative) for breaches of representations and warranties, subject to an aggregate cap of 15% of the deal value, or $120,000,000.
Escrow. An escrow deposit of $40,000,000, representing 5% of the aggregate deal value, is to be held by Ironclad National Bank, N.A. (Thomas Hargreaves, designated escrow officer) for a period of 18 months following the closing, to serve as a source of recovery for indemnification claims. The escrow arrangement is governed by a separate Escrow Agreement to be executed at closing.
Representations and Warranties Insurance. The parties have arranged for a representations and warranties insurance policy with a policy limit of $120,000,000, to be underwritten by Pinnacle Specialty Underwriters, Ltd., and brokered by Atlas Transactional Insurance Group, Inc. The policy was quoted but has not yet been bound, and no premium has been paid. The quoted premium was $3,360,000.
Reverse Break-Up Fee (Halcyon). Pursuant to Section 9.2 of the Merger Agreement, in the event that the Merger Agreement is terminated by Halcyon under certain specified circumstances, including the Antitrust Termination Right in Section 8.1(d), Halcyon is obligated to pay Vectris a reverse break-up fee equal to 3.5% of the aggregate deal value, or $28,000,000. This fee is payable within 15 business days of the termination date and constitutes the sole and exclusive remedy of Vectris and its stockholders against Halcyon in connection with such termination.
Target Termination Fee (Vectris). Pursuant to Section 9.3 of the Merger Agreement, in the event that the Merger Agreement is terminated under circumstances attributable to Vectris (including termination to accept a Superior Proposal pursuant to the fiduciary-out exception), Vectris is obligated to pay Halcyon a termination fee equal to 3.0% of the aggregate deal value, or $24,000,000.
No-Shop Provision. The Merger Agreement contains a customary no-shop provision restricting Vectris from soliciting, encouraging, or engaging in discussions regarding alternative acquisition proposals, subject to a fiduciary-out exception permitting the Vectris Board to consider and accept bona fide unsolicited Superior Proposals, as defined in the Merger Agreement.
Material Adverse Effect. The definition of "Material Adverse Effect" (or "MAE") in the Merger Agreement contains customary carve-outs for changes in applicable law, general economic conditions, conditions affecting the semiconductor or photonics industries generally, acts of war or terrorism, and other specified matters.
Non-Competition and Non-Solicitation. The founders of Vectris, including Dr. Anand Raghavan, have agreed to post-closing non-competition and non-solicitation covenants with a term of three years following the closing.
Voting and Support Agreements. In connection with the execution of the Merger Agreement, Halcyon entered into Voting and Support Agreements with three significant Vectris stockholders: Dr. Anand Raghavan (holding approximately 18.2% of outstanding shares), Granite Peak Ventures Fund IV, L.P. (holding approximately 22.7%), and Nordhaven Capital Partners III, L.P. (holding approximately 14.5%). These stockholders collectively hold approximately 55.4% of the outstanding shares of Vectris common stock and have agreed to vote in favor of the merger, subject to customary exceptions.
D. Timeline of Antitrust Proceedings
The following summarizes the key dates in the regulatory review process to date. A more detailed timeline, presented in chart form, is attached as Appendix A.
August 18, 2023. Halcyon and Vectris filed their respective Notification and Report Forms pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with the Federal Trade Commission ("FTC") and the Antitrust Division of the DOJ. The transaction was assigned to the DOJ for substantive review.
August 25, 2023. Halcyon filed the EUMR Form CO notification with the Directorate-General for Competition of the European Commission (Case M.11247), initiating the Phase I review under the EU Merger Regulation.
September 15, 2023. The DOJ issued a Second Request (in the form of a Civil Investigative Demand) to both Halcyon and Vectris, requesting extensive additional documentary and data submissions. This triggered the extension of the HSR waiting period until 30 days following substantial compliance with the Second Request by both parties.
September 18, 2023. The initial 30-day HSR waiting period, which would otherwise have expired on this date, was superseded by the issuance of the Second Request. The parties began the process of complying with the Second Request, which involved the collection, review, and production of hundreds of thousands of documents and extensive data regarding market shares, pricing, customers, and competitive dynamics.
October 6, 2023. The European Commission issued a decision opening a Phase II in-depth investigation (Case M.11247), determining that the transaction raised serious doubts as to its compatibility with the internal market. The Phase II investigation triggers a more extensive review period and requires the parties to engage in further submissions and dialogue with the Commission's case team.
October 10, 2023. C&H submitted a detailed competitive effects white paper to the DOJ on behalf of Halcyon, presenting economic analysis and documentary evidence in support of the position that the transaction would not substantially lessen competition.
October 20, 2023. C&H submitted to the DOJ a proposed structural remedy package on behalf of Halcyon, consisting of the divestiture of Halcyon's existing U.S. silicon photonics product line (including related personnel, contracts, and intellectual property) to an approved third-party purchaser. The proposed divestiture was designed to address the horizontal overlap identified by the DOJ while preserving the core strategic rationale of the acquisition.
October 30, 2023. The DOJ filed a civil antitrust complaint in the U.S. District Court for the District of Columbia, captioned United States of America v. Halcyon Semiconductor Aktiengesellschaft and Vectris Photonics, Inc., Case No. 1:23-cv-03187, seeking a permanent injunction to block the proposed merger. In filing the complaint, the DOJ rejected the proposed structural remedy submitted by C&H on October 20, 2023, signaling the Division's view that the competitive concerns raised by the transaction could not be adequately addressed through the remedy package offered.
E. DOJ Theory of Harm
The DOJ's complaint alleges that the proposed merger would substantially lessen competition in violation of Section 7 of the Clayton Act (15 U.S.C. § 18). The DOJ defines the relevant product market as the market for silicon photonics transceiver modules for hyperscale data center interconnects within the United States. The DOJ contends that the combined entity resulting from the merger would control approximately 47% of this domestic market, based on combined 2022 revenue shares attributable to Halcyon (approximately 19%) and Vectris (approximately 28%).
At this market share level, the DOJ's complaint invokes the structural presumption of competitive harm recognized by the United States Supreme Court in United States v. Philadelphia National Bank, 374 U.S. 321 (1963), and its progeny. The complaint further alleges that the merger would eliminate significant head-to-head competition between Halcyon and Vectris in the development and sale of next-generation silicon photonics products, would increase barriers to entry by combining the parties' complementary patent portfolios, and would enhance the merged firm's ability to exercise market power vis-à-vis hyperscale data center customers.
In parallel, the European Commission's Phase II investigation focuses on the parties' overlap in co-packaged optics ("CPO") chiplets sold to European cloud infrastructure operators. The Commission has estimated a combined share in the European Economic Area ("EEA") of approximately 38%, raising concerns about unilateral effects in the CPO chiplet market segment.
A detailed analysis of the DOJ's complaint, including an assessment of its strengths and weaknesses and the potential arguments available to Halcyon in defense, was prepared by Howard Bellamy and distributed to the Board on November 1, 2023 (the "Bellamy Memorandum"). That analysis is cross-referenced as Appendix D to this memorandum.
III. Contractual Framework for Termination
A. Outside Date
Section 8.1(b) of the Merger Agreement establishes the Outside Date, which is the date after which either party may terminate the Merger Agreement if the closing has not occurred, provided that the terminating party is not in material breach of its obligations. The original Outside Date is March 10, 2024, which is approximately 180 calendar days from the signing date of August 10, 2023.
The Merger Agreement further provides for an automatic 90-day extension of the Outside Date to June 10, 2024, in the event that, as of the original Outside Date, the sole unsatisfied closing condition is the receipt of the required antitrust approvals. Given the current status of the Regulatory Proceedings—specifically, the pendency of the DOJ Action and the EC Phase II Investigation—it is virtually certain that the antitrust condition would be the sole unsatisfied condition as of the original Outside Date, and accordingly, the Extended Outside Date of June 10, 2024 would apply.
However, as discussed more fully below, the Extended Outside Date is rendered largely moot by our recommendation that Halcyon exercise the Antitrust Termination Right and terminate the Merger Agreement at the earliest practicable date, rather than allow the transaction to remain pending through the Outside Date or Extended Outside Date.
B. Section 8.1(d) — Antitrust Termination Right
Section 8.1(d) of the Merger Agreement grants either party the right to terminate the Merger Agreement if the required antitrust approvals cannot be obtained (the "Antitrust Termination Right"). The full text of Section 8.1(d) is reproduced in Appendix B to this memorandum. For purposes of this analysis, the key operative language provides, in relevant part, as follows:
"This Agreement may be terminated at any time prior to the Effective Time by either Parent or the Company, by written notice to the other party, if any Governmental Authority of competent jurisdiction shall have (i) issued an Order permanently restraining, enjoining, or otherwise prohibiting the consummation of the Merger, and such Order shall have become final and nonappealable, or (ii) enacted, issued, promulgated, enforced, or entered any Law that makes consummation of the Merger illegal or otherwise permanently prohibited; provided that the right to terminate this Agreement under this Section 8.1(d) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the proximate cause of, or shall have resulted in, the failure of a condition to the consummation of the Merger to be satisfied on or prior to the Outside Date."
While the DOJ's civil complaint and the EC Phase II investigation do not, standing alone, constitute a "final and nonappealable" order or a change in law that permanently prohibits the merger, the filing of the DOJ Action and the opening of the EC Phase II Investigation constitute the factual predicates for the failure to satisfy the antitrust condition precedent set forth in Article VII of the Merger Agreement. Specifically, the condition set forth in Section 7.1(b) requires that the waiting period (including any extension thereof) applicable to the merger under the HSR Act shall have expired or been terminated, and that no action shall have been instituted by the DOJ or FTC to challenge or restrain the merger. With the DOJ having filed a complaint seeking to enjoin the merger, this condition cannot be satisfied absent either (i) a favorable judgment for Halcyon following trial, or (ii) the DOJ's decision to withdraw the complaint in connection with an acceptable remedy.
It is our view, based on the analysis set forth in Sections IV and V below, that neither of these outcomes is achievable within a reasonable timeframe or at an acceptable cost and risk profile. Accordingly, the antitrust conditions to closing—both the HSR clearance / DOJ non-challenge condition and the EC clearance condition—are not satisfiable within a reasonable timeframe without either successful litigation or the acceptance of a remedy that would negate the strategic rationale of the transaction. In light of these circumstances, termination under Section 8.1(d) is appropriate and justified.
C&H notes that the proviso clause in Section 8.1(d) (the "anti-reverse-termination" provision) prevents a party from invoking the Antitrust Termination Right if its own failure to fulfill its obligations under the Merger Agreement was the proximate cause of the failure of the antitrust condition. Halcyon has at all times complied with its antitrust-related obligations under Article VI of the Merger Agreement, including the filing of required notifications, the timely production of documents responsive to the Second Request, cooperation with regulatory authorities, and the good-faith proposal of remedies. Accordingly, the proviso clause does not bar Halcyon from exercising the Antitrust Termination Right.
C. Reverse Break-Up Fee Obligation
Upon termination by Halcyon under Section 8.1(d), the Merger Agreement requires Halcyon to pay to Vectris a reverse break-up fee (the "Reverse Break-Up Fee") in the amount of $28,000,000, representing 3.5% of the $800,000,000 aggregate deal value. This obligation is set forth in Section 9.2 of the Merger Agreement, the full text of which is reproduced in Appendix C.
The Reverse Break-Up Fee is payable within 15 business days of the date of termination by wire transfer of immediately available funds to an account designated by Vectris. Importantly, the Merger Agreement provides that, upon payment of the Reverse Break-Up Fee, such payment shall constitute the sole and exclusive remedy of Vectris and its stockholders against Halcyon, Merger Sub, and their respective affiliates, directors, officers, employees, and agents in connection with the termination of the Merger Agreement under the Antitrust Termination Right. This fee functions as a liquidated damages provision, negotiated at arm's length between sophisticated parties, and reflects the parties' agreed-upon allocation of antitrust risk.
The critical consequence of this provision for purposes of this analysis is that Halcyon's maximum financial exposure for termination under Section 8.1(d) is limited to the $28,000,000 Reverse Break-Up Fee. There is no additional damages exposure for Halcyon beyond this contractually specified amount for this termination path. Vectris cannot seek consequential, incidental, or expectation damages, lost profits, or any other form of relief in connection with the termination. This certainty of exposure is a significant factor weighing in favor of the termination option.
D. Surviving Provisions Post-Termination
Section 9.4 of the Merger Agreement specifies that certain provisions survive the termination of the agreement. These include, but are not limited to:
(i) Confidentiality Obligations (Section 6.5). The parties' mutual obligations of confidentiality with respect to non-public information exchanged in connection with the transaction survive termination and remain in effect in accordance with their terms.
(ii) Non-Disparagement (Section 6.8). The mutual non-disparagement covenants, which prohibit either party from making disparaging public statements regarding the other party or the transaction, survive termination for a period of two years.
(iii) Cooperation on Pending Regulatory Matters (Section 6.10). The parties' obligations to cooperate with respect to pending regulatory matters—including the orderly withdrawal of regulatory filings and coordination with the DOJ regarding the disposition of the civil action—survive termination until such regulatory matters are resolved.
(iv) Indemnification for Pre-Termination Breaches. Certain indemnification provisions survive to the extent relating to breaches of the Merger Agreement that occurred prior to the date of termination.
In addition to these surviving provisions, the termination of the Merger Agreement will require the negotiation and execution of a Termination Agreement and Mutual Release (the "Termination Agreement") between Halcyon and Vectris. The Termination Agreement will confirm the effective date of termination, establish the mechanics for payment of the Reverse Break-Up Fee, provide for the mutual release of all claims between the parties (other than claims arising under or relating to the surviving provisions), and address the dissolution of Merger Sub. C&H will prepare the initial draft of the Termination Agreement and negotiate its terms with Whitfield, Prager & Loomis LLP ("WPL"), counsel to Vectris.
IV. Analysis of Option A — Litigate Through Trial
A. Merits Assessment
Based on C&H's comprehensive internal analysis, including the detailed Bellamy Memorandum dated November 1, 2023, our assessment is that the estimated likelihood of Halcyon prevailing against the DOJ at trial is below 35%. This probability estimate reflects our evaluation of the strength of the DOJ's case, the available defenses, the applicable legal standards, and the current judicial and enforcement environment. We set forth below the principal considerations underlying this assessment.
The DOJ's market share allegations present the most significant challenge. The combined domestic market share of approximately 47% (Halcyon 19% plus Vectris 28%) in the DOJ's proposed relevant market of silicon photonics transceiver modules for hyperscale data center interconnects is within the range where courts have historically applied the structural presumption of competitive harm articulated in Philadelphia National Bank and reaffirmed in subsequent decisions, including FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001), and FTC v. Sysco Corp., 113 F. Supp. 3d 1 (D.D.C. 2015). Under this presumption, a merger that produces a firm controlling an undue share of the relevant market and that results in a significant increase in market concentration is presumptively unlawful, and the burden shifts to the defendant to demonstrate that the merger is unlikely to substantially lessen competition.
Halcyon possesses several arguments that have merit in seeking to rebut the structural presumption:
(a) Broader Market Definition. Halcyon can argue that the relevant market should be defined more broadly to include all high-speed data center interconnect solutions, not solely silicon photonics transceivers. A broader market definition would significantly reduce the combined market share and potentially fall below the thresholds triggering the structural presumption.
(b) Low Barriers to Entry. Halcyon can present evidence that barriers to entry in the silicon photonics market are lower than the DOJ contends, pointing to recent entrants and the availability of foundry-based manufacturing capacity.
(c) Customer Sophistication. The hyperscale data center customers served by Halcyon and Vectris are among the world's largest and most sophisticated technology companies. These customers possess significant bargaining leverage, can qualify and switch among multiple suppliers, and have the resources to sponsor new entry.
(d) Supply-Side Substitutability. Manufacturers of adjacent semiconductor and optical components may be able to redirect production capacity to silicon photonics transceivers with relatively modest investment, providing a competitive constraint on the merged firm.
(e) Efficiencies. The merger is expected to generate significant cognizable efficiencies, including the integration of complementary technology platforms, acceleration of next-generation CPO chiplet development, and realization of manufacturing and R&D cost synergies.
Notwithstanding the theoretical availability of these arguments, each faces significant headwinds in the current enforcement and judicial environment. The DOJ under its current leadership has adopted an aggressive enforcement posture in technology markets, and recent case law reflects a heightened skepticism toward efficiency claims and narrow rebuttal arguments. The D.C. district court, to which the case has been assigned, has historically been receptive to DOJ merger challenges. Furthermore, the DOJ's decision to reject the proposed divestiture remedy and instead proceed to litigation signals the Division's confidence in its case and its willingness to invest significant resources in obtaining an injunction.
Finally, the parallel EC Phase II Investigation creates a dual-front regulatory challenge. Even in the scenario where Halcyon prevails against the DOJ at trial—an outcome we consider unlikely—such a victory would not resolve the European Commission's proceeding. The EC could independently conclude that the transaction is incompatible with the internal market, impose conditions that substantially alter the economics of the deal, or prohibit the transaction outright under Article 8(3) of the EU Merger Regulation. A favorable U.S. outcome, standing alone, would therefore not clear the path to closing.
B. Timeline
The DOJ Action was filed on October 30, 2023. Based on customary schedules in DOJ merger challenge cases in the D.C. district court, and accounting for the extensive discovery that both sides would require—including expert reports, depositions, and document productions—we estimate that a trial would not occur before late Q3 or Q4 of 2024 at the earliest. This timeline extends well beyond even the Extended Outside Date of June 10, 2024.
To maintain the transaction pending trial, Halcyon would need to seek a mutual agreement with Vectris to extend the Outside Date beyond June 10, 2024. However, Vectris has no obligation to agree to any such extension. As the prolonged regulatory uncertainty continues, Vectris may face its own business pressures—customer uncertainty, employee retention challenges, deferred capital investment decisions—that could lead the Vectris Board to conclude that the company's interests are best served by terminating the Merger Agreement at the Outside Date (or Extended Outside Date) and pursuing its own independent strategic path. If Vectris terminates at the Outside Date, Halcyon would still owe the Reverse Break-Up Fee.
With respect to the EC Phase II Investigation, the Commission's Phase II decision is expected within 90 to 120 business days of the October 6 opening, which would place the anticipated decision in Q1 or Q2 of 2024. The Commission may issue a clearance decision (with or without conditions in the form of commitments), extend the timeline through commitments proceedings, or issue a prohibition decision. The timing of the EC process is somewhat more predictable than the U.S. litigation timeline, but the outcome is highly uncertain, and the possibility of a prohibition or onerous conditions adds a further layer of risk.
C. Estimated Costs
The financial costs of pursuing Option A through trial are substantial. Based on our experience in comparable DOJ merger challenge cases, and accounting for the scope and complexity of this particular matter, we estimate the following:
Direct Litigation Costs. The estimated total litigation costs for defending the DOJ Action through trial, including outside counsel fees (C&H and any co-counsel), expert witness retention and testimony (including economic experts for market definition and competitive effects analysis, and industry experts), fact discovery and document review, deposition preparation and attendance, trial preparation and trial itself, and potential post-trial briefing and appellate proceedings, are estimated to be in excess of $45,000,000. This estimate is based on the assumption of a fully contested trial with expert testimony and does not account for potential appellate costs, which could add an additional $5,000,000 to $10,000,000 in the event of an appeal by either side.
European Commission Engagement Costs. Additional costs will be incurred for continued engagement with the EC Phase II Investigation, including the preparation of additional submissions, the retention of European counsel and economic consultants, attendance at oral hearings, and potential commitments proceedings. These costs are estimated at $3,000,000 to $5,000,000.
Ticking Fee. The ticking fee on the Meridian Atlantic $500,000,000 commitment is currently accruing at a rate of 20 basis points per annum on the undrawn commitment amount. On an annualized basis, this represents approximately $1,000,000. If the commitment were maintained through Q4 2024, the cumulative ticking fee from the November 8, 2023 commencement date would be approximately $1,000,000.
Ongoing Advisor Fees and Internal Costs. C&H, Ridgeline Partners, and other advisors would continue to incur fees for ongoing transaction maintenance, regulatory coordination, and strategic advisory services throughout the litigation period. Internal management time and opportunity cost are substantial but difficult to quantify precisely.
D. Business Risks
Beyond the direct financial costs, pursuit of Option A carries significant business and operational risks for both Halcyon and Vectris:
Impact on Vectris. An extended period of regulatory uncertainty could cause a material adverse effect on Vectris's business. Customers of Vectris may defer purchasing decisions, shift volume to competitors, or pursue qualification of alternative suppliers. Key technical employees at Vectris—whose retention is critical to the value of the acquisition—may depart for competitors or start-up ventures during the period of uncertainty. Product development initiatives may be delayed or deprioritized as management attention is diverted to regulatory and legal proceedings.
Impact on Halcyon. Halcyon's own business operations and strategic planning would be significantly constrained during the pendency of the DOJ Action. Under the Merger Agreement's interim operating covenants and the requirements of the HSR Act, Halcyon may face restrictions on its ability to pursue other strategic transactions, reallocate capital, or make certain operational decisions. Senior management attention would be substantially diverted from Halcyon's core business to the management of the litigation and regulatory process.
Reputational Risk. A protracted public antitrust litigation in a high-profile technology market carries reputational risk for Halcyon, potentially affecting customer relationships, investor perception, and regulatory relationships in other jurisdictions.
Risk of Adverse Termination. As noted above, Vectris may itself seek to terminate the Merger Agreement at the Outside Date (or Extended Outside Date) if the antitrust conditions remain unsatisfied. In such a scenario, Halcyon would still be obligated to pay the Reverse Break-Up Fee of $28,000,000 and would have incurred the full costs of the intervening litigation and regulatory engagement without any offsetting benefit.
E. Assessment
In summary, Option A—litigating the DOJ Action through trial while continuing to engage with the EC Phase II Investigation—represents the highest-cost, highest-risk, and longest-duration option available to Halcyon. The probability of prevailing at trial is below 35%, while the direct litigation costs alone would exceed $45,000,000. When the ticking fee, ongoing advisor costs, management distraction, and business uncertainty are factored in, the total cost of pursuing this option substantially exceeds the $28,000,000 Reverse Break-Up Fee payable upon termination. Moreover, even in the favorable scenario where Halcyon prevails at trial, the EC Phase II Investigation presents an independent and potentially insurmountable obstacle to closing.
On a probability-weighted basis, the expected value of pursuing litigation is significantly negative when compared to the certain and contained cost of termination. We do not recommend this option.
V. Analysis of Option B — Negotiate Further Remedies
A. Background on Remedy Proposals to Date
On October 20, 2023, C&H submitted to the DOJ a detailed proposed structural remedy package on behalf of Halcyon. The proposed remedy consisted of the divestiture of Halcyon's existing U.S. silicon photonics product line to a third-party purchaser approved by the DOJ. The proposed divestiture package included the relevant manufacturing assets, key personnel (subject to employee consent), customer contracts, and associated intellectual property rights. The proposal was designed to eliminate the horizontal overlap between Halcyon and Vectris in the U.S. silicon photonics transceiver market while preserving Halcyon's ability to realize the core strategic benefits of acquiring Vectris's technology platform.
The DOJ rejected this proposed remedy. On October 30, 2023—ten days after the submission—the DOJ filed the civil complaint in the D.C. district court, an unambiguous indication that the Division considered the proposed divestiture insufficient to resolve its competitive concerns. In conversations between Howard Bellamy and senior staff at the DOJ's Antitrust Division following the filing of the complaint, the Division communicated informally that the proposed remedy was inadequate in scope and that the Division had concerns about the viability of the proposed divestiture buyer and the sustainability of the divested business as an independent competitive force.
B. Feasibility Assessment
In light of the DOJ's rejection of Halcyon's initial remedy proposal and the Division's subsequent decision to litigate, C&H has evaluated the feasibility of negotiating an expanded or alternative remedy package that could resolve the DOJ's competitive concerns without litigation.
Our assessment is that any divestiture package acceptable to the DOJ would likely need to encompass a significantly larger scope than the one proposed. Based on the DOJ's theory of harm and the scope of its complaint, a satisfactory remedy would likely require the divestiture of either Halcyon's entire silicon photonics business unit—including the very assets and capabilities that Halcyon is seeking to enhance through the Vectris acquisition—or significant product lines or assets of Vectris itself. Such a remedy would fundamentally undermine the strategic rationale for the transaction.
In addition, the European Commission may require separate and potentially different remedies to address its own competitive concerns relating to co-packaged optics chiplets in the EEA. The Commission's Phase II investigation focuses on a different product market (CPO chiplets) and a different geographic market (the EEA) than the DOJ, raising the prospect of dual-track remedy negotiations with inconsistent or even contradictory requirements. The complexity of managing parallel remedy negotiations across two major jurisdictions with different substantive standards, procedural frameworks, and enforcement priorities substantially increases the execution risk and timeline for this option.
There is no indication from either the DOJ or the European Commission that remedies short of substantial structural changes would be acceptable. Behavioral remedies—such as supply commitments, firewall provisions, or non-discrimination obligations—are generally disfavored by both the DOJ and the Commission in horizontal merger cases, particularly where the market shares of the merging parties are at the levels presented here.
From a timing perspective, remedy negotiations with the DOJ after the filing of a complaint typically involve consent decree negotiations that can extend for months. Even if the DOJ were willing to engage in settlement discussions—which is by no means assured given the Division's decision to litigate—the process of negotiating a consent decree, identifying and qualifying an acceptable divestiture buyer, and obtaining court approval of the consent decree would likely extend well beyond the Extended Outside Date of June 10, 2024.
C. Impact on Strategic Rationale
The strategic rationale for Halcyon's acquisition of Vectris is centered on the acquisition of Vectris's silicon photonics transceiver and co-packaged optics chiplet technology, together with its extensive intellectual property portfolio (187 issued U.S. patents and 43 pending applications) and its technical workforce. These assets are the foundation of the value that Halcyon expects to derive from the transaction.
A remedy requiring the divestiture of the very assets that motivate the transaction—whether on the Halcyon side or the Vectris side—would eliminate the deal's value proposition. If Halcyon were required to divest its own silicon photonics business to obtain clearance, the Company would be exchanging an existing competitive position for an acquisition that carries substantial integration risk and execution cost. If Halcyon were required to divest portions of the Vectris business post-closing, the strategic rationale for paying an 39.5% premium would be substantially undermined.
Moreover, the cross-border complexity of any remedy—necessitating coordination between the DOJ and the European Commission, potentially involving divestitures in different product markets and geographic regions—increases the probability that the remaining transaction, after implementation of all required remedies, would no longer deliver the expected strategic and financial returns.
Ridgeline Partners has confirmed that, in its assessment, the economic value of the transaction to Halcyon would be substantially impaired by any remedy package of the scope likely required to satisfy the regulatory authorities. The advisory team has indicated that, under the most plausible remedy scenarios, the net present value of the transaction to Halcyon would decline below the threshold at which the deal would be value-accretive on a risk-adjusted basis.
D. Assessment
In summary, Option B—further remedy negotiations—is unlikely to succeed given the DOJ's demonstrated litigation posture and its rejection of the initial proposed remedy. Any remedy package likely to satisfy the DOJ and the European Commission would negate the strategic value of the acquisition, rendering the transaction uneconomic for Halcyon. This option carries significant risk, including the risk of continued expenditure of time and resources without a satisfactory outcome, with a low probability of reaching a resolution that preserves the economic and strategic value of the deal.
We do not recommend this option.
VI. Analysis of Option C — Terminate Under Section 8.1(d)
A. Mechanics
Under this option, Halcyon would exercise the Antitrust Termination Right set forth in Section 8.1(d) of the Merger Agreement. The mechanics of termination are straightforward:
(i) Halcyon, acting through its authorized representatives, delivers written notice of termination to Vectris in accordance with the notice provisions of Section 10.2 of the Merger Agreement. The notice would be addressed to Rebecca Lau, General Counsel of Vectris, at Vectris's principal offices, with a copy to Catherine Whitfield of Whitfield, Prager & Loomis LLP, counsel to Vectris, as specified in the notice provisions.
(ii) Termination is effective immediately upon delivery of the notice of termination. Upon effectiveness, all rights and obligations of the parties under the Merger Agreement cease, other than the surviving provisions described in Section III.D above and the obligation to pay the Reverse Break-Up Fee.
(iii) Following the delivery of the notice of termination, the parties negotiate and execute a Termination Agreement and Mutual Release, confirming the termination, establishing the mechanics for payment of the Reverse Break-Up Fee, providing for mutual releases of claims (other than surviving obligations), and addressing the dissolution of Merger Sub.
C&H has prepared a draft notice of termination for review by the Vorstand and the Aufsichtsrat. Subject to authorization by the Board, C&H proposes to deliver the notice of termination to Vectris on November 30, 2023, which would allow sufficient time for the Aufsichtsrat meeting scheduled for November 20, 2023 and any follow-up actions required prior to the delivery of the notice.
B. Financial Consequences
The financial consequences of termination under Section 8.1(d) are identifiable, quantifiable, and contained. The principal financial elements are as follows:
Reverse Break-Up Fee. Halcyon is obligated to pay the Reverse Break-Up Fee of $28,000,000 to Vectris within 15 business days of the termination date. This is the primary and most significant cost of termination.
Release of Financing Commitment. Upon termination, Halcyon will deliver notice to Meridian Atlantic Bank, N.A. (Sandra Feeney, Commitment Letter contact) and to Kalder & Eames LLP (Philip Strand, financing counsel) terminating the $500,000,000 Commitment Letter. Upon termination of the Commitment Letter, the ticking fee accrual (currently running at 20 basis points per annum on the undrawn $500,000,000 commitment, effective since November 8, 2023) will cease immediately. The accrued ticking fee from November 8 through the anticipated termination date of November 30 will be approximately $61,000, and Halcyon will be responsible for payment of the accrued ticking fee and any other amounts owing under the Commitment Letter.
Avoidance of Litigation Costs. By terminating, Halcyon avoids the estimated $45,000,000 or more in direct litigation costs that would be incurred in connection with defending the DOJ Action through trial, as well as the estimated $3,000,000 to $5,000,000 in costs associated with continued EC Phase II engagement.
Calderwood & Harkness Fees. C&H's total estimated billings through the date of termination are approximately $7,900,000, consisting of approximately $5,800,000 for M&A advisory and transaction work and approximately $2,100,000 for antitrust and regulatory work (including the preparation of HSR and EUMR filings, Second Request compliance, white papers, remedy proposals, and analysis of the DOJ complaint). These fees have been incurred and are payable regardless of whether the transaction closes or is terminated.
Ridgeline Partners Fees. Ridgeline Partners' fee arrangement provides for a base advisory fee of $3,200,000 (calculated as 0.40% of the $800,000,000 aggregate deal value), which is payable regardless of whether the transaction closes. Ridgeline's success fee of $800,000 (0.10% of deal value) is payable only upon the closing of the transaction and, accordingly, will not be owed in the event of termination. The total Ridgeline fee payable upon termination is therefore $3,200,000.
Representations and Warranties Insurance. The R&W insurance policy from Pinnacle Specialty Underwriters, Ltd. (brokered by Atlas Transactional Insurance Group, Inc.) was quoted at a premium of $3,360,000 for a $120,000,000 policy limit. However, the policy has not yet been bound, and no premium has been paid. Accordingly, no insurance premium will be owed in connection with the termination.
Escrow. The Escrow Agreement with Ironclad National Bank, N.A. (Thomas Hargreaves) for the $40,000,000 escrow deposit becomes moot upon termination, as no closing will occur. No escrow funding is required.
Total Identifiable Cost of Termination. The total identifiable cost of termination is the $28,000,000 Reverse Break-Up Fee, plus transaction costs already incurred (including C&H fees of approximately $7,900,000, Ridgeline base fee of $3,200,000, regulatory filing fees, ticking fees, and other incidental costs). These sunk transaction costs are incurred regardless of the path chosen and do not represent incremental costs of the termination decision.
C. Comparison: Cost of Termination vs. Cost of Litigation
The following table summarizes the comparative cost analysis of termination versus litigation. A more detailed version of this analysis is set forth in Appendix E.
The comparison is stark. Termination results in a certain, contained cost of approximately $28,000,000 (plus minimal incremental ticking fee), while litigation carries an expected incremental cost of approximately $79,000,000 or more with a probability of success below 35%. On a probability-adjusted basis, the expected value of litigation is deeply negative. Even in the favorable scenario where Halcyon prevails at trial (which we estimate at less than 35% probability), the substantial costs of litigation would significantly erode the value of the transaction, and the EC Phase II Investigation would present an independent obstacle to closing.
Moreover, if Halcyon pursues litigation and ultimately fails—whether through an adverse judgment, an unfavorable settlement, or Vectris's own termination at the Outside Date—Halcyon would still owe the $28,000,000 Reverse Break-Up Fee, in addition to having incurred all of the litigation costs. The Reverse Break-Up Fee is not avoidable through litigation; it is payable upon any termination under the Antitrust Termination Right.
D. Withdrawal of Regulatory Filings
Upon termination of the Merger Agreement, C&H will take the following steps with respect to the pending regulatory proceedings:
(i) EUMR Form CO Notification. Howard Bellamy will notify the European Commission of the withdrawal of the Form CO notification filed in connection with Case M.11247. The Commission will close its Phase II investigation upon notification of the withdrawal.
(ii) DOJ Civil Action. Following confirmed termination of the transaction, the DOJ's civil case (United States of America v. Halcyon Semiconductor Aktiengesellschaft and Vectris Photonics, Inc., Case No. 1:23-cv-03187 (D.D.C.)) is expected to be dismissed, either by stipulation of the parties or on the DOJ's own motion, as the pending merger that is the subject of the complaint will no longer be contemplated. C&H will coordinate with DOJ counsel to facilitate the dismissal process.
(iii) HSR Filing. The HSR Act filing becomes moot upon the abandonment of the transaction. No formal withdrawal is required, although C&H will notify the FTC's Premerger Notification Office as a matter of courtesy and good practice.
E. Surviving Obligations
As discussed in Section III.D above, certain provisions of the Merger Agreement survive termination and will continue to bind the parties. These surviving obligations are summarized as follows:
(i) Confidentiality (Section 6.5). Halcyon must continue to comply with the confidentiality provisions of the Merger Agreement with respect to non-public information of Vectris received during the course of the transaction. C&H will distribute a reminder to all Halcyon personnel who had access to Vectris confidential information regarding their continuing obligations.
(ii) Non-Disparagement (Section 6.8). The non-disparagement covenants survive for a period of two years following termination. Halcyon's public statements regarding the termination should be carefully coordinated with C&H to ensure compliance.
(iii) Regulatory Cooperation (Section 6.10). The parties' obligations to cooperate on pending regulatory matters survive until such matters are resolved. In practice, this obligation will principally relate to coordination regarding the dismissal of the DOJ Action and the withdrawal of the EC notification.
(iv) Dissolution of Merger Sub. Halcyon Acquisition Sub, Inc. was formed solely for the purpose of the transaction and serves no independent business purpose. Upon termination, C&H will prepare and file a Certificate of Dissolution with the Delaware Secretary of State (File No. 7634291) to dissolve Merger Sub.
(v) Litigation Hold. C&H will reassess the scope of the litigation hold implemented in connection with the DOJ Action following the anticipated dismissal of the civil case. Pending dismissal, the existing litigation hold should be maintained. Following confirmed dismissal, C&H will issue updated guidance regarding the release of the hold and the disposition of preserved materials, in consultation with Dr. Luisa Hartmann, General Counsel of Halcyon.
F. Assessment
Termination under Section 8.1(d) is the lowest-cost, lowest-risk, and most expeditious resolution available to Halcyon. The $28,000,000 Reverse Break-Up Fee, while a significant sum in absolute terms, is a fraction of the potential cost of continued litigation and is materially less than the expected cost of the alternatives on a probability-weighted basis. Termination provides certainty of outcome, eliminates the ongoing financial burden of the ticking fee and advisor costs, releases Halcyon's management team from the distraction of extended regulatory and legal proceedings, and preserves Halcyon's strategic flexibility to pursue alternative growth opportunities—whether through organic investment, alternative acquisitions, or other strategic initiatives.
The Reverse Break-Up Fee represents the agreed-upon contractual allocation of antitrust risk between two sophisticated parties. Its payment in these circumstances is fully consistent with the terms of the Merger Agreement and does not give rise to any additional liability or reputational concern for Halcyon.
We recommend this option.
VII. Recommendation
Based on the foregoing analysis, Calderwood & Harkness LLP recommends that the Vorstand and the Aufsichtsrat of Halcyon Semiconductor Aktiengesellschaft authorize the termination of the Agreement and Plan of Merger dated August 10, 2023, among Halcyon Semiconductor Aktiengesellschaft, Halcyon Acquisition Sub, Inc., and Vectris Photonics, Inc., pursuant to Section 8.1(d) of the Merger Agreement (the Antitrust Termination Right).
Our recommendation is grounded in the following principal considerations:
(i) The estimated likelihood of Halcyon prevailing at trial against the DOJ in the civil antitrust action is below 35%, reflecting the strength of the DOJ's market share evidence, the applicability of the structural presumption, and the challenging judicial and enforcement environment.
(ii) The estimated direct litigation costs of defending the DOJ Action through trial exceed $45,000,000, exclusive of additional costs for EC Phase II engagement, ticking fees, ongoing advisor fees, and management distraction.
(iii) The DOJ's rejection of Halcyon's proposed structural remedy and its decision to file a civil complaint rather than engage in further remedy negotiations signals a strong enforcement posture that is unlikely to yield to negotiation at a scope acceptable to Halcyon.
(iv) The EC Phase II Investigation presents a parallel and independent barrier to closing, which would not be resolved even in the event of a favorable outcome in the U.S. litigation.
(v) Further remedy negotiations are unlikely to succeed, and any remedy package of the scope likely required to satisfy the DOJ and the EC would negate the strategic value of the acquisition, rendering the transaction uneconomic for Halcyon.
(vi) The $28,000,000 Reverse Break-Up Fee is the certain and contained cost of termination, representing the sole and exclusive remedy of Vectris against Halcyon for termination under the Antitrust Termination Right. This cost is materially less than the expected costs and risks associated with either of the alternative options.
We further note that the termination of the Merger Agreement would not constitute or arise from any material adverse effect on Halcyon's own business, operations, or financial condition. The termination is driven solely by the inability to satisfy the antitrust conditions precedent to closing of the merger, as a direct result of the DOJ's decision to challenge the transaction and the EC's opening of a Phase II in-depth investigation. Halcyon has at all times complied with its obligations under the Merger Agreement, including its antitrust and regulatory obligations, and the termination is fully within the scope of the contractual rights negotiated by the parties.
VIII. Proposed Next Steps
Subject to the authorization of the Vorstand and the Aufsichtsrat, C&H proposes the following sequence of next steps to implement the termination:
1. Aufsichtsrat Meeting (Proposed: November 20, 2023). C&H will present this analysis to the full Aufsichtsrat and the Vorstand at a joint meeting to be convened on November 20, 2023. Oliver Mackenzie and Howard Bellamy will attend in person (or by secure videoconference, as appropriate) to present the Firm's analysis and answer questions from the Board. The Board will be asked to deliberate and vote on a resolution authorizing the Vorstand to terminate the Merger Agreement and to take all actions necessary or appropriate to implement the termination. A draft resolution will be circulated to the Aufsichtsrat members in advance of the meeting for review and comment.
2. Notice of Termination. Upon authorization by the Board, C&H will prepare and deliver the formal written notice of termination to Vectris Photonics, Inc. (attention: Rebecca Lau, General Counsel), with a copy to Whitfield, Prager & Loomis LLP (attention: Catherine Whitfield), in accordance with the notice provisions of Section 10.2 of the Merger Agreement. The notice will invoke Section 8.1(d) of the Merger Agreement and specify the grounds for termination. C&H proposes a target effective date of termination of November 30, 2023.
3. Termination Agreement and Mutual Release. Following delivery of the notice of termination, C&H will prepare the initial draft of the Termination Agreement and Mutual Release and negotiate its terms with Whitfield, Prager & Loomis LLP on behalf of Vectris. The Termination Agreement will confirm the effective date of termination, establish the mechanics for payment of the Reverse Break-Up Fee (including designation of Vectris's receiving account), provide for mutual releases of all claims between the parties other than claims arising under or relating to the surviving provisions, and address the dissolution of Merger Sub. C&H will circulate the final Termination Agreement to the Vorstand and General Counsel for review and approval prior to execution.
4. Reverse Break-Up Fee Payment. Halcyon will arrange for the wire transfer of $28,000,000 to Vectris's designated account by December 15, 2023, which falls within the 15 business day payment window spec