RHT/IBM: Third Parties Caution Brazilian Competition Authority of Potential Competitive Harm

Relevant Documents:
Sompo Seguros Questionnaire
Banco Bradesco Questionnaire

Takeaways
 

• While two third-parties told Brazil’s antitrust authority that they did not perceive the deal to be inherently anticompetitive, they cautioned that potential risks to competition could result from IBM’s acquisition of Red Hat.
• In responses to questionnaires sent by Brazil’s Administrative Council for Economic Defense, or CADE, Banco Bradesco and Sompo Seguros warned Brazil’s antitrust authority that competition could be adversely affected if IBM hinders Red Hat’s compatibility and development of open sourcing.
• Sompo Seguros also stated that the deal could result in potential dominance of an operating system software for non-Microsoft platforms, the unification of relevant solutions in the market, and a loss in bargaining power.
• CADE polled nine companies for supplemental market information on April 24. Following Sompo Seguros’ and Bradesco’s response earlier this week, the authority is slated to receive input from Itaú Unibanco, Banco Santander, Tivit and Amil Assistência Médica Internacional today, May 10, and Caixa Econômica Federal and Telefônica Brasil next week. The ninth market participant, Banco do Brasil, has not responded or disclosed a timeline for submitting its response.

Two companies that use Red Hat and IBM’s products and services have expressed concern that if IBM hinders Red Hat’s compatibility and development of open sourcing, the deal could harm competition in the market for business software.

In responses sent to Brazil’s Administrative Council for Economic Defense, or CADE, earlier this week, Banco Bradesco, a banking and financial services company, and Sompo Seguros, an insurance company, both state that they do not recognize the deal to be harmful to market competition. Bradesco and Sompo Seguros specify that IBM and Red Hat’s competitors offer close substitutes to the companies’ products in a market that has low barriers for entry.

However, they did warn CADE about how the tie-up could adversely harm competition should IBM eliminate Red Hat’s compatibility with open source products.

In its response, Bradesco cautioned CADE that the transaction may adversely impact the business software market if IBM discontinues certain products or services in Red Hat’s portfolio. Bradesco specified that it foresees a potential harm if IBM were to discontinue Red Hat’s current commitment to support open sourcing. As Reorg M&A previously reported, these concerns have been acknowledged by open source technology advocates, who view Red Hat as a key player and a leader in the open source community.

Sompo Seguros also expressed concern about IBM clamping down on Red Hat’s commitment to open sourcing. In Sompo Seguros’ response, the company states that it does not view the merger of Red Hat and IBM to be harmful to market competition. However, the insurance company stipulates that factors that may harm competitive market conditions include a potential for high market dominance for operating system software for non-Microsoft platforms, the unification of relevant solutions in the market, and a loss in bargaining power.

CADE polled nine companies for supplemental market information on April 24. Several of the market participants asked CADE for an extension of the May 5 deadline to return their responses. The authority is slated to receive input from Itaú Unibanco, Banco Santander, Tivit and Amil Assistência Médica Internacional today, May 10. Caixa Econômica Federal and Telefônica Brasil are expected to submit responses next week on May 13 and May 16, respectively. The ninth market participant, Banco do Brasil, has not responded or disclosed a timeline for submitting its response.

As previously reported by Reorg M&A, CADE’s Superintendence General will likely examine overlaps in eight markets identified by Red Hat and IBM in the notification filed before CADE on April 9. The companies' overlaps include the market for Software-Defined Storage Controller software - which is related to the Hyper-Converged Infrastructure software, commonly referred to as HCI software.

Reorg M&A’s previous coverage of this transaction can be found HERE.

--Hannah Deichman and Kathryn Haake