Anticipated acquisition by Thales UK Limited of nCipher plc

Affected market: IT security products

No. ME/3780/08

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 23 September 2008. Full text of decision published 6 October 2008.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

Thales UK Limited (Thales) is wholly owned by Thales S.A, a French international electronics and systems group with activities in the defence, aerospace and security sectors worldwide. In the UK, Thales provides information systems to organisations in all areas of government, defence, aerospace, banking, finance, energy and air travel. In addition to supplying defence electronics systems, Thales provides expertise in secure network communications and provides the security technology used to protect credit/debit card transactions.

nCipher plc (nCipher) is a UK-listed company. The firm provides encryption and key management solutions comprising net security products, technologies and services to public and private enterprises and institutions through a network of partners and offices in the UK, Europe, Asia-Pacific rim and the US. nCipher's UK turnover in 2007 was [  ].

TRANSACTION

As a result of the proposed transaction, Thales will purchase the entire issued share capital of nCipher. Thales has offered consideration of 300 pence per share to nCipher's shareholders. Based on the number of outstanding shares being 16,905,534, this values the equity share capital at approximately £50.7 million.
 
The transaction is also subject to the provisions of the City Code on Takeovers and Mergers and will be implemented by way of a Court approved scheme of arrangement under Part 26 of the Companies Act 2006.

The parties notified the transaction to the Office of Fair Trading (OFT) on 28 July 2008. The administrative deadline for the OFT to decide whether to refer the merger to the Competition Commission (CC) is 23 September 2008.

The transaction was also notified to, and subsequently cleared by, the relevant authorities in Germany and Austria.

JURISDICTION

As a result of this transaction, Thales and nCipher will cease to be distinct. The parties overlap in the supply of hardware security modules (HSMs) and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met as the parties have a combined share of more than 25 per cent in relation to the production and supply of HSMs in the UK. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

The OFT received comments and views about the merger from a large number of third parties, including competitors and customers of the merging parties.

Three competitors raised concerns on the transaction. In particular, they expressed the view that the merger would allow the new entity to bundle GP and Payment HSMs and effectively drive them out of the market. However, two competitors acknowledged that the parties were supplying products which complement rather than compete with each other and that they did not see the parties as being close competitors.

One competitor was particularly vocal in its concerns. Its primary concern was that the merger would reduce by one the number of credible suppliers of HSMs to UK customers and that it would eliminate competition between the two largest UK HSM suppliers. In the alternative, the same competitor argued that the merger would raise conglomerate issues, in other words that the parties supplied complementary as opposed to competing products.

A minority of customers raised concerns about the merger. Those that did argued that the merger would limit the choice of HSMs suppliers in the UK available to them. However, these customers did not substantiate that the parties were in fact competitors and some of them were confused with regards to the differences between GP and Payment HSMs.

The concerns expressed by third parties have been dealt with above. Some concerns were not merger-specific.

ASSESSMENT

The parties overlap in the production of HSMs. On a narrow market definition considering GP and Payment HSMs in separate markets, the parties combined share of supply is around [65-75] per cent for Payment HSMs but with a small increment ([0-10] per cent or less) and [35-45] per cent (or [60-70] per cent according to a complainant's estimates) for GP HSMs with an increment of only [0-10] per cent, on a wide market definition including both types of HSMs, the parties' combined share of supply is [55-65] per cent with an increment of [30-40] per cent, but these figures do not appear accurately to capture the competitive dynamics and likely merger effect in the UK supply of HSM products, because although the parties are the two largest suppliers of HSMs in the UK, they are not sufficiently close competitors to raise concerns.

This conclusion is supported by the low increments to shares of supply in the two individual HSM product categories considered, internal documentary evidence, and the views of many market participants, all of which suggests that the parties are not close competitors, that the merger will not remove an important competitive constraint, and that pricing and other supply terms of each of the product lines will be constrained to the pre-merger level by credible internationally-active rivals such as Safenet, IBM, HP and Sun. 
 
Some conglomerate concerns were expressed by third parties, relating to ability of the parties to bundle GP and Payment HSMs and effectively drive rival firms out of the HSM market before raising their prices. However, the evidence before the OFT suggests that the merging parties will not have the ability to foreclose the HSM market through bundling their products, because bundling across the categories does not appear common practice, and to the extent it is or could become so, there are a number of suppliers of both types of HSMs who are equally capable of bundling their own products, or offering single-product propositions to customers of GP HSMs, without the risk of harm to UK customers.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

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