Monday, April 30, 2018

Sprint, T-Mobile US HHI Numbers Probably Will Not Pass Antitrust Muster

The proposed merger between Sprint and T-Mobile US is going to have a tough time getting around its score on the Herfindahl-Hirschman Index (HHI), a basic tool used by the U.S. Department of Justice and most other antitrust authorities globally.

The Justice Department will generally investigate any merger of firms in a market where the Herfindahl-Hirschman Index (HHI), a test of market concentration, exceeds 1000 and will very likely challenge any merger if the HHI is greater than 1800.

The U.S. market has an HHI of about 2500.

Three years ago, the very same proposed transaction would have occurred where the U.S. market had an HHI score of about  2,766. But following a merger of Sprint and T-Mobile, the score would be 3,252. Is the market less concentrated now?

The last time Sprint and T-Mobile US tried to merge, three years ago, Craig Moffett of MoffettNathanson calculated that the wireless industry currently had an HHI score of 2,766.

But following a merger of Sprint and T-Mobile, the score would be 3,252. That suggests an increase in concentration of about 486 points. So it did come as a surprise that regulators signaled opposition to the merger.

Do you think the market is significantly less concentrated than three years ago? AT&T and Verizon are probably slightly down, share wise, from three year ago levels. T-Mobile clearly is up, but Sprint is down, MVNOs are flat and others have lost share.

To be sure, the U.S. market is not as concentrated as many other markets. Looking at the biggest 36 mobile markets globally, analyst Chetan Sharma found that the average HHI score of a typical market ranks 3440 on the scale.

Developed markets have an HHI of 3270. So the U.S. market, with an HHI of 2500, lies between “heavily concentrated” and “moderately concentrated.”

The point is that DoJ is looking at a major market concentration move in a market that already is, by its own tests, moderately to heavily concentrated.

While it always is conceivable that U.S. Department of Justice attorneys will ignore their traditional horizontal merger guidelines, it seems unlikely that any proposed horizontal merger increasing the Herfindahl–Hirschman Index by more than 200 points will have an easy time being approved.

The agency generally considers markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated.  

Transactions that increase the HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission.  

The proposed AT&T acquisition of T-Mobile would have resulted in AT&T having 43.7 market share, resulting in an HHI of 3,335, an increase of 951 points. It is no surprise that the merger effort failed.

The AT&T acquisition of T-Mobile also would have raised HHI scores by more than 200 points in 94 percent of markets. By some estimates, HHI would have increased by more than 416 points.

The latest proposed merger should probably find an HHI change of close to that 416 points, not much less than the 486 points that lead the DoJ to oppose the AT&T acquisition of T-Mobile US.

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