HHI Still is a Barrier to Sprint-T-Mobile US Combination

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

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 increase by more than 416 points.

So the issue is what regulators might make of increased market concentration any merger between Sprint and T-Mobile US would entail.

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. That is not so 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.”

Still, two prior proposed horizontal mergers (AT&T with T-Mobile US; and Sprint with T-Mobile US) have failed.

Some might argue the odds of approval of any T-Mobile US combination with Sprint are higher than in the past. Others might argue that T-Mobile US has proven to be the dynamic force shaking up the U.S. mobile market and delivering competitive benefits for consumers. Sprint argues a combined Sprint-T-Mobile US would be a more-powerful competitor, in that regard.

Others are going to question that assertion. Equity analysts uniformly believe the markets will be less competitive after any such merger, which will allow firms to raise prices.

It always can be argued that the combination will involve significant disposition of assets. Some might argue the new company could spin off subscribers (assuming it wants to keep its spectrum). Of course, that sort of negates the whole point of acquiring subscriber bulk.