Strategic Economics

Horizontal Mergers and the HHI Screen

Learn the arithmetic a competition authority runs on your deal in the first fifteen minutes (squared market shares, a change of exactly twice the product of the two shares), and the three things that decide the answer long before that arithmetic is reached.

  • Advanced
  • 15 min total
  • 14 chapters

What decision this helps you make: Whether a horizontal deal will clear quietly, draw a long review, or be blocked; how to size the timing risk and the break fee before you sign; and which internal documents will be read back to you when it happens.

What this topic is

When two firms that compete with each other combine, the number of independent competitors falls by one. The Herfindahl-Hirschman index is the standard way of scoring how concentrated a market is: add up every firm's market share expressed in percentage points, squared. A market of ten equal firms scores 1,000; a monopoly scores 10,000. The screen looks at where the index lands after the deal and at how much the deal moved it, and above stated levels the merger is presumed to be unlawful unless the parties can rebut that presumption.

Why it matters

The screen is arithmetic, it is published, and you can run it on your own deal before you hire anybody. Doing so changes the terms you agree to: how long the outside date should be, who bears the risk of a long review, whether a divestiture package should be prepared in advance, and how large a reverse break fee is warranted. Sellers who discover the concentration problem after signing negotiate from a much worse position than sellers who discovered it before.

Who should learn it

Founders and owners considering a sale to a competitor, corporate-development and private-equity teams building roll-ups, CFOs sizing regulatory timing risk, and anyone who has written an email describing what a deal would do to prices.

What you will understand

  • How to compute the index and the change it produces, including why the change is always twice the product of the two shares
  • The current thresholds, what a presumption actually means, and what rebuts it
  • Why market definition decides the outcome before any share is computed, and how the hypothetical monopolist test works
  • The tools that have partly displaced the screen: diversion ratios, GUPPI, and critical loss analysis

Prerequisites

Common misconception

That the index is the test. It is not; it is a screen, and screens are designed to be over-inclusive. A deal that trips it may clear on evidence about diversion, entry, efficiencies, or the fact that the two firms were never each other's close substitutes; a deal that passes it may still be challenged where the merging parties are the two closest competitors in a differentiated market and the shares understate that. The deeper point is that every share figure is downstream of a market definition, and market definition is the genuinely contested step. Change the boundary of the market and both the level and the change move by hundreds of points without a single fact about the deal being different.