FREE online courses on Mergers & Acquisitions - Chapter 2 - Anti-Trust Laws

 

One of the most important federal laws is Section 7 of the Clayton Act which stipulates that a merger cannot substantially lessen competition or result in a monopoly. In determining if a merger is anti-competitive, federal agencies will look at the markets served and the type of commerce involved. Several factors are considered, such as size of market, number of competing companies, financial condition of companies, etc.

 

The size of the newly merged company in relation to the market is very important. The USJD uses an acid test known as the Herfindahl-Hirshman Index (HHI) to determine if action should be taken to challenge the merger. The HHI measures the impact the merger will have on increased concentration within the total marketplace. HHI is calculated by summing the squares of individual market shares for all companies and categorizing market concentration into one of three categories. The three categories are:

 

Less than 1000: Unconcentrated market, merger is unlikely to result in anti-trust action.

1000 - 1800: Moderate concentration. If the change in the HHI exceeds 100 points, there could be concentration in the marketplace.

Above 1800: Highly concentrated market. If the change in the HHI exceeds 50 points, there are significant anti-trust concerns.