Introduction to Corporate Finance

21: Mergers, Acquisitions and Corporate Control

Mergers resulting in a highly concentrated HI measure are the most likely to be challenged. Consider

the example in Table 21.5. The pre-merger HI of this industry is 1,750 (moderately concentrated). A

merger between Company 7 and Company 8 would reduce the number of competitors in the industry,

but the marginal impact of a merger between the two smallest players in the industry would increase the

HI to only 1800 and would probably not face a challenge. However, a merger between the two largest

companies in the industry would result in an HI of 2,980 – moving this industry from moderately to

highly concentrated and likely prompting a challenge by the competition regulator.

TABLE 21.5 DETERMINATION OF ANTI-COMPETITIVENESS USING THE HERFINDAHL INDEX (HI)

Pre-merger concentration Post-merger concentration

Company Market

share (%)

Market

share^2

Company Market

share (%)

Market

share^2

Company Market

share (%)

Market

share^2

1 30 900 1 30 900 1 + 2 50 2,500

2 20 400 2 20 400 3 10 100

3 10 100 3 10 100 4 10 100

4 10 100 4 10 100 5 10 100

5 10 100 5 10 100 6 10 100

6 10 100 6 10 100 7 5 25

7 5 25 7 + 8 10 100 8 5 25

8 5 25

Sum (=HI) 1,750 1,800 2,950

Concentration Moderate Moderate High

example

The failed 1997 merger attempt of Staples and Office
Depot exemplifies the role of regulatory agencies in
preventing what are deemed to be anticompetitive
combinations. On 4 September 1996, Staples and
Office Depot announced their intent to merge in
a $3.4 billion deal. At the time, Office Depot and
Staples were the largest and second-largest US office
supply superstores, respectively. Of the $14.0 billion
in sales in this market, Office Depot had a market
share of $6.6 billion, followed by Staples with $4.1
billion, and the only other major competitor was
OfficeMax, with sales of $3.3 billion.
The Federal Trade Commission (FTC) reviewed the
proposed merger for anticompetitive effects and
requested more information from the companies at
the end of the initial review period. At the end

of the second review, the FTC concluded that the

proposed merger would have an anticompetitive

impact if allowed to be consummated, so it rejected

the merger proposal. One of the key points cited by

the FTC in its rejection was the market power (the

5% rule)^28 that the merged company would be able

to wield in those markets where no stores other than

Staples or Office Depot existed. In order to remedy

this obstacle, Staples and Office Depot proposed to

sell 63 stores to OfficeMax in the geographic markets

where both Staples and Office Depot were located.

The FTC again rejected the merger, and threatened

to sue the companies in federal court if they

attempted to pursue it. The FTC further threatened

that it would continue to pursue the merged

company for antitrust violations.

28 The 5% rule is an alternative to the HI anti-competitiveness rule presented in Table 21.5. This alternative rule is based on an elasticity measure
that gauges whether a merged firm will have the market power to control prices in its market. To implement the 5% rule, the US Department of
Justice determines whether a 5% increase in price would results in a decline of more than 5% in market demand. If it would, then that market is
deemed elastic and therefore unlikely to be adversely affected by a merger (and also less likely to be strictly governed by the HI measure).