a) Suppose Fiat recently entered into an Agreement and Plan of Merger with Case
ID: 1217116 • Letter: A
Question
a) Suppose Fiat recently entered into an Agreement and Plan of Merger with Case for $4.3 billion. Prior to the merger, the market for four-wheel-drive tractors consisted of five firms. The market was highly concentrated, with a Herfindahl-Hirschman index of 2,765. Case’s share of that market was 22 percent, while Fiat comprised just 12 percent of the market. If approved, by how much would the postmerger Herfindahl-Hirschman index increase?
(b) Based only on this information, is the Justice Department likely to challenge the merger according to the Horizontal Merger Guidelines?
1) No.
2) Yes.
3) Possibly - but other factors will be considered.
Explanation / Answer
(a) If approved, the merger would raise the HHI by:
10,000[(0.22+0.12)2 – (0.22)2 – (0.12)2 ] = 528 points.
Thus the post-merger HHI = 2765 + 528 = 3293.
(b) Yes, since the post-merger HHI is greater than 2,500 and the change in HHI is greater than 200, this merger likely will be challenged by the Justice Department.
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