First RBOC/IXC merger could block others, says Yankee Group

The first merger of a regional Bell operating company and a major interexchange carrier could be the last, at least for the near term, according to a research note issued this morning by the Yankee Group. A second such merger, the group argued, would probably render the telecom services market insufficiently competitive in the eyes of federal regulators.

Under current market conditions, the U.S. Department of Justice is likely to allow an RBOC/IXC merger, the Yankee Group said. But mergers or acquisitions that raise the Herfindahl-Hirschman Index (or HHI, the standard measure of market concentration) by more than 100 points in moderately concentrated markets raise concerns within the DOJ’s antitrust division. However, such transactions might still succeed if they don’t push the total HHI in their markets past 1800.

Several potential scenarios fit that description with a resulting HHI between 1400 and 1500, the Yankee Group said, including a BellSouth/Sprint merger (which would only raise the total HHI by 39 points) and a Verizon Communications/AT&T merger (which would raise the total HHI by 252 points). But a subsequent merger could raise the market’s total HHI too high, the group said.

"Therefore, one pairing is likely to meet the HHI test," the Yankee Group note said, concluding that a first-mover advantage will be key for any RBOCs considering acquiring an IXC.

"The first-mover advantage is potentially critical," the Yankee Group added. "The suitor that acts first will be best positioned and will be more likely to be approved by anti-trust powers because of current market concentration levels. In addition, an early-mover ensures it will acquire the company with the best fit for its business."