The Wall Street Journal is reporting (subscription required) that a St. Louis-based reseller, Sotel Systems, has asked the U.S. Department of Justice to examine whether an Avaya acquisition of Nortel Enterprise Solutions would result in an Avaya-Cisco "duopoly."The Journal cites the belief of Sotel's president, Jim Goebel, that, "the DOJ appears to be taking his complaint seriously, as it arranged an hour-long conference call between him and six of the department's officials earlier this week to learn more."
Goebel apparently claims that if Avaya acquires Nortel Enterprise, it would, together with Cisco, control a combined 75% of the "overall enterprise market." That's much higher than Allan Sulkin's just-released figures would indicate. Based on Sulkin's numbers, Cisco, Avaya, and Nortel together control 47.8% of the market.
That 47.8% is still a pretty big number, but does it violate anti-trust? Taking Sulkin's numbers, I did a real quick back-of-the-envelope Herfindahl index calculation to see how concentrated the enterprise voice market would really be under an Avaya-buys-Nortel scenario (Herfindahl is the index used for anti-trust purposes; formula at the link).
The bottom line is that the market would be entering the realm of "moderate concentration," but would be safely below the anti-trust threshold. I assigned market share numbers as follows (per Sulkin):
* Avaya + Nortel = 27% * Cisco = 21% * NEC = 8% * Mitel = 8% * 7 others = 3% each (Sulkin says 2-3% each, so I concentrated this segment as much as possible) * 15 others = 1% each (again, these are 1% or less, so I assumed the fewest number of players with the highest share each, for maximum concentration)
This results in a Herfindahl index of 1,376 for the North American enterprise communications market. This website notes that "The Department of Justice considers Herfindahl indices between 1,000 and 1,800 to be moderately concentrated and indices above 1,800 to be concentrated."
However, the site goes on to note, "increases of over 100 points generally provoke scrutiny, although this varies from case to case." With Nortel as a standalone company, the North American enterprise communications market has a Herfindahl index (per Sulkin's numbers) of 1,016. So the Avaya-Nortel deal would boost the index by 360 points, or 3.6 times the amount that could "provoke scrutiny." So even if Sotel's 75% figure is exaggerated, it's not beyond the realm of possibility that DoJ would want to take a look at Avaya-Nortel, even if the deal is unlikely to be blocked. And a point made in the Journal article is that a bankruptcy buyer is judged not just by the dollar value of their bid, but by whether it's the "highest and best" offer, which could include the potential for regulatory scrutiny to delay or derail the deal.
BTW, just for the heck of it, I tried out the highest-concentration scenario: Cisco decides to buy Nortel Enterprise. That scenario yields a Herfindahl index of 1,520--still below the antitrust threshold.
