How to calculate market concentration (HHI) before an acquisition
By
Lisa
Why market concentration matters before you sign
A revenue multiple tells you what a target is worth relative to its peers. It tells you nothing about what happens to the market once you own the target. Two deals with identical target financials can look completely different once you map the market around them: one closes you into a near-duopoly that invites regulatory attention, the other adds you to a long tail of small competitors with real room to consolidate.
Market concentration analysis answers that question before the deal, not after a regulator asks it. For corporate development teams running a buy-and-build strategy, it also doubles as a sourcing tool: a fragmented market with a low HHI is usually a market with more add-on targets left to find.
What the Herfindahl-Hirschman Index measures
HHI is the sum of the squared market shares of every competitor in a defined market, using whole-number percentages. A market with one supplier has an HHI of 10,000 (100² = 10,000). A market with an infinite number of equally tiny competitors approaches zero. Everything real sits somewhere between the two.
Squaring the shares, rather than just adding them up, is the point: it weights the index toward the largest players, so a market with one dominant firm and a dozen minor ones scores very differently from a market with four roughly equal competitors, even if both have the same top-line share accounted for.
How to calculate HHI: the formula and a worked example
The formula is:
HHI = Σ (market share of firm i)², with shares expressed as whole numbers (30% enters the formula as 30, not 0.3).
Take a market with five competitors before a deal:
HHI before the deal
| Company | Market share | Share squared |
|---|---|---|
| A | 30% | 900 |
| B | 25% | 625 |
| C | 20% | 400 |
| D | 15% | 225 |
| E | 10% | 100 |
| Total HHI | 2,250 |
Now assume A acquires D. Their combined share is 45%, and the other three are unchanged:
HHI after the deal
| Company | Market share | Share squared |
|---|---|---|
| A (post-deal) | 45% | 2,025 |
| B | 25% | 625 |
| C | 20% | 400 |
| E | 10% | 100 |
| Total HHI | 3,150 |
The deal moves the market from an HHI of 2,250 to 3,150, a delta of 900 points, and pushes it from moderately concentrated into highly concentrated territory under the US thresholds below. That single number is usually enough to tell a deal team whether to expect a straightforward filing or a long look from antitrust counsel.
US thresholds: how the DOJ and FTC read an HHI score
The Herfindahl-Hirschman Index is the metric the US Department of Justice and Federal Trade Commission use to classify markets under their merger guidelines. The commonly cited bands are:
US HHI classification bands
| HHI range | Classification | What it signals |
|---|---|---|
| Below 1,500 | Unconcentrated | Low concern; mergers in this range are rarely challenged on concentration grounds alone |
| 1,500 to 2,500 | Moderately concentrated | A merger that raises HHI by more than roughly 100 points can draw a closer look |
| Above 2,500 | Highly concentrated | A merger that raises HHI by more than roughly 100 to 200 points is presumed to raise competitive concerns |
These are screens, not hard rules. A deal that crosses a threshold is not automatically blocked, and a deal that stays under one is not automatically safe. But the thresholds set the tone for how much additional analysis, and how much legal cost, a deal is likely to require.
EU thresholds: where the European Commission draws the line
The European Commission's horizontal merger guidelines use HHI in a similar way but with different bands, and they look at both the post-merger level and the change (delta):
EU HHI safe-harbor bands
| Post-merger HHI | Delta | Commission's typical view |
|---|---|---|
| Below 1,000 | Any | Unlikely to raise concerns; usually needs little detailed analysis |
| 1,000 to 2,000 | Below 250 | Unlikely to raise concerns, absent special circumstances |
| Above 2,000 | Below 150 | Unlikely to raise concerns, absent special circumstances |
"Special circumstances" include a recent market entrant, a maverick competitor on an otherwise stable price, or a merging party that already holds 50% or more of the market on its own. A cross-border deal needs both sets of thresholds checked separately, since a market structure that clears comfortably in the US can still draw a second look in Brussels, or the reverse.
Where private company data breaks the calculation
The formula is simple. The data rarely is. HHI needs a market share for every meaningful competitor, and market share needs a revenue (or unit) figure for every one of them. That is straightforward when the market is dominated by listed companies with public filings. It falls apart in most of the markets corporate development and PE teams actually chase: lower-middle-market, founder-owned, and niche B2B segments where the majority of participants are privately held and publish nothing beyond a statutory minimum, if that.
Three problems show up in practice:
- Incomplete competitor lists. Teams tend to build their market map from the companies they already know, which systematically undercounts small, regional, or recently founded competitors, and understates fragmentation.
- Missing financials. Even once a competitor is identified, a private company outside the largest disclosure regimes may not publish revenue or EBITDA at all.
- Inconsistent market definition. HHI is only as good as the market boundary drawn around it. Too broad a definition dilutes concentration that is real at the sub-segment level; too narrow a definition manufactures concentration that is not.
Getting market share data when most of the market is private
None of this is solved by finding a better spreadsheet template. It is solved by starting from a company database broad enough to capture the long tail, not just the names a deal team already has on file. StrategyBridgeAI builds that company universe through niche-filter target and competitor search across a database covering more than 50 million companies in over 100 countries, rather than fixed industry codes, which is the step that catches the regional and founder-owned competitors a manual market map usually misses.
For the financials, the same outside-in business analysis that deal teams already use to size an individual private target, including revenue and EBITDA estimation, benchmarking, and valuation, can be applied across the whole competitor set, so a market share table can be built even where most participants don't publish numbers. On-demand niche market and industry analysis adds the context, including barriers to entry and historical trends, that supports the market definition decision HHI depends on, so the “highly concentrated” or “fragmented” read is anchored in sourced industry data rather than a team's working assumption.
None of this changes the formula. It changes whether the market share numbers feeding it are complete enough to trust.
HHI is a screen, not a verdict
Even a correctly calculated HHI answers a narrower question than it looks like it does. It describes concentration in a market as defined, at one point in time, based on revenue or output share. It says nothing about barriers to entry, about whether the market is growing or shrinking, or about whether a merger would actually let the combined company raise prices. Antitrust counsel treats HHI as a first screen that decides how much further analysis a deal needs, not as the analysis itself. For a corporate development team, the same discipline applies in reverse: a low HHI is a reason to look harder at a fragmented market for the next three or four add-ons, not a guarantee that any one of them is a good deal on its own merits.
Frequently asked questions
What is a good HHI score for a merger?+
There is no universal “good” score; it depends on the regime and the post-merger delta. Under the commonly cited US bands, a post-merger HHI below 1,500 is unconcentrated and rarely draws scrutiny on concentration grounds alone. Under the EU's guidelines, a post-merger HHI below 1,000, or between 1,000 and 2,000 with a delta under 250, is unlikely to raise concerns absent special circumstances.
How do you calculate HHI from market share percentages?+
Square each competitor's market share as a whole number, then add the squares together. A market with shares of 30%, 25%, 20%, 15%, and 10% has an HHI of 30² + 25² + 20² + 15² + 10² = 2,250.
What HHI increase triggers an antitrust review?+
Under the commonly cited US bands, a merger that increases HHI by more than roughly 100 points in a moderately concentrated market, or by more than roughly 100 to 200 points in a highly concentrated market, is presumed to raise competitive concerns. The European Commission uses delta thresholds of 250 points (post-merger HHI between 1,000 and 2,000) and 150 points (post-merger HHI above 2,000) for its “unlikely to raise concerns” safe harbor.
Can you calculate HHI for a market made up mostly of private companies?+
Yes, but it requires building a complete competitor list and estimating revenue or EBITDA for companies that do not publish financials, rather than relying only on the competitors a team already knows. A broad company database combined with private-company revenue and EBITDA estimation is what makes the market share table possible.
Is HHI calculated the same way under US and EU merger rules?+
The formula is identical: the sum of squared market shares. What differs is the thresholds used to interpret the result and the delta bands each regime treats as a safe harbor, so the same market structure can read differently depending on which jurisdiction's guidelines are applied.
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