First principle of oligopolies
Our first principle is that all industries tend towards oligopoly. That's not an immutable law, but in the current economy, it seems inevitable and in the past decade, the trend towards oligopoly has accelerated.
The rate and degree of concentration varies from industry to industry. Certain businesses are now tight oligopolies with three or fewer competitors dominating the sector (radio, soft drinks, ice cream, chicken). Others have a larger number (4-8) of major rivals but a lot fewer than there were a decade ago (pharmaceuticals, oil, television, magazines, personal computers, cell phone services). Still others are traditionally highly unconcentrated industries that are just starting to see a flurry of mergers and acquisitions, along with the bankruptcy of weaker rivals. This includes such sectors as funeral homes and commercial printing, each of which is still diffuse but dramatically less so than in the early 1990s.
The biggest round of mergers and acquisitions happened during the boom of the late nineties. As I see it, this incredible uptick had to with a number of factors.
- The major factor was the availability of plentiful, inexpensive money for buyouts. Large amounts were invested in stocks and bonds, while at the same time banks and pension funds were awash with cash, and venture capitalists were eager to invest, and a whole new specialty in investment banking grew to foster such takeovers. Needless to say, lots of principals and facilitators got rich even off the dumbest, most disastrous deals.
- For many investors, growth in gross company income was seen as more important than margins, so conservative companies that did not play the mergers and acquisitions game were penalized in the stock market.
- Lots of owners of smaller companies saw this as their best chance to cash out, and they could demand inflated prices for their firms. Optimism about ever-expanding consumption made it seem like any investment would pay off, thanks to economies of scale, synergies, and marketing savvy. The so-called "new economy" mania fueled an enthusiasm for wheeling and dealing, including seemingly overpriced mergers and acquisitions.
- A laissez-faire attitude to industry concentration in the US had started in Reagan administration and continued during the Bush and Clinton years. Antitrust inhibitions were weaker than they had been since the trustbuster era. A number of mergers that would have been unthinkable in the 1970s and 1980s were given easy approval.
- The concept of key brands and brand management became gospel, and a premium investment to buy an already well-known brand was seen as a smarter move than investing in the slow and chancy process of building new ones.
- New markets opened, especially in Asia and Eastern Europe, thanks to political and economic changes. Large companies with segment-leading products had the muscle and money to enter these markets in a big way, through buying up local companies and setting up local affiliates. For many products, this was the only place to get major new product growth.
- Freer trade and looser rules on transnational ownership were advantages that larger companies were best equipped to exploit quickly and creatively. The worldwide export of American consumer values accelerated this trend, and modern advertising and marketing became truly global, reaching expanded TV audiences.
- Finally, the principles of the new oligopoly that I have outlined here were instinctively being recognized as the best bet for corporate survival. The imperative to get bigger in key categories and to sell off assets in non-key segments became apparent to all companies.
After the merger dip in the last few, post-bubble years, a new wave of mergers is taking place. It seems to be for similar reasons. Investors may be more cautious, money may be tighter, and the climate may be more pragmatic. But growth is still the best way to increase share value, and the understanding that consolidation means power to restructure the market and the law in your favor. Bigger companies in tight oligopolies have more influence over suppliers, customers, and regulators. Given the current climate in Washington, the big companies have most to gain from manipulating the tax code and government contracts, passing (and often writing) laws that favor and protect their interests, and supporting massive deregulation. Having (sometimes with difficulty) digested the acquisitions of the late 1990s, the biggest oligopolies are ready to gobble more.
8:02:12 PM 
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