Goldman Sachs Says a Good Merger Should Screw Customers

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Feb. 14 2014 4:48 PM

Goldman Sachs Says a Good Merger Should Screw Customers

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Mmm ... vampire squid.

Photo by Daniel Hayduk/AFP/Getty Images

Mergers and corporate takeovers are oftentimes just an ill-advised, ego-driven affair. Think AOL-Time Warner or Daimler Chrysler. But Mark DeCambre has some fun excerpts from a new Goldman Sachs research note which makes the case that M&A isn't always a bad idea. Sometimes it can help companies reduce competition and screw their customers.

"M&A that drives an industry toward oligopoly is the good kind," Goldman writes.

An oligopolistic market structure can turn a cut-throat commodity industry into a highly profitable one. Oligopolistic markets are powerful because they simultaneously satisfy multiple critical components of sustainable competitive advantage—a smaller set of relevant peers faces lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice, scale cost benefits including stronger leverage over suppliers, and higher barriers to new entrants all at once.
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Of course these are precisely the kind of mergers that regulators shouldn't approve. So that makes this analysis actually pretty problematic for an investment bank like Goldman that makes a lot of money from M&A fees. If you want the Justice Department to approve a merger, you'd better have some reason for it other than reducing competition and raising prices. But if your economic analysis says that increased pricing power is the main advantage of a merger that's worth doing, then you're going to have a hard time making that case.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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