High Levels Of Consolidation Result In Sector Outperformance: Goldman

Mergers and acquisitions are often seen as risky, since mature businesses with cash on hand may be looking for growth without considering whether M&A activity actually produces returns above the cost of capital.

Consolidation reduces competition, improves stickiness

“There is a natural pull toward consolidation among mature or maturing industries. An oligopolistic market structure can turn a cut-throat commodity industry into a highly profitable one,” writes Goldman Sachs analyst Robert D. Boroujerdi. “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.”