Megamergers—good for investors?

A growing number of sectors in the U.S. are being dominated by fewer and fewer companies. Nearly one-third of industries are considered highly concentrated under federal antitrust standards. That's up from a quarter in 1996, according to a Wall Street Journal report.

Anheuser-Busch InBev NV made a $107 billion formal bid for SABMiller Plc, in a transaction that would combine the world's largest brewers. While the deal faces regulatory hurdles, the combined company would control roughly one-third of the global beer market and about half of industry profits.

An Anheuser-Busch InBev NV branded Stella Artois beer, along with SABMiller Plc branded beers.
Halden Krog | Bloomberg | Getty Images
An Anheuser-Busch InBev NV branded Stella Artois beer, along with SABMiller Plc branded beers.

Big-ticket appliance makers comprise an industry that has become top heavy. In 1996, there were two dozen companies that manufactured and sold washers, dryers, refrigerators and stoves. Today there are eight. Whirlpool's 2006 acquisition of Maytag helped the combined company control nearly 40 percent of the U.S. clothes-dryer market. Twenty years ago, there were 40 publicly-traded companies operating America's grocery stores. Today there are 18. Telecommunications is down to four national players with AT&T and Verizon dominating.

While managements argue that such combinations would leverage economies of scale, cut costs and pass the efficiencies to shareholders and customers, critics contend that industry-dominant companies tend to raise prices, block competitors and stifle innovation. It could be argued that Microsoft in its heyday did just that. When the company's operating system dominated the personal computer landscape, it had no incentive to improve without the threat of competition. Eventually the Internet changed desktop computing and Microsoft was knocked off its perch.

Nearly two-thirds of all publicly-traded companies competed in more highly-concentrated markets in 2013 than they did in 1996, according to USC economists Gerard Hoberg and Gordon Phillips. Among more than 1,700 public companies studied, nearly two-thirds had a bigger share of their markets in 2013 than they did in 1996.

Industry consolidation and dominating players may help explain why corporate profit margins are pinned in the top quintile of their historical range and why capital expenditures and productivity are falling short of expectations.

Last year Anheuser-Busch and Miller together spent nearly $1 billion in advertising in the U.S. Expect the combined company to have fewer employees than the two companies had collectively and spend less on advertising.

As Americans, we could shake our heads at how dominant companies have become. But the investor in us should capitalize on mega companies' outsized profit margins. Your entry-level economics professor will tell you these companies' profit margins will eventually shrink back to their long-term average as competitors jump into the fray, yet it hasn't happened.

Perhaps the largest companies in the S&P are a better value than your economics teacher would suggest.

Commentary by Jack Ablin, the chief investment officer at BMO Private Bank. Follow him on Twitter @j_ablin.