Friday, May 13, 2011

On The Evils of Mergers

The demagoguery about the oil companies is starting to border on hilarious. Chris Matthews had a couple of Democratic Senators on Hardball yesterday, Chuck Shumer and Debbie Stabenow, and their pitch was that the problem is that we allowed the oil companies to merge, creating too few companies that are too large, and that stifled any competition. Shumer agreed that they don’t “meet in a smoke-filled room” and set prices, but claimed that one company raises the price of gasoline and “since they don’t have to compete” they all follow suit.

Do I need to say that the facts do not bear that out? Do I need to say that if they were doing that their profit margins would be quite a lot higher than a paltry 5% to 10% on revenue, which is what they are currently making?

I long ago lost count of how many software companies Microsoft bought out, but their policy has been to purchase anyone who might compete with them, and who is left that actually competes with them in business software systems these days? Oracle has bought everyone other than Microsoft who makes computer database software, and these two companies generate profit margins on revenue of 30% and 24% respectively.

And what industry has not merged into a handful of mega companies? How many cell phone companies were there a few years ago as opposed to the number that exist today? How many auto manufacturers are there today? Railroads have diminished from hundreds to about ten.

Lets talk about banks. Banks have been on a merger spree that created “too big to fail” and contributed to the Great Recession. One merger was so blatantly anti-competitive and illegal that Congress had to pass legislation that legalized the merger retroactively. What effect has that had on banking profits and pricing to consumers?

Well, Bank of America is not exactly gorging itself, making 7.6% profit margin on revenue in the first quarter of this year, but Wells Fargo is clicking along at 18.5%, Union Bank at 27.4%, Chase Bank at 21.7%, Citibank at 15.2%, U.S. Bank at 23.2% and Capital One at 24.9%.

As a reminder and for comparison, the big three oil companies are making 10%, 9% and 5% profit margins on revenue in that same fiscal period.

So, of every dollar that you pay in bank fees, about 22¢ is profit to the bank, while of every dollar of gas that you pump into your tank, about 8¢ is profit to the oil company.

That kind of makes oil companies look like paragons of virtue, doesn’t it?

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