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Big mergers create market of 'superstars' that draw antitrust scrutiny: Goldman

Blockbuster mergers have dramatically reduced the number of publicly-traded companies — and the “superstars” that are left are increasingly the subjects of antitrust action, according to Goldman Sachs.

In a lengthy research report it released this week, the bank noted that the number of US companies has dropped 50% since 1996 to roughly 4,000 currently. Industry consolidation and fewer IPOs are to blame, it said.

The shrinking pool of companies—across key sectors that include telecoms and media — has led to the rise of what Goldman called “superstar” firms.

These consolidated companies have “captured increasing market share, translating their competitive advantage into higher margins and outperformance during the past three years,” the firm’s analysts wrote.

And, according to Goldman, superstars also happen to be the targets of more regulatory oversight and antitrust lawsuits. That dynamic has become apparent with mega mergers like ATT (T)-Time Warner (which cleared its last legal hurdle just this year), and T-Mobile (TMUS)-Sprint (S). Both deals came under heavy pressure from regulators and lawmakers.

In its report, Goldman identified the following areas where the effect has yielded the most changes:

Shrinking equity markets

Whereas there were 8,000 listed companies in 1996, Goldman points out that today, there are roughly 4,000.

The new era of “Superstar” firms has seen increased market concentration, and companies defined by a higher share of sales, stronger pricing power and high margins, Goldman said.

“Today, the most concentrated areas of the US equity market based on 2018 US sales are Tobacco and Interactive Media & Services (GOOGLFB),” the firm said.

Antitrust trouble

Superstars are also getting lots of unwanted regulatory scrutiny. That means regulatory risk is back into the mix for stock investors, especially since the Justice Department is investigating Google and Apple (AAPL), the Federal Trade Commission is probing Facebook and Amazon (AMZN), and the House Judiciary Committee is casting a wide net across the entire tech sector.

With European regulators also tightening the noose, “increased regulation poses a risk to revenue growth, margins, and valuations,” Goldman wrote — which has traditionally hurt software, media and entertainment stocks, it added.

Regulatory uncertainty

Goldman didn’t explicitly warn investors away from stocks of companies that are under investigation. However, they looked at past examples, and how they concluded.

For example, AT&T’s 1974 lawsuit filing resulted in decreased valuations prior to the suit’s resolution; growth slowed down and valuations rose in its post resolution era. Conversely, Microsoft’s lawsuit — which didn’t result in a break-up but more regulation — saw its growth and stock price stagnate for years after the 1999 ruling.

“While the impact of regulation on today’s stocks will be case-dependent, similarities among historical outcomes suggest that investors should reduce exposure to any stock that becomes subject to an antitrust lawsuit,” Goldman wrote.

“In the past, stock valuations and share prices declined between lawsuit filing and resolution (after years of litigation), and was followed by a downshift in the trajectory of sales growth,” it added.

Donovan Russo is a writer for Yahoo Finance. Follow him @Donovanxrusso.

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