The Downside of M&A: Monopolies

When the purchase of Sallie Mae by a private-equity consortium was announced, I thought it was a "risky bet," predicated on the current political firestorm over student lending going away.

Steven Pearlstein has a different take: it's simply an attempt at building a monopoly, seeing as how Sallie Mae and two of its buyers, JP Morgan Chase and Bank of America, between them have as much as 40% of the college loan business.

Tom Joyce, Sallie Mae's spokesman, claims there will be no antitrust problem because the two banks and Sallie would continue to run their college lending businesses separately, competing vigorously...
Joyce stepped on his own story line when he told my colleague David Hilzenrath that the deal would enable Sallie to sell its products, such as its tax-free college savings plans, through Bank of America and J.P. Morgan branches...
Call me cynical, but it doesn't sound like these "competitors" are going to launch price wars against one another anytime soon.
Perhaps the most telling piece of evidence is the 50 percent premium the banks and their partners are willing to pay for a company even before they know how the Democratic Congress is going to change the federal student loan program, as it is inclined to do. As analyst Matt Snowling of Friedman Billings, Ramsey put it, there's no way to justify the $60 per share offer without assuming the benefits of integrating the three college-lending operations. For the banks, he reckons, buying Sallie was a "defensive move" -- in other words, a way to foreclose competition.

Monopolies are popping up in industries across the board, it would seem. Pearlstein reports that researchers recently "asked 100 of the country's top antitrust lawyers whether mergers between firms in the same industry are more likely to be approved than they were a decade ago. On a scale of 1 to 5, with 5 being "significantly more favorable," the average score was 4.9."

Monopolies are bad for the economy, they are a classic example of a market failure, and, with few exceptions, they should not be allowed. The problem is that monopolies are usually also politically powerful, and they can often pull strings to get their way. And politicians rarely get any political benefit from fighting against a proposed merger.

(Via Thoma)