Stock investors who view the record global merger boom as opening up a gold mine of bullish stock picking opportunities may also be wise to look at the potential downside from industry consolidation. Moody’s has studied 1,000 companies and found that 14% of them, or 140 companies, are vulnerable to “concentration risk” due to major consolidation and mergers in their markets. This makes shares of these corporations more vulnerable to downgrades, which could in turn hammer their share prices. Four of the companies cited by the investment firm include Mattel Inc. (MAT), TransDigm Group Inc. (TDG), B&G Foods Inc. (BGS) and Griffon Corp. (GFF), per Barron’s.
- 14% of 1,000 companies vulnerable to downgrades
- 140 vulnerable companies
- Group includes Mattel, TransDigm Group, B&G Food and Griffon
Source: Moody’s, per Barron’s
Small Firms Vulnerable
Two decades of blockbuster M&A in the U.S. has attracted the attention of lawmakers, citing research that shows a whopping 75% or more of industries have become more concentrated since the late 90s. While many in favor of breaking up industry giants, including the FAANG tech behemoths, have focused on the risks that consolidation poses to consumers, employees, and productivity growth, they may be overlooking the vulnerability it imposes on smaller companies that now rely on massive suppliers and clients.
According to Moody’s, for a significant number of small firms, getting dropped by one or two major corporate suppliers or clients could be a painfully expensive or even fatal event. Exposure to these big companies could result in lowered ratings for smaller firms, often more vulnerable to swings in their stock prices due to their smaller market caps. Losing a major supplier or client typically also results in a surge in costs for companies, making it tougher to service debt. Moody’s research indicates that over the past 18 months, at least eight of these smaller firms have suffered from such a scenario.
Mattel was one out of a number of companies cited by Moody’s that has fallen victim to industry M&A. Shares of the toy maker were downgraded by the financial services firm after its main retailer, Toys ‘R’ Us, filed for bankruptcy. The event heightened Mattel’s borrowing costs significantly, per Moody’s.
The record wave of M&A over the recent decades, coupled with a potential downturn that could squeeze suppliers, would hurt these smaller companies even more, sending shares plummeting. Moving forward, investors should be wary of smaller companies with a large portion of their business reliant on one or two key players.