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Consolidation has been impacting operators across many sectors of the economy during the past three years, with five markets in particular standing out from the rest.

Consolidation occurs when separate companies become one. Companies often consolidate through merger and acquisition (M&A) activity (i.e. when one company absorbs another). However, true consolidation is when two separate companies combine to form an entirely new entity.

ProcurementIQ analyzed over 1,000 reports to identify five markets that have displayed fast-paced M&A activity and rapid consolidation during the past three years. Read on to find out how this wave of consolidation and mergers has impacted buyers in several markets.

1. Pesticides

Pesticides are used in agricultural, commercial and industrial settings to protect against insects, weeds, rodents, birds and a variety of other pest types. The pesticide market has long been dominated by a small group of chemical giants, including BASF, Bayer and Dow Chemical Company, which now operates in the market as Corteva Agriscience.

Chemical providers have historically used M&A to expand their revenue and change the direction of their companies, sometimes breaking into new markets. In 2016, M&A values in chemical markets hit an all-time high, exceeding $250 billion. For many chemical providers, M&A activity was a response to declines in commodity prices, which threatened revenue growth across chemical markets. After a 2016 announcement, Syngenta was acquired by China National Chemical Corporation, which operates as ChemChina. This acquisition was followed by merger talks between ChemChina and Sinochem Group in 2018, another Chinese-based chemical giant. In addition, UPL purchased Arysta Lifesciences from Platform Chemical in 2019, cementing their position in the global market.

Rising consolidation among these top players has been threatening competition in the market and reducing options for key buyers. Not only has negotiation leverage suffered, but market leaders have gained more control over pesticide offerings. Changes in product offerings have forced farmers to tailor their crop-growing practices to cater to suppliers’ pesticide lines.

2. Midstream Oil & Gas Services

Midstream oil and gas services entail the transport of oil and natural gas from one location to another using various methods, including pipelines, trucks, rail, marine tankers and barges. M&A activity in this market trends in line with oil production. When production rises, demand for midstream oil and gas services increases and enables vendors to earn higher revenue. Rising revenue among market providers places them in a better position to make acquisitions.

According to the U.S. Energy Information Administration (EIA), annual U.S. crude oil production grew 5.0% in 2017. Following this uptick, U.S. production reached a record level of 10.96 million barrels per day (b/d) in 2018, a 17.0% increase from 2017 levels. As the need for oil transport picked up, vendors lifted their prices and secured greater revenue for their companies. Armed with additional revenue, Enbridge completed its acquisition of Spectra Energy in 2017. That same year, Energy Transfer Partners merged with Sunoco Logistics. The combined company then merged with Energy Transfer Equity in 2018 to form Energy Transfer LP. 

Although fast-paced market consolidation can enable top players to dominate, the effects of M&A are more subdued in the midstream oil and gas service market due to heavy oversight from the Federal Trade Commission (FTC). The FTC’s antitrust analysis of midstream deals concerns local, rather than national, geographic markets and takes into consideration both the origin and destination of the petroleum product. FTC oversight has been successfully preventing top players from overwhelming their competition and gaining significant pricing power. In addition, M&A can sometimes benefit buyers in this market by helping suppliers implement cost-cutting strategies and improve operating efficiency, thereby constraining price growth.

3. Deep Sea Cargo Transportation

Deep sea cargo transportation involves the shipment of cargo. Specifically, buyers purchase shipping capacity on a spot basis or through contracts to get their containers from one location to another. Many routes in this market are international, meaning that M&A activity across the globe impacts consolidation in the U.S. market. During the past three years, nearly half of the 20 major container operators were either acquired or exited the market due to bankruptcy. Notably, China’s two major ocean lines merged to form China Cosco Shipping Corporation Ltd. in 2017. Shortly after, China Cosco Shipping began talks with rival carrier Orient Overseas Container Line (OOCL), leading to an acquisition in 2018. In 2019, the three largest alliances, the 2M Pact, Ocean Alliance and THE Alliance, collectively control more than 90.0% of U.S. ocean cargo transportation. 

Top players’ increasing control of the market has been further exacerbated by the exit of financially burdened competitors. Following Hanjin Shipping Company’s bankruptcy filing and subsequent exit in 2016, Toisa and Ultrapetrol filed for bankruptcy in 2017. Greater control by top players, combined with surging demand for cargo space in preparation for various trade tariffs, have caused rates to increase in this market. Although rates have been rising, carriers in the deep sea cargo transportation market still face pressure to control price hikes due to the commoditized nature of their services.

4. Group Health Insurance

Group health insurance policies cover a portion of the healthcare costs for a group of people, such as employees of a business or organization. During the past three years, the healthcare landscape as a whole has seen significant consolidation. Blocked mergers between Aetna-Humana and Anthem-Cigna spurred cross-industry mergers to crop up instead. For example, CVS-Aetna and Cigna-Express Scripts mergers were completed in 2018 to promote synergy between pharmacy benefit management (PBM) and group health insurance.

Although mergers between PBMs and health insurance carriers do not directly impact market share in the group health insurance market, economists predict that mergers like the CVS-Aetna one will eventually drive smaller, less powerful insurers out of the market. In this way, cross-industry mergers indirectly promote consolidation in the group health insurance market and harm buyer negotiation power. High barriers to entry in the health insurance market prevent new entrants from starting up business and offsetting the M&A activity. With increased control over the market, prices for health insurance are poised to rise. This trend is harmful to both the employers purchasing group health insurance and the insured parties. Individuals covered by insurance giants’ plans are at risk of facing unfair hikes in drug costs once insurance carriers gain control of PBMs.  

5. Cellular Telephone Services

Cellular telephone services provide direct communication through radio-based cellular networks. Services include wireless mobile telephone services, paging services and wireless internet access. M&A activity among wireless communications providers is common and both helps and harms buyers. Mergers are often conducted to expand cellular coverage areas, which aids buyers by giving them access to higher-value services with fewer dead zones. However, mergers have also caused powerful mobile carriers to dominate the market and gain cellular service pricing power.

Verizon, Sprint, Deutsche Telekom (T-Mobile) and AT&T have long been on top due to several acquisitions made over the past decade. This oligopoly is well on its way to strengthening after a Department of Justice (DOJ) approval came through regarding a merger between T-Mobile and Sprint at the end of July. However, lawsuits filed by several states, including California and New York, are currently preventing the finalization of this deal. Should the deal go through, reduced competition in the market is expected to result in higher prices. When companies act in concert with each other, offering similar terms and prices, customers face the same negotiation conditions they would if one big provider controlled the entire market. This major merger is not the only activity in recent history that contributes to consolidation and weaker negotiation leverage; smaller acquisitions have been peppering the market from 2016 to 2019. For example, iWireless was acquired by T-Mobile in 2018 and Cellular One of East Central Illinois was acquired by AT&T in 2016.

By Kimberly Bucci

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