I recently wrote on the merger and acquisition craze across various sectors in Kenya. This time round, I will reflect on how we may seemingly be in an “end of markets and rise of networks in the corporate markets”. The rise of institutional investors who acquire shares in competitive companies has led to the killing of competition in our markets due to fixing of prices.
Horizontal shareholding exists when a common set of investors own significant shares (mostly voting right-shares) in corporations that are horizontal competitors in a product market. A small group of institutional investors has designed special purpose vehicles to simply “invest” thus perfecting the art of acquiring large shareholdings in horizontal competitors throughout our economy; causing them to compete less vigorously with each other.
As a result, such shareholdings are likely to anti-competitively raise prices when the owned businesses compete in a concentrated market, for the simple reason that you cannot compete against yourself. The situation can however be curtailed through the separation of ownership. To begin with, what incentive could one company have that would propel it to trade its products at a lower price while still competing with another company that sells the same product at a higher price?
None, since it is like taking away business from the same person or group of people who owns it. The effects of horizontal shareholdings by institutional investors brought about a major economic blockbuster in the United States when a group of investors who controlled a certain airline, also owned shares in a competing airline—hence controlling the airline’s rival. The airline industry was not the only industry that was plagued by such cases of horizontal shareholdings. In the banking sector, the top four shareholders of JP Morgan Chase were also the top four shareholders of Bank of America and Citigroup.
An empirical study conducted afterwards revealed that such horizontal shareholdings significantly increased the fees that banks charge and decreased the deposit rates that banks pay.
The economic blockbuster went on to disclose that the same shareholders were also the top four shareholders of Apple, and four of the top six shareholders of Apple’s main rival, Microsoft. This ironically meant that these top four shareholders collectively owned Apple and Microsoft. Could the situation be any different here in Kenya? Being that we are in an interconnected market, is price fixing by institutional investors easy?
This network of companies created by institutional investors is designed to ensure that corporate managers and directors primarily operate corporations in the interest of the horizontal shareholders, thus leading businesses to compete less against each other.
These managers know whether their leading shareholders are horizontal and know that lessening competition benefits those shareholders. Basically, it’s a structured network of competitive markets owned by the same institutional investors.
More emphasis needs to be placed on acquiring shares that create horizontal shareholdings if their structural effect is creating anti-competitiveness in the market, or mergers that create anticompetitive market structure.