Anti-conglomerate measures are still possible, argues Reg Rumney
Anglo American executive director Michael Spicer has arguably made it harder for Trade and Industry Minister Trevor Manuel to avoid taking steps against South Africa’s big conglomerates.
Spicer, who has gone to ground now, perhaps fearing further personalisation of the conglomerate debate, went on the offensive after Manuel made threatening noises about economic concentration in a series of recent speeches.
Business leaders who have met Manuel since then have suggested conglomerates have nothing to fear: no anti-big legislation is in the offing.
But Spicer has drawn attention once again to the domination of the economy by a few big companies.
McGregor’s Who Owns Whom states that the top four groups, Anglo American, mutual assurers Sanlam and SA Mutual, and Rembrandt Group control about 76 percent of the Johannesburg Stock Exchange (JSE) market capitalisation. Anglo American has absolute control, according to McGregor’s, of about 38 percent of the market cap, and significant influence over a further two percent — a figure disputed by Anglo, which has previously admitted to a still high 30 percent.
Whether moves are made through the coming redrafted Competition Bill or some other legislation, the pressure is on for unbundling and increased competition in what is seen, certainly by outsiders, as a somewhat clubby economy.
Spicer implied that the government was “anti-big” and that companies which are big fish here are minnows in world markets.
Again that is not the issue. Nor is abuse of size through collusion, price-fixing or cartelisation, though there is sufficient evidence of these – take the long- standing commercial car insurance cartel. Market dominance is a much bigger problem, and Robin McGregor, publisher of Who Owns Whom, has over the years sketched its dimensions, advocating retrospective legislation to break up domination of markets by two or three big players.
When two or three major players dominate a market it is hardly necessary for them to fix prices in smoke-filled rooms. Price following, where the market leader’s price rises are soon followed by price increases just below those of the market leader by the numbers two and three, can have the same deleterious inflationary effect.
The counter-argument is that economies of scale are necessary to build companies of a size which can compete in international markets.
Market domination, nonetheless, is a deterrent to foreign investment here. No major foreign brewer has entered the South African market in competition to South African Breweries (SAB) — bar the Indian United Breweries investment in Vivo. Might this not have something to do with SAB having an estimated market share of 97 percent? Heineken, for instance, chose to be distributed by SAB.
It does Spicer no good to have cited, as he did in a local business paper, the entry of numerous foreign firms in joint ventures with Anglo as proof that competition is alive and well in South Africa.
United States attorney and privatisation expert Ronald Roberts has pointed out this is indicative of the problem: the only competition conglomerates are happy with is in the form they can handle, such as in joint ventures. Is this really foreign competition, which by its nature should cause incumbent companies sleepless nights?
The JSE embodies the problem. One of the most sophisticated and mature of the emerging stock markets, it is numbed by bad circulation.
Liquidity on the JSE, as measured by the value of shares traded as a percentage of market capitalisation, is in single figures. For the larger exchanges in the US, Britain and Japan this figure is more than 50 percent.
The JSE is addressing the problem in its new listing requirements, introduced in July this year. There is a more stringent definition of what constitutes public share ownership and new minimum spread requirements. Companies now must have a 10 percent public shareholding, with a minimum of 300 public shareholders.
This may help unbundling, together with scrapping of remaining exchange controls, though Roberts says the JSE lacks rivalry because of conglomeration and cross-ownership of listed entities.
Hostile takeovers which penalise conglomerate inefficiency elsewhere are rare. Here he sees regulation, which he says is not out of line with the legal requirements that govern acquisitions on Wall Street, as a means to encourage subdivisions of conglomerates to be put into play in the market. It is a matter of enhancing corporate governance, in a more radical way than the rather staid recommendations of the King Report on Corporate Governance.
Competition Board chairman Pierre Brooks has ruled out breaking up conglomerates except as a last resort.