Points de vue & Analyse
Too big to fail? Don’t overlook anti-trust
With a market cap in excess of $105 trillion, analysing the global equity universe and selecting quality companies with long-term growth potential is no easy feat. As the world becomes more complex, our analysis must also evolve to factor in new scenarios. Our investment process has ESG analysis integrated within each component; as part of our bottom-up research we assess all material ESG factors for the companies we are looking at and consider the financial implications.
For many of the companies we analyse, a material ESG issue that is often overlooked by the market is anti-trust legislation and regulation.
Anti-trust laws, as described by the US Federal Trade Commission, are designed to protect the process of competition for the benefit of consumers, creating incentives for businesses to operate effectively, keeping prices down and quality up.
The fear is if companies become too big and powerful, they will exercise monopolistic powers, increase prices and reduce the quality of their product/service to the detriment of the consumer. This issue is becoming increasingly important across both developed and emerging markets.
Anti-trust regulation in action
We have started to see international institutions become more forceful on anti-trust issues.
For example, the European Commission proposed new anti-trust regulation in March – the Digital Markets Act – which was adopted by the European Parliament in July. The regulation targets large digital platform (“gatekeeper”) companies in the EU that meet pre-defined criteria regarding their user numbers, market capitalisation and turnover. Such gatekeeper companies include the household names Google, Microsoft, Apple, Meta and Amazon.
The regulation primarily targets:
- Side loading – gatekeepers must allow electronic devices using their operating systems to uninstall pre-installed software and allow for the installation of third-party equivalents.
- Self-preferencing – stopping the ranking of gatekeeper products above competitors on their own platforms.
The fines associated with these actions are material:
- Up to 10% of the company’s total global annual turnover (20% for repeat offenders).
- Periodic penalty payments of up to 5% of the gatekeeper’s global daily turnover.
- Forced sale of parts of the gatekeeper’s business for systematic infringements.
On the day this regulation was signed, the European Commission upheld a $4.12bn anti-trust fine against Google for imposing unlawful restrictions on manufacturers of Android mobile devices and mobile network operators to consolidate the dominant position of its search engine.
These developments follow an anti-trust crack down on big tech in China in 2021, and a more muscular Federal Trade Commission in the US is looking to do more to block what it sees as anti-competitive acquisitions, such as Meta and Within Unlimited.
These actions send a message to gatekeeper companies, and in turn to investors, that these considerations must be taken into account when valuing businesses.
Integrated equity analysis
So how can equity investors consider anti-trust issues when valuing businesses?
There are three main tools available to reflect rising anti-trust risk under the discounted cash flow (DCF) valuation framework:
1. Assume extra expenses based on precedent or stipulated fines – Investors who believe a fine is likely can benchmark against previous fines similar companies have faced, or look at the fines the regulation states. This number could then be spread across 5-10 years within the model to reflect the potential cost to the business.
Source:Mirabaud Asset Management, September 2022
2. Increase the discount rate – Investors could choose to increase the discount rate by a number of basis points to adequately reflect the rise in the equity risk premium from the risk of anti-trust penalties.
Source:Mirabaud Asset Management, September 2022
3. Discount the future cash flows of an exposed division – Another option would be to discount the future cash flows of a particularly exposed division more aggressively than the rest of the business.
None of these methods are perfect, but they do provide a pre-emptive tool for investors to consider the potential impacts of anti-trust measures on a company’s valuation before they happen. Whichever approach investors choose, they will need to find a way to integrate these increasingly important ESG considerations into their valuation models, as up until now the market has underplayed their significance.
How we integrate ESG within our investment process
Since it was founded in 1819, Mirabaud has respected the concept of sustainability in all of its activities and has never engaged in speculative trading or investing for its own account
Our thematic approach to global equity investing.
Our global equities team have been multi-thematic investors since 2016. The team’s 2021 themes are outlined below, which focus around transformational innovation.
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John Kisenyi, CFA
Sustainable Global Equity Analyst