U.S. antitrust officials have begun asking companies about communications with their biggest shareholders as part of merger investigations, according to people familiar with the matter, adding to the growing scrutiny of the power of giant index funds.
The Federal Trade Commission wants buyers and sellers to identify their largest shareholders, the extent of their influence over the companies and any communications they’ve had, said the people, who declined to be named because the matter is confidential.
The requests represent a new development in U.S. antitrust enforcement and could pose yet another hurdle to companies seeking regulatory approval for mergers. While the agency routinely digs into the reasons why companies are pursuing mergers, the new inquiry shows investigators are going further to determine the amount of influence of institutional investors.
Behind the scrutiny lies growing worries about the power of giant money managers such as BlackRock Inc., Vanguard Group Inc. and State Street Corp.
Those fund companies are often called the Big Three because they are the largest index-fund companies and also the largest owners of many U.S. publicly traded firms. Economists and antitrust lawyers are raising concerns that the fund houses are harming competition among the companies whose shares they jointly own.
“This is evidence they’re taking it seriously,” said Martin Schmalz, a finance professor at the University of Oxford, referring to the FTC. Schmalz is a co-author of one of the seminal papers on the effect of index-fund ownership on competition.
Thanks to the runaway growth of funds that passively track stock indexes like the S&P 500, the Big Three collectively own about 22% of the typical S&P 500 company, according to Bloomberg data. That could give them significant influence over major decisions like mergers.
Their dominance also means they own companies that compete with one another in the same industry. As a result, the fund companies are better off, in theory, when mergers increase consolidation and reduce competition in a market.
FTC Commissioner Rohit Chopra raised that very issue when he dissented in November against approval of Bristol-Myers Squibb Co.’s acquisition of Celgene Corp. He said Bristol-Myers’s “incentives might also be distorted, given overlaps in ownership” between the two companies.
Vanguard, BlackRock and State Street are among the four biggest owners of Bristol-Myers, collectively holding about 14% of the shares, according to data compiled by Bloomberg. They were also the top three owners of Celgene, with 19% of the shares.
The fund companies have similar overlapping stakes in AbbVie Inc. and Allergan Plc, whose merger proposal the FTC is now reviewing. They own 19% of Abbvie and 18% of Allergan, according to Bloomberg.
Anticompetitive Evidence
Academics have found evidence to back up the idea that ownership of competitors by institutional investors -- known as horizontal shareholding or common ownership -- harms competition. A widely cited 2014 paper, by José Azar, an economist at the University of Navarra in Barcelona, along with Schmalz and Isabel Tecu, concluded that airline fares are 3% to 7% higher because of common ownership by big funds.