Vertical Is the New Horizontal
| Lasse Lien |
Unrelated horizontal diversification is widely seen as smoking-gun evidence of agency problems, and heavily sanctioned by capital markets, boards, media, etc. Consequently, we don’t see much blatant conglomeration anymore. But if you are a manger with a strong desire to build an empire, or more generally grow at “all costs,” what do you do?
My conjecture is that unjustified vertical integration is increasingly taking the place of unjustified horizontal diversification as an expression of such tendencies. Why? Simply because the penalties (i.e. the costs) of growing via the latter have increased, which presumably creates a tendency to substitute towards the former.
Admittedly, I don’t have much data to support this, but I do seem to recall that Fan & Lang (2000) found a strong positive link between verticality and the diversification discount. Less scientifically, I have tourist sampled the link between vertical integration and government ownership in my home country (Norway). There seems to be a strong positive correlation between public ownership and vertical integration, but no obvious correlation with horizontal diversification.