Activist Investing In The Technology Sector

Recent earnings reports from technology powerhouses of the past couple of decades exemplify that these prior titans are all now challenged by lack of revenue growth, margin compression and/or disruptions from new technologies. In particular, Cisco, Dell, IBM, Intel, HP, Microsoft and Oracle all either suffered from weak revenue and/or margin results in their most recent respective earnings results.  Perhaps the confluence of weak results was coincident with the lack of global GDP growth and indicative that these large companies are all suffering from the “law of large numbers” as they have all become mature companies with exposure to legacy businesses (e.g. personal computers, Ethernet switching and structured relational databases etc.) that they all helped define and conquer in the prior three decades?  If true, however, the boards of these companies have to be cognizant of increasing shareholder activism in the technology industry and that more shareholder friendly actions in the form of increased capital returns to shareholders, potential company breakups and leadership changes will need to be considered in addition to traditional technology management actions such as using M&A to spur growth.   The fall from grace of HP prior to Meg Whitman being named CEO was unfortunately an example of a poor use of company cash for M&A, lack of internal investment for innovation and leadership selection choices and raises the question on whether an earlier action by an activist would have helped HP and its board make better decisions.

Recent successes of shareholder activism, which were not originally supported by company boards in large and “legacy” technology companies, have often led to favorable shareholder returns.  Such positive stock returns, will likely encourage further activism in my view from not only the traditional activists but from traditional “long only” investment funds.  The positive returns for shareholders in other “legacy” technology companies Motorola, Yahoo and Dell where activists became involved and ultimately led to a company breakup for Motorola, new leadership for Yahoo and a higher acquisition price for Dell in its planned LBO all resulted in favorable returns for shareholders.  Carl Icahn’s recent tweets regarding his recent investment in Apple, the largest technology company as measured by market capitalization, and discussions with Apple CEO Tim Cook regarding increasing capital returns for shareholders is further evidence of activism taking on the cash rich nature and relatively low valuation of large technology companies.

The recent case of Microsoft is also telling in regard to increased activism playing a role in leadership selection and potentially strategy change.  The fact that Microsoft is currently the third largest technology company in the world based on market capitalization, is not deterring activism from playing a role at this critical point in the company’s history.  In August of 2013, Microsoft offered a board seat to activist investor fund ValueAct Capital Management that had been pressing for a change of the CEO of company.  I also recall a few occasions during my career as a technology sell side analyst visiting institutional investor accounts around the same time as Steve Ballmer, CEO of Microsoft.  I found it interesting that investors would tell me how they made it a point to tell Mr. Ballmer that Microsoft needed to consider selling or exiting certain businesses, breaking up the company or other actions to enhance shareholder returns, but that such requests were falling on deaf ears.  When it was announced that Steve Ballmer would retire from Microsoft on August 23rd, Microsoft’s market capitalization rose by ~$20 billion.  After the announcement on September 2nd that Microsoft would acquire Nokia’s Device and Services business, thus doubling down on its current strategy even as a new CEO was not yet identified, Microsoft shares gave up about $13 billion in market capitalization.

Investors not only saw the Nokia acquisition as doubling down on the prior strategy, but at the time also the increased likelihood that Stephen Elop, current Nokia CEO and former executive at Microsoft, would be the next CEO of Microsoft and potentially maintain the status quo of Steve Ballmer’s tenure.  The opportunity to be heard and play a role in the future of Microsoft, however, was not going to be lost as shareholder activism led to several of Microsoft’s largest shareholders are putting pressure on the board of Microsoft to consider a CEO with “turn around” experience rather than someone who is going to just maintain the status quo.  It will certainly be interesting to see how the CEO selection of Microsoft develops and how activism will likely play a role in the CEP selection as well as the potential ongoing strategy post the selection.  The recent rally in Microsoft stock to a new 10 year high is a likely a sign that investors “smell” a positive leadership change, that will unlock value at the company.

Note: The basis for this article was originally published in the inaugural issue of the “Cornerstone Journal of Sustainable Finance and Banking” published in October 2013.

I also recently was interviewed on Bloomberg TV on the topic of Activism in The Technology Sector.  The interviewed can be viewed here