Yahoo Not Alone, Many Techs Facing Active, Agitated Shareholders
In recent years, no industry has provided shareholder activists with as many opportunities to force changes — or generate financial gains — as technology. In its Shareholder Activism 2015 report issued last November, Moody’s found that 33% of the 178 shareholder activism cases it had tracked through Oct. 15 of last year focused on tech firms, far more than any other industry. Tech firms, ironically, can blame their successes as well as their failures for their preferred status among shareholder activists. The sector’s growth potential attracts the hedge funds and equity investors that are less inclined to sit docilely on the sidelines. “You really have to have a stomach for it,” said Gerry Granovsky, an analyst at bond rating firm Moody’s Investor Service. “A lot of it is confrontational. You have to not be afraid to ruffle feathers.” Where many of the most famous shareholder activism cases have focused on poorly managed companies that represented turnaround opportunities — which does include a fair number of tech companies, to be sure — many tech firms instead have been targeted for not sharing their riches enough. Granovsky points out that as the tech sector has demonstrated historic stability over the past 10 years, it has enjoyed growing access to debt. Meanwhile, as scores of tech firms have grown into thriving global businesses, many have amassed massive amounts of cash overseas and have chosen to keep it there rather than pay U.S. tax rates. Apple Finally Convinced To Share Some Wealth It’s that cash, and companies’ explanations for hording it, that often attracts the attention of shareholder activists more than anything. “Activists don’t care about policies. They see Apple having $216 billion in cash,” Granovsky said. “To some extent they have a point.” The activities of shareholder activists do at least potentially benefit a larger group of stakeholders, and shareholder activists do function as a sort of corporate watchdog, so they have to be willing to get dirty for the cause. After finding itself on the receiving end of pressure from big-name shareholder activists Carl Icahn and David Einhorn, Apple ( AAPL ) has in the past couple of years been returning cash to shareholders in programmatic fashion. Similarly, persistent pressure from activists helped spur ATM maker NCR ( NCR ) to embark on an effort to buy back $1 billion worth of stock, funded by a deal with Blackstone that gives the financial advisory firm three seats on NCR’s board — a deal activist investor and NCR shareholder P. Schoenfeld Asset Management has questioned. Targeting excess cash is not a new shareholder activism strategy. In fact, it appears to have been one of the original strategies. In his just released book, “Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism,” Jeff Gramm, a portfolio manager and adjunct professor at Columbia Business School, traces shareholder activism back to the 1920s. Gramm explores a 1927 case in which economist and investor Benjamin Graham, considered the father of value investing, led an effort to get Northern Pipeline to release some of its stockpile of unused cash back to its shareholders. That strategy has been used against tech firms to great effect in recent years, with a number of companies succumbing to similar pressures. And Granovsky says that trend might not peak until interest rates rise, causing tech firms to slow their borrowing and instead start tapping those overseas cash reserves. No worries. Even if all the cash-rich tech companies start giving back to shareholders, there are always underperformers to turn around. Microsoft, Qualcomm Also Among Those Targeted Despite the stability in the tech market Granovsky points to, there are plenty of tech companies that have found themselves in activists’ cross-hairs for other reasons. In 2013, Microsoft ( MSFT ) granted its first board seat to an activist — ValueAct Capital — after facing widespread criticism for being a step behind a series of emerging tech trends such as cloud computing and mobility. Last year, Qualcomm ( QCOM ) launched a “strategic realignment plan” after activist hedge fund Jana Partners began pressuring the company to spin off its struggling chip business from its profitable licensing business. Also last year, eBay ( EBAY ) spun off PayPal ( PYPL ) after pressure to do so from several activists, led by Icahn, who argued that both companies would perform better if separated. More recently, Yahoo ( YHOO ) has been girding itself for a battle with one of its biggest shareholders, activist Starboard Value, as the Internet giant has been unable to forge much revenue growth in the past decade. Consider the case of Motorola Solutions ( MSI ). Shareholder activists have besieged the company since 2007, when its former entity, Motorola, was embroiled in a series of legal skirmishes over allegations the company had made misleading financial statements. (It eventually split into two companies in 2011, establishing Motorola Solutions as a communications provider, while it spun off the cellphone business into a separate company, Motorola Mobility, acquired by Google in 2011 and then sold to China’s Lenovo in 2014.) Between 2007 and 2015, Motorola granted board seats to at least three shareholder activists: Icahn, ValueAct and Silver Lake Partners, according to Investopedia. Shep Dunlap, an investor relations spokesman at Motorola Solutions, spoke with IBD about the company’s experience with ValueAct, describing the relationship as “generally collaborative” and nothing like the contentious battles for which other shareholder activists, such as Icahn, have become known. “Their approach has been much more constructive with management rather than using the press and media as a mouthpiece,” says Dunlap said. Motorola Solutions Cut $550 Million In Costs, With Prodding He says ValueAct’s objectives have been aligned with Motorola’s leadership from the get-go, and that ValueAct’s guidance has helped streamline the company. In particular, he cites more than $550 million in costs removed since 2012, and $12 billion returned to shareholders, mostly through stock buybacks. “There’s been a lot of progress in terms of optimizing our cost structure,” Dunlap said. “We’re really a pure-play mission-critical communications company at this point.” Naturally, ValueAct has profited from the relationship, and today still owns 4.7% of the company’s stock, a stake worth about $619 million based on the current valuation of $13.2 billion. Dunlap points to the fact that ValueAct has been a Motorola shareholder since 2011, longer than most activists stick around, as evidence of its commitment to the company’s long-term health. He said not every activist is out to create a firestorm, cash out, and move on. “You have to keep an open mind when you’re learning about an investor, whether it’s an activist or not,” he said. “I think every company should use the feedback that’s available to them from the investor community.” Its unlikely that the relationship has been as Pollyannaish as Dunlap paints it. Granovsky stopped short of describing shareholder activism as bullying, but was comfortable calling it intimidation. “Companies don’t want to deal with activists,” he said. That said, there are times when they’re a necessary evil if a company is to thrive, and Motorola may be an example of this. One thing is certain: Shareholder activists aren’t going anywhere, and tech companies, and their piles of cash and occasional missteps, are clearly in their sights.