Old folks’ yard sales feature spare parts of what once were important life pursuits.
Similar wistful divestitures are occurring in the more mature neighborhoods of the technology industry. Aged giants are busy selling off once-exciting businesses now disused or faded, as they seek to simplify and perhaps fund a livelier new life phase.
The leaders of technology in the 1990s or earlier – the winners of the personal-computer, business-software and cell-phone revolutions – have, since the deflation of the tech bubble in 2000, become cash-rich, low-growth manicurists of a legacy that holds little innate appeal to today's investors.
Of the 10 largest tech stocks in the Standard & Poor’s 500 index, a sector tracked by the Technology Select Sector SPDR fund (XLK), eight were public companies before 2000. Those stocks – with Apple Inc. (AAPL) the largest and Cisco Systems Inc. (CSCO) the smallest – have an average forward price-to-earnings multiple of 11.4, compared with more than 15-times for the S&P 500 as a whole.
Unable to steal the market spotlight from the more youthful social-network, cloud-computing and consumer-application hotshots, the stalwarts of Old Tech have been rummaging around for staid, past-their-prime businesses to turn into cash.
The list of tech giants shedding unloved divisions that make low-margin commodity tech products seems to grow weekly:
- International Business Machines Inc. (IBM), whose shares have been savaged after years of flat revenue and a weak 2014 outlook, last month agreed to sell its low-end server business to China’s Lenovo for $2.3 billion. The company is also soliciting buyers for its semiconductor-manufacturing arm. And press speculation has percolated in Asia around the prospect that Lenovo, which bought IBM’s PC division in 2005, could follow up the server deal with another for IBM’s enterprise-storage line.
- Sony Corp. (SNE), having thwarted for now an activist-investor effort to split into two companies housing its electronics and media arms, is said to have its Vaio PC business on the block. Lenovo shares fell hard on unconfirmed reports it might acquire Vaio; Sony acknowledges it's reviewing various options for the computer unit.
- Nokia Corp. (NOK) essentially surrendered in the mobile-handset wars, selling the business to its partner Microsoft Corp. (MSFT), which continues to make a go at competing with Windows-based phones.
- Google Inc. (GOOG) – the farthest thing from one of these sclerotic older tech names – nonetheless found itself offloading an also-ran business, selling the Motorola Mobility handset operation to Lenovo.
- Among smaller or notional asset-shuffling moves among long-tenured tech players, there is Intel Corp.’s (INTC) handing of its media effort to Verizon Communications Inc. (VZ); Blackberry Ltd.’s (BBRY) so-far failed efforts to find a buyer or strategic investor; and the long-shot attempt by corporate shake-up (or is it shake-down) artist Carl Icahn to have eBay Inc. (EBAY) spin off its growth engine, PayPal.
All this activity arises from a weighty cluster of tech companies that dominate product categories that are no longer growing much yet continue to have annuity-like cash flow and have amassed enormous troves of inert cash with few obvious, high-potential places to invest it.
The venture capitalist Marc Andreessen – and board member at Facebook Inc. (FB), eBay and Hewlett-Packard Inc. (HPQ) – sent a widely shared and debated rush of tweets last weekend detailing the dilemma of one-time growth-boasting tech companies that have migrated to cash cows owned mostly by value investors.
Something dramatic about to happen in tech: tons of M&A, or huge upward move in P/E multiples, or revenue collapse of many public tech cos.— Marc Andreessen (@pmarca) February 9, 2014
Specific challenge in tech: value investors dont want speculative investment in new tech, but without, hard to maintain profits over time.— Marc Andreessen (@pmarca) February 9, 2014
Andreessen points out it's far easier for a company to find itself rotating from growth-investor portfolios into the hands of value investors than it is to make the opposite trip. Once a big-name stock is largely in the domain of value investors, who prize cash flow and dividends more than reinvestment, there can be a kind of suspended animation.
Cisco shares, for instance, have essentially spent more than a decade oscillating between $15 and $30, equidistant poles from the current level of $22.79, even as its profits and cash flows have increased prodigiously. Storage giant EMC Corp. (EMC) had a P/E ratio above 90 in 2000. It is now valued at less than 12-times the next 12 months’ forecast profits, and the stock has hugged the $25 level for three years, doing almost nothing as the Nasdaq Composite gained more than 40% and stormed to new highs.
There are a couple of big takeaways for investors here:
- The stock market is probably even less attractively valued than you think. Much has been made of the cash-rich coffers of Corporate America. But most of the cash and a lot of the “cheapness” are concentrated in a handful of enormous tech companies. Tech is about 19% of the S&P 500 and trades at a 14.6-times 2014 forecast profits — a lower multiple than the index as a whole, which is at 15. So once old, low-growth tech is excluded, the rest of the market fetches a well above-average valuation today.
- There could be more — and perhaps radical — M&A, restructuring and activist assaults. Investors give little credit to companies for their huge cash holdings. Quite the opposite, actually: Cash piles are seen as a reflection of past success and not future promise - lots of financial “potential energy” and little operational “kinetic energy.” Research firm CCS Insight is predicting 2014 will be a culmination year for tech and telecom deals.
Icahn’s runs at Apple and eBay show mega-caps with inefficient balance sheets or conglomerate discounts are not immune to gadflies. EMC owns a majority of VMWare Inc. (VMW), they share a chairman and the stocks move in lockstep. Is this a sensible arrangement? Oracle Corp. (ORCL) is a multi-decade roll-up of software companies with a lavishly paid founder-CEO. The chatter about breakups of HP or Microsoft has quieted down but could easily resurface with a stock decline, operational setback or, for Microsoft, key moves made by newly appointed CEO Satya Nadella.
Things could get interesting if these big tech giants get serious about shaking themselves up — beyond just holding big yard sales in fear of ending up as estate sales.