Qualcomm and other aging tech giants ripe for activist investors
Hedge fund Jana Partners' move to pressure Qualcomm (QCOM) into a break-up, disclosed by the Wall Street Journal on Monday, marks the latest step-up in the activist shareholder war on aging tech companies. Expect further escalation across the tech sector.
San Diego-based chip maker Qualcomm looks like an obvious target for Jana, with its stock down 11% over the past year despite a cash hoard of nearly $18 billion and cash flow from operations of over $2.4 billion in the fourth quarter of 2014. Jana, which owns $2 billion worth of Qualcomm shares, says the company should spin off its semiconductor unit from its patent licensing business, cut costs, buy back more stock and generally follow the entire activist shareholder playbook.
The same could be said about many of the older and now slower-growing tech stocks. Intel (INTC) had a fine 2014 but its shares have dropped 12% this year as the PC market slows. Shares of Cisco Systems (CSCO) and Oracle (ORCL) have done better, but the companies still may look like slower-moving, cash-heavy targets to activists. Hewlett-Packard (HPQ) and eBay (EBAY), Meg Whitman's current and former spots as CEO, have already agreed to splits.
Activist investors, who buy shares and then pressure for changes like spin-offs, share buybacks and higher dividends, have never been more active. Activists launched a record 222 campaigns last year and have already come after 54 companies through March 15 of this year, according to a new report from Moody's Investor service. Major tech companies have already been in their sights, including Apple (AAPL) and EMC (EMC).
The allure of tech
Technology companies attract activist investors because they have the biggest piles of cash, much of it stashed overseas to avoid taxation, doing little to improve shareholder returns. The largest tech firms have $564 billion, or 55% of the cash held by the 50 largest non-financial companies, Moody's calculated.
Jana has frequently focused on the tech sector. Last year the fund, along with allies at Elliot Management, pressured Juniper Networks to start paying a dividend and buy back $2 billion of its shares.
"A larger number of companies are at risk of being targeted by activist shareholders as the number of funds pursuing activist investment strategies has increased, along with capital available to fund activist campaigns, particularly for mature tech companies with modest or challenged growth prospects," Moody's analyst Raj Joshi said in the report.
The campaigns create a major distraction for management and don't always pay off for shareholders, Joshi notes. Companies that spend more on dividends and buybacks don't have the flexibility to pursue strategic acquisitions or make new investments to adapt to changing markets, he says.
"Although it has been argued that activist shareholders force operational and strategic changes that bring greater cost discipline and benefit debt investors, the balance sheets of targeted companies have generally deteriorated, often more-than-outweighing any potential operational benefit," Joshi says.
But two giants, Google (GOOGL) and Facebook (FB) will likely remain out of bounds for the activists, because they operate under a dual class shareholder structure that makes it nearly impossible for outside investors to impose much pressure.
