Longignored by activist investors, the technology industry is increasingly findingitself in the bull’s-eye on their dartboard. Proxy battles in recent years attech companies have led experts to think that activist pressure in the sectoris intensifying.
Butwhy are technology firms now popping up on activists’ radar screens? “They werekind of ignored in the past because there was a perception that tech companieswere very volatile which affected share prices,” says Greg Fraser, senioranalyst at Moody’s who co-authored the report with Jeff Benner, the firm’sassistant vice president. “I think, also, valuations for tech companies werevery lofty in the past, relative to other sectors. There really was nothing tocriticize the management for, because the stocks were doing well forshareholders.”
Bennersays while friction between management and shareholders in the industry isrelatively new, a clear trend is emerging. Technology companies saw moreshareholder activism last year than any other sector. “I think theacceleration, the stats in the report show, has been in the last two-to-threeyears– that’s when those trends started to hit on all cylinders.”
Fraserattributes the reason for activists’ rising interests in the tech sector toshifting attitudes toward the industry as it matures, yielding lower equityvaluations relative to earnings, reduced cash flow volatility, and strongbalance sheets. “These companies essentially have grown up,” he says. “There’smore consistency and there’s more visibility in their earnings.”
“I think, also, valuations for tech companies werevery lofty in the past, relative to other sectors. There really was nothing tocriticize the management for, because the stocks were doing well forshareholders.” -Greg Fraser, Moody’s Investors Service
Muchof the activism has been effective. In October, activist investor Ralph Whitworth targeted Sprint Nextel Crop.,helping to orchestrate the ouster of the company’s then-CEO, Gary Forsee.Citing a loss of confidence in the executive, Whitworth threatened a proxyfight for an undisclosed number of board seats unless the company’s directorsdealt with the leadership of Sprint. The company announced Forsee’s leave less than a weeklater.
LastJune, Efficient Capital Structures sent a letter to the Vodafone Group,asking it to submit a number of resolutions to the company’s annual generalmeeting in July concerning potential restructuring options for the company. Thegroup of shareholders, who held 210,000 ordinary Vodafone shares as of lastsummer, asked the communications company to return as much as £34 billion(about $49.7 billion) to investors by spinning off its stake in Verizon Wireless.
Bymoving closer to the spotlight, as in instances like these, tech companies maystart to make changes in their own corporate governance practices. Currently,though, Fraser says he hasn’t yet seen much in the way of broad governance changesor in defensive moves like shareholder rights’ plans.
“Wehave seen some companies that have tried to improve their poison pill andtake-over defense mechanism,” he says. “I wouldn’t say there’s a major changeunder way. I think a piece like this [report] is something that alerts issuersthat they may need to take another look at their poison pill to fend off apotential suitor or an activist.”
Additionally,the report finds that an increase in shareholder actions could heighten therisk for the sector’s bondholders; as such activism often leads to actions thathurt creditors, like increased share repurchases. In the report, Fraserexpresses concern that rated technology companies could witness heighteneddownward ratings pressure as activist investors set their sights on theindustry and place increasing demands on management and boards to unlock valuefor shareholders.