Activists Increasingly Target Tech Firms

Long ignored by activist investors, the technology industry is increasingly finding itself in the bull's-eye on their dartboard. Proxy battles in recent years at tech companies have led experts to think that activist pressure in the sector is intensifying.

A recent study by Moody’s Investors Service, finds that the number of activist shareholder proxy fights at technology companies doubled from 11 in 2006 to 22 in 2007, which was more than triple the seven campaigns waged in 2005.

But why are technology firms now popping up on activists’ radar screens? “They were kind of ignored in the past because there was a perception that tech companies were very volatile which affected share prices,” says Greg Fraser, senior analyst at Moody’s who co-authored the report with Jeff Benner, the firm’s assistant vice president. “I think, also, valuations for tech companies were very lofty in the past, relative to other sectors. There really was nothing to criticize the management for, because the stocks were doing well for shareholders.”

Benner says while friction between management and shareholders in the industry is relatively new, a clear trend is emerging. Technology companies saw more shareholder activism last year than any other sector. “I think the acceleration, the stats in the report show, has been in the last two-to-three years-- that’s when those trends started to hit on all cylinders.”

Fraser attributes the reason for activists’ rising interests in the tech sector to shifting attitudes toward the industry as it matures, yielding lower equity valuations relative to earnings, reduced cash flow volatility, and strong balance sheets. “These companies essentially have grown up,” he says. “There’s more consistency and there’s more visibility in their earnings.”

"I think, also, valuations for tech companies were very lofty in the past, relative to other sectors. There really was nothing to criticize the management for, because the stocks were doing well for shareholders." -Greg Fraser, Moody's Investors Service

One of the most recent examples is activist investor Carl Icahn’s push for a new slate of directors at Motorola, which was launched earlier this month.

Much of 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 proxy fight for an undisclosed number of board seats unless the company’s directors dealt with the leadership of Sprint. The company announced Forsee’s leave less than a week later.

Last June, Efficient Capital Structures sent a letter to the Vodafone Group, asking it to submit a number of resolutions to the company’s annual general meeting in July concerning potential restructuring options for the company. The group of shareholders, who held 210,000 ordinary Vodafone shares as of last summer, 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.

By moving closer to the spotlight, as in instances like these, tech companies may start 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 changes or in defensive moves like shareholder rights’ plans.