Activist investors target tech companies after stocks dive

Activists who spent years going after small and midsized tech companies are now aiming for bigger targets, including Salesforce and Google, after a huge decline in stock prices

Tech companies, whose stocks were battered in 2022, now face another beating of sorts: They’re drawing the focus of activist investors, who see a chance to get in at cheaper prices and agitate for changes that will make them richer.

An especially voluble bunch of billionaire investors are targeting some of the industry’s biggest names, which are stumbling through layoffs and watching their stock prices plunge and their growth slacken. The investors are preparing to swoop in, take some radical actions to raise stock prices — then sell at a profit.

“No one is immune. We will see more of this given the market dynamic,” said the chief executive of one publicly traded tech company that recently dealt with activist activity. “Activists are good at determining who is undervalued and how [that] can be fixed in discrete moves. It seems to be across the board. The larger the activist firm, the more they can invest in a target, so it correlates to larger companies.”

Last year was a record-setter for U.S. shareholder activism, topping nearly 900 campaigns amid an uncertain macroeconomic landscape and geopolitical climate, according to Nasdaq IR Intelligence’s Shareholder Activism: 2022 Year-in-Review whitepaper, citing data from FactSet.

Large tech companies are alluring to investors because they are “incredibly good businesses but could possibly be more profitable,” said the CEO, who asked not to be identified in order to speak freely. Activists see an opportunity to drive up margins and profits and make money from their investments in those companies, he added.

As stocks plunge, investor activism has escalated. David Larcker,a corporate-governance expert at Stanford University, calls it the “standard playbook” of corporate activism.

“When prices back off, it is a natural place to look for value and change in strategy,” he said. “But it used to be smaller [or] medium targets. We are in a bit of a different world now, with bigger companies being looked at, and the ability to get more board seats.”

‘Not all activist investors are created equal’

Salesforce Inc, whose co-CEO Bret Taylor recently stepped down following a 22% drop in the company’s shares over the last 12 months, added three new board members last week amid an onslaught of actions by a handful of activist groups. One of those, the hedge fund ValueAct Capital, also had a significant impact on shifts in strategy by Adobe Inc and Microsoft Corp from a focus on legacy software to cloud-based platforms, according to Robert Bartlett, a law professor at the University of California, Berkeley.

On Wednesday, a fifth activist investor had jumped into Salesforce shares. The Wall Street Journal reported that Third Point LLC had built a stake in the software company.

Salesforce also faces pressure from the hedge fund Elliott Investment Management, which is expected to nominate a slate of directors at the embattled company amid slowing growth and the layoffs of 1,900 employees. Elliott reportedly has a multibillion-dollar position in Salesforce and has also taken stakes over the past few years in Pinterest Inc, PayPal Holdings Inc. and AT&T Inc , as well as in Twitter Inc. before its acquisition by Tesla Inc CEO Elon Musk.

Elliott presents more of an antagonistic challenge than ValueAct, based on its pugnacious nature and demands.

“Not all activist investors are created equal: Some, like ValueAct, are more reasonable than others,” Bartlett said.

In October, Starboard Value CEO Jeff Smith revealed that the hedge fund had also taken an unspecified stake in Salesforce, saying the software company had not generated meaningful operating leverage relative its to peers in recent years.

ValueAct, Elliott Management and Starboard Value declined to provide comment to MarketWatch.

Walt Disney Co., whose stock DIS has tumbled 23% the last 12 months, faces a more hostile foe as it navigates cost cutting and treacherous competition in streaming.

While not a tech giant, Disney has jumped into streaming in recent years against the likes of Netflix Inc. and Apple Inc but it hasn’t been an easy ride: Less than three years after CEO Robert Iger handed over the reins to chosen successor Bob Chapek, the board asked him to return and ditched Chapek.

Nelson Peltz, co-founder of Trian Fund Management, is seeking a seat on Disney’s board because he believes Disney’s “succession plan has failed, and a new voice is needed in the boardroom,” a Trian spokesperson told MarketWatch. Peltz wants to replace Disney board member Michael Froman, vice chair of Mastercard Inc.

Disney’s board has responded by issuing a statement calling Froman “a highly valued member of the Board with deep background in global trade and international business, who the Board believes is far better qualified than either Mr. Peltz or his son to help drive value for shareholders.” Peltz had also put forward his son, Matthew Peltz, as a possible replacement for Froman.

A Trian website, “Restore The Magic,” presents its chief criticisms: that Disney shares are trading near an eight-year low and that the company has seen precipitous drops in adjusted earnings per share, free cash flow and dividend per share. Disney, meanwhile, provided a supplemental deck to its proxy statement, outlining reorganized leadership that puts “more decision making back in the hands of creative teams” and prioritizes streaming profitability.

Meanwhile, hedge-fund billionaire Christopher Hohn has urged Google’s parent company Alphabet Inc to lay off at least 20% of its employees, saying that the 12,000 layoffs the company announced in late January are not sufficient to reduce the tech giant’s cost base.

Hohn, the founder of activist hedge fund Children’s Investment Fund Management, which holds a $6 billion stake in Alphabet, wrote to Alphabet CEO Sundar Pichai in late January, outlining his concerns over the job cuts announced last week.

Sky-high expectations

Hypergrowth during the pandemic not only juiced the revenues and workforces of tech companies but also raised expectations sky high. “The market demanded it,” George Deglin, CEO of mobile-messaging startup OneSignal, told MarketWatch. “There was so much pressure to grow.”

Indeed, some of the same hedge funds now demanding layoffs were clamoring for more hires during the pandemic-fueled sales surge, Deglin said. “Given the amount these companies have grown in revenue and workforce the past few years, these current layoffs are not dramatic,” he added.

“The pitch investors are making is [that tech companies] had explosive growth” but hired “without attention to margins and cost,” Bartlett, the Berkeley law professor, told MarketWatch. “Now the reality is hitting us, and we need to focus on margins and being efficient and profitable.”

So, what other companies might be vulnerable? Will beleaguered tech titans like Intel Corp or HP Inc be next?

Industry observers are loath to speculate, but Facebook parent company Meta Platforms Inc might seem a logical candidate as it endures a pullback in ad spending, tries to reign in metaverse development costs and eliminates more than 11,000 jobs.

But targeting Meta is easier said than done: CEO Mark Zuckerberg holds 55% of the company’s voting shares, giving him majority power. Some tech A-listers have installed founder control into their companies as a way to shield executives from activist investors clamoring for change. Snap Inc whose shares have plummeted 68% over the past year, offers no voting shares to investors, and Google co-founders Sergey Brin and Larry Page dominate control of their company.

Nonetheless, Jim Breyer, one of Facebook’s earliest investors and a former board member, contends that Meta isn’t cutting costs fast enough despite three straight quarters of declining revenue. And in a letter to Meta in October, Brad Gerstner, CEO of investor Altimeter Capital, claimed Meta needs to get its “mojo back” by reducing headcount expenses by 20% and limiting the company’s pricey investments in metaverse technology to no more than $5 billion annually.

“Meta needs to rebuild confidence with investors, employees and the tech community in order to attract, inspire, and retain the best people in the world,” Gerstner wrote in the letter. “In short, Meta needs to get fit and focused.”

Zuckerberg acknowledged the necessity of efficiency — he used the word 28 times during a conference call with analysts following Meta’s earnings report last Wednesday — and bemoaned the need to slash costs after 18 years of turbocharged growth.

“The rise of activist investor activity coincides with the overall discontent with the economic decline, and some big companies are declared responsible for the alarming social trends,” Kate Romanovskaya, co-founder of app maker House of Pitch, told MarketWatch. “Case by case, it’s hard to say if it’s a good or bad thing — what drives particular activists in their campaigns, and what are their real incentives?”

She added: “Sometimes it’s almost impossible to say if activists spotlight the problem or create it.”


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