Silicon Valley is generally disdainful of activist investors, branding them as near-term profiteers who provide technology companies with little more than headaches. But a new report from Boston Consulting Group suggests that such sentiment is unjustified.
Before continuing, it’s important to understand that technology has become the sector most often targeted by activists. BCG finds that a typical S&P 1500 company has a 13% chance of becoming an activist target, whereas the likelihood rises to 22% for technology companies. That’s four percentage points higher than the next most-targeted sector, consumer discretionary. And tech companies are particularly vulnerable if they have low dividends or high capital expenditures (let alone both).
There are a lots of reasons why tech companies like Apple (AAPL), EMC (EMC) and Yahoo (YHOO) have become so attractive to activist investors ― including the industry’s relative youth and subsequent maturation—but BCG believes the primary driver has been slowed earnings growth since the dotcom crash:
Slowed growth, of course, tends to reduce total shareholder returns. Particularly when married to things like low dividends.
And that’s where BCG’s big finding comes in. The firm analyzed 24 recent situations in which activists got involved with tech companies (it did not identify the companies), and found “significant” increases in total shareholder returns. Not only in the initial weeks or months, but for at least two years after the activists existed.
“Companies on average suffered [total shareholder return] declines prior to an activist event and enjoyed 36% cumulative TSR during the activists’ involvement,” according to the report.
It doesn’t look like the activists will be leaving Silicon Valley anytime soon.
