“Keep buying Tim! You still have $145 billion cash,” Carl Icahn tweeted last week, after Apple Inc. (NASDAQ:AAPL) announced its $14 million buyback of stock. And Mr. Icahn’s public push for Apple to return some of its $160 million cash pile to its investors is symptomatic of a broader trend in the technology sector, according to a report by Toni Sacconaghi Jr., an analyst at Alliance Bernstein.
The tech sector has historically been less prone to activists and hostile takeovers, due to the inherent uncertainty in the business. These have traditionally been “growth” companies with low leverage and high valuations, subject to disruptions in technology and demand. However, as the sector has broadened and deepened, investors are becoming more comfortable with analyzing technology companies, which are maturing into their “value” phase. They are now able to gauge their stability and valuations relative to the space.
Technology companies’ capital allocation
In addition to this, many technology companies’ capital allocation has been “atrocious,” according to the report. The technology companies in Alliance Bernstein’s Quant/Strategy Universe of the largest 1500 companies by market cap have 10% of their market cap in net cash, and although they are getting better at returning cash to their investors, the report claims that there is still room for improvement. M&A in this space has also been seen to be difficult to execute properly and involves high premiums, which also makes them a prime target for activists.
Activists have taken very public positions in technology companies like BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB), Apple Inc. (NASDAQ:AAPL), Broadcom Corporation (NASDAQ:BRCM), Hewlett-Packard Company (NYSE:HPQ) and Juniper Networks, Inc. (NYSE:JNPR). These technology companies all have certain characteristics in common- stock underperformance, high net cash reserves to market cap, a poor M&A track record and high “inside” ownership.
Jana Partners’ interest in Juniper
Jana Partners LLC, the New York-based hedge fund run by Barry Rosenstein, recently disclosed its activist interest in network equipment provider Juniper. According to Jana’s fourth quarter report, Juniper has a lot of potential for upside and is situated in the right place at the right time, given that we are currently in the “tail-wind of a favorable telecom spending cycle on required network upgrades.”
Jana Partners also believe that if Juniper Networks, Inc. (NYSE:JNPR) were to cut out unnecessary costs such as the “elaborate expense” of its new Sunnyvale, CA campus, it could add save as much as $300 million, adding $0.40 to its earnings per share. Jana’s report also mentions the company’s “unfocused” business segments, which could be streamlined through divestitures.
Finally, the company’s $3 billion cash pad makes its balance sheet “over-capitalized, even by Silicon Valley standards,” according to Jana’s report, and they suggest that a large capital return program should be immediately instituted.
According to Alliance-Bernstein’s report, some other technology companies also bear resemblance to Juniper. The report highlights certain technology companies that could be a target for activist investors, including video-conferencing company Polycom Inc (NASDAQ:PLCM), communications network provider JDS Uniphase Corp (NASDAQ:JDSU), digital circuit manufacturer Altera Corporation (NASDAQ:ALTR) and semiconductor producer Xilinx, Inc. (NASDAQ:XLNX).
Bernstein believes that cloud computing company Citrix, in particular, could be a prime target for activists. Citrix Systems, Inc. (NASDAQ:CTXS) has underperformed the space and is in the process of looking for a new CEO, which could make it appealing to activists. It also has some segments, like its online collaboration products GoToMeeting, GoToWebinar, GoToTraining and Podio that have divestiture potential.
Another cloud computing company that could be a target for activists is EMC Corporation (NYSE:EMC), due to its highly valuable VMWare segment. It has also had its cash reserves increase significantly over 2013 up to over $7 million. However, it increased its stock buyback program to $6 billion last year and has a strong management team, which makes it less attractive to activists. However, its stock price has struggled, and further underperformance of its stock could lead to increased interest.