First eBay Inc. unveiled a PayPal spinoff, then Hewlett-Packard Company followed with a breakup announcement. Now Symantec Corporation is expected to jump on the bandwagon. What is driving the breakup wave among iconic tech industry stalwarts?
It's a confluence of factors including pressures on managment to goose the stock price, shareholder activism, the ability to borrow cheaply, and the end of easy profit growth.
EBay Inc. announced plans last week to separate the e-commerce giant and PayPal into independent publicly traded companies in 2015, a move activist investor Carl Icahn demanded earlier this year. Hewlett-Packard followed suit earlier this week and unveiled the company's plan to separate its personal-computer and printer businesses from its corporate hardware and services operations. Now Symantec Corporation could be the latest major tech firm to break itself apart, Bloomberg reported Wednesday.
“There’s growing pressure from shareholders to make more efficient structures where these tech stalwarts can compete in a more strategic and focused way,” said Daniel Ives, an analyst at FBR Capital Markets & Co.
Some of these companies have not had a lot of revenue growth in the last two years and have been forced to drive profitability by reducing costs. Meanwhile, increasing stockholder activism is pushing companies to realize that the best defense against an activist is a higher stock price.
The Federal Reserve’s quantitative easing program over the past five years has had varying effects on the tech sector as it has made financing costs for mergers and acquisitions very low, enabling companies to go out and make acquisitions and easily have them be accretive to earnings.
“[Quantitative easing] is not directly responsible, but companies with a relatively low stock price may be feeling the heat, and that may be what has forced companies to look more closely on how they can generate shareholder value on their own,” said Jordan Posner, managing director and senior portfolio manager at Matrix Asset Advisors.
Hewlett-Packard, Symantec and International Business Machines Corp. are facing headwinds in terms of growth given the move to cloud and mobile, trends that have not yet benefited them. Pressure is now on boards to start looking at breaking up the capital structures that are not working for shareholders. Many of these companies are also finding themselves on the wrong side of IT spending.
What other companies will begin to hop on the bandwagon? Ives hinted that the wave will include not only Symantec but also possibly cloud computing firm EMC Corporation and health services firm Cymetrix Corporation.
So why is this all happening now? There is some seasonality to it. Traditionally, after the seasonal slowdown in the summer activity picks up in the final quarter of the year. Companies that are weighing breakups or mergers tend to do it in the early fall to get the work started before the New Year.
"If a new M&A wave accelerates, that might not necessarily be a bullish sign for Main Street or Wall Street,” said Adam Sarhan, founder and chief executive officer of Sarhan Capital.