We recently wrote that “Scale Matters in Tech”. Technology companies that have captured the number 1 or number 2 position within a particular vertical enjoy Economies of Scale including: 1.) automatically getting a seat at the table for sales bakeoffs, 2.) job seekers naturally gravitate toward market leaders, 3.) prospective acquisition targets will find you, 4.) having balance sheet capacity to invest in areas that further extend leadership positions.
Here’s a short list of three Technology firms that activist investors may pursue. Our list is primarily related to the Economies of Scale issue.
AT&T (tkr: T): Time Warner/HBO is a sub-scale content production asset when compared to Disney and Netflix in the traditional (movies & TV) content business. Similarly, both Amazon and Apple could step on the production accelerator and drive content output that would far exceed AT&T’s capabilities. Video games are another story entirely where Warner properties barely register in a Minecraft, Fortnite world. We could envision a scenario where an activist investor forces a content divestiture on AT&T sometime in the next five years.
IBM (tkr: IBM): IBM’s $34 billion Red Hat acquisition does not make IBM more competitive with AWS, Azure nor GCP in a meaningful way. Activist investors would likely force a management change to facilitate an overhaul of IBM’s capital allocation strategy. We have long advocated that IBM acquire a basket of Information Services companies (IHS Markit (tkr: INFO), Verisk (tkr: VRSK), Solera (pvt.) and others). However, in the seven years since we first advocated this strategy, prospective target companies have grown significantly in both size and valuation while IBM has largely stood still.
Roper Technologies (tkr: ROP): Roper’s overarching strategy makes little strategic sense. Quote from CEO Neil Hunn: “Our new segments reinforce Roper’s diversified, niche market strategy by emphasizing business models instead of end markets.”
This “holding company” strategy – a vestige of former Chairman & CEO Brian Jellison (decd. 2018) – who prior to leading Roper served as an EVP of Ingersoll-Rand, a diversified industrial company), essentially ensures that Roper won’t achieve nor enjoy the benefits of Economies of Scale – especially within its Software portfolio. Activist investors would likely force management (or install new management) to focus its efforts on two or three broad industry verticals/ end markets. For example, Healthcare, Financial Services, Insurance.