Never has techland felt the influence of activist investor so acutely, with a Who’s Who of hedge-fund luminaries transforming the investing landscape.
Jesse Cohn of Elliott Management is pushing EMC to spin off VMWare. Dan Loeb reshaped Yahoo’s board and installed Marissa Mayer as chief executive, and now Starboard Value wants to break up the company. Value Act’s Jeffrey Ubben pushed Steve Ballmer out of Microsoft. And Carl Icahn has been an agitator in the industry for the past seven years.
Lots of public companies have responded by shoring up weaknesses before they attract unwanted attention and creating plans for when the hedge-fund guys call.
But some tech businesses seem to have a built-in activist repellent: a dual-class share structure that keeps power in the hands of management.
Facebook is the poster child for this type of arrangement. The company’s Chief Executive Officer Mark Zuckerberg owns a minority stake, but his special share-class holdings give him a majority of the voting rights. This structure gives Zuckerberg a lot of freedom, like the ability to do a megadeal, like the WhatsApp purchase with very little interference from the board, shareholders or outside dealmakers.
Soon after Facebook’s initial public offering, Bloomberg News noted that multiple-share classes had become the new normal in Silicon Valley. And many of the companies that went public during the past decade adopted some version of this structure, including Google, Groupon, LinkedIn, Twitter, Zillow and Zynga. The leaders of the Chinese online retailers JD.com and Alibaba are also insulated from outside forces.
In its F-1 filing before going public, Alibaba explains why its share structure gives the executive stakeholders more power than common shareholders:
Our company will not make decisions based on short-term revenues or profits. Our strategies will be implemented with mission-driven, long-term development in mind...
In the interest of building a business ecosystem that is healthy, sustainable and growing, the corporate charter of the company empowers the partners in the Alibaba Partnership to have a strong say in charting the strategic direction and moral compass of the company.
The situation is more extreme at JD.com. TheStreet.com notes that the founder has virtually no oversight, given that he can cancel and otherwise control board meetings.
When shareholders have so few rights it’s hard for hedge funds to get much leverage. Even if they rally the support of all the common shareholders, their efforts can be blocked by management. Unsurprisingly, the most successful activist campaigns have been against older companies such as Yahoo and Microsoft, where share-class structure doesn’t so blatantly protect the executives.
Activists have been stymied in situations where the founders have a lot of control. Jana Partners, for example, seems to have sold its position in Zynga, which was early to the dual-share class trend, without much to show for it. The stock went public at $10 and it traded at about $3.50 when Jana’s stake was revealed in May 2013. Even after founder Mark Pincus was pushed out of the company, he still controlled 62% of the voting rights. The stock now hovers around $2.25.
This isn’t to say that Jana couldn’t have made money on Zynga, but broadly speaking shareholders didn’t benefit from the campaign. The Web-based game designer has yet to execute a turnaround and the stock reflects that.
(Jana seems to still have increased its stake in Groupon, another stock that favors management. Shares of the online-coupon distributor are trading right where they were when news hit that the fund had taken a position.)
With the activists buzzing tech, some bankers say that late-stage private companies have started to think about how to tangle with cage-rattling hedge funds too. They’re being factored into the cost of being a public company, just like Sarbanes-Oxley compliance, as executives prepare for IPOs. The specter of an activist at the gate strengthens the case for multiple share classes that keep the founder in control.
But history has shown that share classes don’t protect underperforming companies forever. Newspaper companies such as the New York Times, Dow Jones and the Washington Post famously used tiered-share structures to keep power in the hands of family-owned trusts. But the Bancroft family was forced to sell Dow Jones to Rupert Murdoch and the Grahams sold the Post to Amazon's Jeff Bezos.
Voting rights may be a buffer, but they’re not a permanent barrier against outside pressure. Ubben and Cohn are at the height of their influence. Boards are said to fear them. If they sense that dual-class share structures are crimping returns or otherwise hurting investors, the activists won’t be held at bay forever.
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