From Matthew Johnston:
Shares of Big Tech firms got hit with a bit of antitrust angst last week, tumbling on news that they could face scrutiny over their dominant competitive positions in digital markets. Apple Inc. (AAPL), Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN) and Facebook Inc. (FB) lost a combined total of $140 billion in market capitalization on Monday, as the Department of Justice (DOJ) and the Federal Trade Commission (FTC) get set to begin their investigations. But contrary to the pessimism of the markets, New York University marketing professor Scott Galloway believes that breaking up Big Tech could be a boon for shareholders, according to Barron’s.
“DoJ and the FTC are slowly but steadily getting it right,” says Galloway. “But the market on Monday got it wrong. Break them up and the spinoffs will be accretive to shareholders. There’s an opportunity for enormous value creation.”
BIG TECH BREAKUP: STRONGER APART
- Big Tech conglomerates are less competitive;
- Big Tech conglomerates are less innovative;
- Spinoffs would create more value for shareholders.
Galloway’s been making the case for a number of years now that Alphabet, Facebook, and Google in particular should be broken up–Alphabet should spin off YouTube, Facebook should spin off Instagram and WhatsApp, and Amazon should spin off its vast cloud computing operation, Amazon Web Services (AWS). These big conglomerates are less innovative and create less value for shareholders than they otherwise could as much smaller entities.
He cites the breakup of AT&T Inc. (T) and the spinoff of PayPal Holdings Inc. (PYPL) from eBay Inc. (EBAY) as past examples in which, after being broken up, the individual components of the former conglomerates created more value for shareholders rather than destroyed it. “In almost every instance, maybe not in the short term, but in the medium and long term, the aggregate value of the spun companies is much greater than the original conglomerates,” Galloway told Bloomberg.
Some recent valuation analyses from Wall Street analysts suggest Galloway might be on to something. Cowen analyst John Blackledge and his team issued a report that pins the value of AWS alone at $506 billion, 56% of Amazon’s total market capitalization of $905.6 billion. AWS as a stand-alone business might be among the 10 most highly valued companies in the world.
Piper Jaffray analyst Michael Olson and his team used a sum-of-the-parts (SOTP) analysis for Apple at the end of March. They found that the most valuable segment of the iPhone maker’s business was not its products but its services segment. Olson cited a value of $500 billion for Apple services and $400 billion for Apple products, which combines to a total that is a little over $6 billion higher than the company’s current market valuation of $893.8 billion.
UBS analyst Eric J. Sheridan thinks that a break up of Google parent Alphabet would also lead to an accretion of value to shareholders, rather than dilution. “In the case of any company breakup (even if a possible outcome that would be years away), we actually see unlocked value as the various pieces within [Alphabet’s] conglomerate would likely warrant a higher valuation,” he said.
Interestingly, the decision to begin investigating the power wielded by Big Tech companies comes as the U.S. ramps up its trade war with China, whose technological prowess is growing every day. U.S. regulators may be able to limit the power wielded by America’s tech giants by breaking them up, but that won’t be an option for China’s increasingly dominant tech companies.
The Vanguard Information Technology ETF (VGT) . Year-to-date, VGT has gained 26.26%, versus a 8.69% rise in the benchmark S&P 500 index during the same period.
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