May 23 (Bloomberg) -- Activist investors are targeting companies from NetApp Inc. to Apple Inc., preying on an aging U.S. technology industry.
Data-storage company NetApp, under pressure from Elliott Management Corp. to boost shareholder value, said this week it’s cutting jobs and returning cash through stock buybacks and dividends. Dell Inc., the target of the biggest technology takeover this year, is now in Carl Icahn’s sights as well after the billionaire investor deemed the offer price too low. Even iconic Apple boosted its stock buybacks last month following the urgings of hedge-fund manager David Einhorn.
Mature tech companies’ slowing growth, coupled with a substantial cash pile of more than $500 billion and the low debt typical of the industry, make them ripe for activist investing, which has historically targeted cyclical sectors such as retail and consumer goods. That may spell more activists in tech, said Michael Carter, co-head of U.S. technology investment banking at RBC Capital Markets.
“Not all technology companies have proven savvy at cycle management, continuing to view themselves as high-growth when maturity has settled in,” Carter said. “Failure to act or react has opened a window to vocal and agitated shareholders.”
NetApp, based in Sunnyvale, California, announced its staff reductions and share repurchases at the same time it forecast sales that fell short of analysts’ estimates. Before today its stock had sunk by more than one-third since 2011, giving the company a market value of about $13 billion. Elliott, the hedge-fund company founded by billionaire Paul Singer, owns about 16 million shares of NetApp, according to a statement this week.
Elliott took aim at NetApp after its success with Houston-based BMC Software Inc. The firm spent almost a year pressing the software maker to seek a sale, culminating in its acceptance of a $6.9 billion buyout this month from Bain Capital LLC and Golden Gate Capital. The day the deal was announced, BMC reported fourth-quarter earnings that trailed analysts’ projections.
Hewlett-Packard Co., in the midst of a multiyear turnaround, named activist shareholder Ralph Whitworth as interim chairman in April. The largest personal-computer maker, founded more than 70 years ago, shook up its board amid shareholders’ disappointment with the company’s performance and its botched acquisition of Autonomy Corp.
“The macroeconomic environment has caught up with the industry, which has been a darling of the market during and after the financial crisis,” said Drago Rajkovic, head of technology M&A at JPMorgan Chase & Co. “Technology companies have started missing earnings forecasts in the last two quarters amid an IT spending slowdown.”
Dell, the target of a $24.4 billion buyout by its founder and Silver Lake Management LLC, is among them. The Round Rock, Texas-based company reported last week that profit in the first quarter ended May 3 shrank to 21 cents, compared with the 35-cent average of analysts surveyed by Bloomberg. The performance of the company, started almost 30 years ago in a Texas dorm room by Michael Dell, underscores the very reason Dell is going private.
Meanwhile, activists keep circling. Icahn, for example, joined forces with top outside Dell investor Southeastern Asset Management Inc. to propose an alternative deal, saying the $13.65-a-share offer isn’t enough. As of this week, Dell’s board was pressing Icahn to provide more details on the proposal for evaluation.
While some technology ages, major secular shifts such as cloud computing, big data and social media have fueled growth at next-generation companies, said Michal Katz, Carter’s co-head of U.S. technology investment banking at RBC in New York. That’s attracted older companies on the hunt for growth: For example, Yahoo! Inc., an up-and-comer in the dot-com heyday, agreed this week to pay $1.1 billion for Tumblr Inc., staking the future of the largest U.S. Web portal on the blogging startup.
Of course, the hot sectors come complete with high prices. Yahoo is paying about 85 times revenue for Tumblr, the richest valuation for a dot-com company since 2000, according to data compiled by Bloomberg. When social-media giant Facebook Inc. went public more than a year ago, it was valued at about 26 times trailing 12-month sales, making the company more expensive than every single member of the Standard & Poor’s 500 Index at the time.
While Facebook’s shares have since sunk, other initial public offerings of next-generation technology companies are faring well. Tableau Software Inc. and Marketo Inc. surged in their stock-market debuts last week.
Before today, Seattle-based Tableau, a provider of digital charting tools, had gained more than 60 percent since pricing its initial public offering last week. Marketo, the San Mateo, California-based company that sells software for marketing automation, had almost doubled since pricing its IPO.
They joined a crop of recent business technology providers thriving in public markets. Workday Inc., which went public in October, and ServiceNow Inc., whose offering took place last June, have both more than doubled since their debuts.
“Technology has become a tale of two cities,” said RBC’s Katz. “On one hand, you have the maturing slower-growth companies, which generate healthy cash flow and need to rethink their capital structure. On the other, you have the high-growth next-generation companies which trade at skyrocketing multiples.”
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