Should Investors Worry About Big Tech Breakups?
The market confronted the news about the potential for restrictions on big tech companies with a negative attitude. Cooler heads have started to prevail already.
In the late 19th and early 20th century, businessman John D. Rockefeller gained almost total control of the oil business. At its height, the trust that controlled all of Rockefeller’s companies was responsible for no less than 91% of all the oil production in the United States as well as 85% of all petroleum sales.
The government eventually stepped in and broke up Standard Oil, splitting it into several smaller companies, although small isn’t a way to describe some of them. Today, the surviving companies of this famous breakup include Exxon, Mobil, Chevron, Amoco, and several other smaller oil companies which were eventually sold to Sunoco and BP.
Exxon and Mobil eventually merged, and became the largest oil company in the U.S., with Chevron in second place. They may have broken up the company but Rockefeller still owned them and this breakup ended up adding significantly more to Rockefeller’s wealth. In terms of one’s percentage of GDP, Rockefeller’s wealth far surpasses any of the more modest multi-billionaires of today, and this breakup played a significant role in this.
Those who believe that breaking up a company is a bad thing for investors just assume this and don’t really look very much into the matter. Moves like this do serve to reduce things that interfere with competition, the goal of antitrust suits, but if we think that this will reduce the collective footprint of these companies, we may want to have another look at this.
A more recent case in point is with eBay’s spinning off PayPal. Since the breakup, both eBay and PayPal have both done well, and while they may have done so together as well, they certainly have not suffered or inflicted any punishment upon themselves from any of this.
This move in fact gave PayPal what they really needed for their stock to really shine, the ability for investors to focus on them along, and their price has tripled since and show no signs of stopping. eBay’s growth has been much more modest but they are still up 40% from the time PayPal left in 2015. Collectively, this move has added a lot of value to the stocks, and some people are expecting the same thing should we break up companies such as Amazon, Alphabet, Facebook, and Apple.
Big tech companies make all sorts of acquisitions, with the new companies getting benefited by being brought into the fold and oversight of a much more successful and resourceful company. At some point though, after whatever transformation and enhancements that are involved take hold, it can be wise to let them leave the nest and get back to building their own niche.
PayPal is a perfect example of this, as it was allowed to grow by being eBay’s payment processor, and after they left, they still maintained this relationship but now were in a position to attract a lot more investment from those who had a yearning to get in on the new digital payment craze. PayPal is by far the market leader in this field and now has much more control over their own niche than eBay could ever hope for, given they live in the very long shadow of Amazon.
We Are Strictly Limited in When We Can Break Up Companies
Regulators and lawmakers don’t have carte blanche here though, and far from it actually. These cases are settled by the judiciary and not by politicians or political will. Since the Sherman Act of 1890, anti-trust law has become a rich and well-defined field of law, and is guided by legal principles and precedents, not by some people just believing that these companies have become too big.
This can’t really be about size though, as in terms of revenue, Walmart dwarfs all of these tech companies that are now in the crosshairs, and while some politicians and a lot of people resent Walmart’s success, there’s no talk about breaking them up. There’s no basis to do it on, although we don’t necessarily need one to target a company.
ExxonMobil is also bigger than any of these four in terms of revenue, but no one is talking about breaking them up into their component parts. Back in Rockefeller’s day, competition was put down, but today’s competitive environment in the oil business is as fierce as they come.
Microsoft is right up there with Apple where market capitalization is concerned, with both companies coming in at around a trillion dollars. The government did go after Microsoft some years ago, and even received a judgement against them, but this was overturned on appeal. While the argument for restraining the world’s largest software company back then was on the weak side, at least there was one.
If there were issues with restraint of trade with the tech companies that are now being targeted, then it would be surprising if the government did not step in. When looking to apply restraint of trade law, you need a situation that can be demonstrated to actually involve an illegal restraint of trade, otherwise there’s nothing to talk about.
We would at least think that this is always true, but with the concerns with Apple, Amazon, Facebook, and Alphabet, the parent company of Google, don’t really involve genuine accusations of restraint of trade, as they are instead about people just not liking how successful they have become.
These companies are all now arguing that they do not have monopolies, and as long as we understand the concept of a monopoly, this is clearly not the case. The issue with a monopoly isn’t about market share per se, it’s using their market share or other means to stifle competitors and use this as a tool to artificially increase prices.
This is what old John D. did with his oil company, for example by controlling the means of getting oil to the market and then denying his competitors access to it. If you need to send your oil by rail and your opponent controls the railroads, you either go out of business or sell it to the competitor at a reduced price, as you are trapped.
The standard here isn’t quite that high, as merely interfering with the ability of your competitors to compete can be seen as enough to act upon. It doesn’t mean making phones that people like to buy, selling products at your site online that people love to shop at, creating a social media site that is immensely popular, or a search engine that people prefer over all others.
We might think that we could construe a de facto monopoly out of arrangements such as YouTube being owned by Google, where YouTube is given preference in search results with Google’s search engine, and be seen as restraining other services similar to YouTube. This would involve a fundamental misunderstanding of what we are out to prevent with anti-monopoly laws, which is manipulation of prices.
It does not involve intentionally backing off on what businesses do, which is to create value, and there is never an obligation to assist a competitor, only not intentionally restrain them. Otherwise, we get to run our businesses for the benefit of the owners, with no exceptions, nor should there ever be any.
This is where the line is drawn, whether a company uses its power to limit its competitors directly, such as their competition being reduced by way of reciprocal acts between companies that infringe upon the right of outside companies to compete with them. If the intention is to just promote your own companies in a manner consistent with a free market, and the allegedly egregious acts are simply a manifestation of a company’s exercising their legal power, such as Google deciding how to run their own company without undue interference, this is not restraint of trade by any reasonable interpretation.
This Likely Will Not Happen, But It Isn’t Really Bad if it Does
With all this said, if somehow regulators managed to win cases against one or more of these big tech companies, this would likely be bullish for the companies affected as well as their shareholders, as the value created by any breakups would allow for people to bid up their stocks even more.
At least part of this effect, if not all of it, comes from the fact that stock prices are set by investor sentiment, and by breaking up your company, you can target more investors and even create more excitement among investors. This is exactly what happened with PayPal, which is one of the most loved stocks out there these days and has been a simply fabulous investment since they branched off on their own.
For this to happen though, you need a good case. Dislike or popular opinion doesn’t really count for much here.
There is a certain segment of the stock market that functions like your knee does, causing your foot to leave the floor if your knee is struck in the right way. This doesn’t last for very long though, and once it returns to its normal position, we then get to contemplate the matter instead of just reacting to it. That’s what we saw Monday. In the end, there really isn’t a good reason to think that our knees are under any sort of meaningful attack or risk by any of this poking around though.
Cooler heads have prevailed in the market since Monday’s tumble. Apple not only gained back the $1.77 a share they lost Monday, they have added another $11.85 per share for good measure during the other four days of last week. Amazon also ended the week higher than it started. Facebook recaptured most of Monday’s losses.
While Alphabet has taken the worst of this and gained back less than half of the dip they took on Monday, this is a stock that has struggled a lot lately anyway and were already down 14% during the month of May before this all hit.
Facebook now looks like it may have put in a bottom now during this downward trend, in spite of having to take a step back due to these new concerns. It is clearly the weakest of the four right now in terms of their recent stock performance, but we can already assume that the worry over being broken up has at least mostly past, and they have been at least well enough to share in some of the market love we’ve seen since.
Whether or not it is realistic that these companies become broken up by successful antitrust actions, we still need to keep a close eye on these companies, because with the stock market, belief really does create reality.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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