Of all sectors, big tech hasn’t succumbed to breaking itself up as it chose to get larger and larger. With size come problems. (sic)
Tech companies are facing multiple challenges as they grow in different phases: Meta is rolling out its roadmap for handsets and wearables through 2027; TikTok is facing regulatory scrutiny from the US, EU, and Canada; and Twitter’s declining performance post-takeover (earnings fell -40% in Dec 2022). Additionally, META’s enormous investments in the Metaverse might not suit investors’ current interests as investment returns in the Metaverse are expected in the long-term. We at The Edge believe these external factors are forcing big tech to think differently, such as Alibaba’s plan to reshape its empire through the exploration of a six-way split of its business units. JD.com has also recently followed Alibaba’s strategy through its own separation of its Property and Industrials units. Alibaba’s successful restructuring will stand as a great example for other big tech conglomerates on value creation through break-ups.
Regulatory Scrutiny
What I’ve found over the years is the bigger and more powerful the company is, the reluctance to break-up is stronger. However, they could be forced to.
Although the size and impact of major tech corporations like Google GOOG -3.3%-3.2%, Meta, Apple AAPL -0.1%-0.1%, and Amazon AMZN +0.5%+0.5% have come under growing scrutiny and criticism, breaking them up would require significant legal and regulatory action, which has not yet appeared, but watch this space. The momentum is building.
Having said that, a few recent events have the potential to result in more regulation of major digital firms. To address concerns about data privacy, competition, and other issues, new legislation has been proposed as well as antitrust actions that have been brought against some of these businesses.
Ultimately, several variables, such as public sentiment, political pressure, and legal changes, will determine whether large digital businesses are broken up. It may not take much to get there in the current political and social environment and if the economy takes a downturn, these businesses will be under more pressure to act.
Spinoffs can unlock the value of the FAANG stocks. The probability of Spinoffs increase as we see regulatory interference in big tech companies. Governments across the globe are considering new regulations that limit how big tech companies can treat their smaller competitors. Most recently, on January 24, 2023, the US Justice Department sued Google for monopolizing digital advertising technologies.
Furthermore, the Federal Trade Commission (FTC) pursued changes in August 2022 to how big tech (Amazon, Apple, Facebook, and Google) handles consumer data. They aim to focus on any actual harm caused by data collection, whether through data breaches, ad targeting, or algorithmic discrimination, and how big tech companies’ automated decision-making systems might impact consumers without their knowledge.
To answer these factors, we believe Spins are a way FAANGs can boost investors’ confidence, create shareholder value, and protect their interests.
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