I never thought I would write these words: Paul Singer is totally right. I am no big fan of shareholder “activists” like him. In fact, I think the old sobriquet, “corporate raiders”, was more accurate. But the letter that Mr Singer’s investment firm Elliott Management sent last week to AT&T’s board of directors couldn’t be truer.
The telecoms group, which orchestrated a controversial and ill-advised merger with Time Warner last year, is an underperforming, mismanaged dodo bird of a company — big enough to have racked up $190bn in debt yet not large enough to fend off the Big Tech apex predators ready to eat its lunch.
I predict it will someday be a case study about how corporate arrogance destroyed a tonne of value. It is also a marker for where tech, media, and the market in general may be headed.
It is tough to argue with Mr Singer’s maths. Elliott, which owns a $3.2bn stake in AT&T, says the company “not only failed to keep pace with the broader market, but has actually underperformed by over 150 percentage points” over the past decade. Not good, especially at a time when most boats were rising.
Still, that alone wouldn’t make me cheer for activist involvement. Corporations can underperform for many reasons, including investing in their future. It is a shame that markets all too often penalise a company for building its business rather than handing money back to shareholders.
But that is not the case with AT&T. Over the past 10 years, it has tried to buy growth, awkwardly, with a series of expensive merger and acquisition deals. These include a failed attempt to buy T-Mobile, the purchase of DirecTV at the very peak of the traditional television market, and most recently Time Warner. Elliott correctly points out that this has made AT&T “an outlier in terms of its M&A strategy: most companies today no longer seek to assemble conglomerates”.
Too many of those that do so are trying to compete with the sheer heft of the platform technology giants, with no coherent strategy. This is particularly true at the intersection of technology and media. Google’s YouTube has a billion users. Apple and Facebook together spend billions on video content. Amazon and Netflix are moving into the premium space once solely occupied by Time Warner’s groundbreaking cable network, HBO. And the AT&T merger has driven away top talent, like former HBO chief Richard Plepler and other senior executives, who could undoubtedly see that content would not be king in the new organisation.
This is not a morality play about spoiled creatives resisting bean-counters. It is a culture problem. After AT&T completed its DirecTV acquisition, the entire management team from that company also departed. The result is a corporation that is bigger but certainly not better. I suspect that AT&T will struggle to invest in top quality content and 5G — the high-speed network that should ultimately be its bread and butter — while servicing in its massive debt. That will be particularly true if interest rates start to rise.
Bottom line: scale as strategy is played out in this late stage, overleveraged market. Being the biggest can help, but it can also hurt. Silicon Valley’s content might become less profitable if a recession leads to a downturn in the advertising market. Uber is laying off hundreds of people and warning that it can no longer just grow without worrying about profits.
Whatever their size, the winning companies will be those that are profitable. That may sound obvious, but it hasn’t been for the past decade, as easy money has dulled investor senses. Now, they are waking up and want to see results. The scepticism over WeWork’s upcoming initial public offering is a case in point. For every dollar the company earns, it spends two, maths that works better on private ledgers than in the public markets.
All this chimes with Mr Singer’s move on AT&T. Activists are often the canaries in the coal mine for large, lasting market trends. When Carl Icahn demanded a few years back that Apple return billions in cash to investors, it signalled a broader shift towards record corporate share buybacks and dividend payments.
Elliott’s letter could mark a similar turning point. The growth of passive investing in entire markets has masked a wide divergence in corporate value within sectors. I think you will now see activists start circling like sharks around fat corporate seals in telecoms, media, and utilities that have most obviously tried to buy growth.
Meanwhile their Big Tech competitors are already being circled by regulators. Last week, California passed a new law aimed at forcing many companies to treat gig workers as employees, which would be a huge cost hit for companies like Uber. Attorneys-general from 50 US states and territories in the US have launched an antitrust investigation into Google’s dominance of search and advertising, while New York is leading a probe of Facebook’s monopoly power. And in Europe, the EU competition commissioner Margrethe Vestager, long a thorn in Silicon Valley’s side, has been given a broader remit that includes digital policy.
Twilight is falling in the valley of corporate giants.