Tech’s love-hate relationship with activist investors is headed toward an awkward end

An SEC rule proposal would help tech companies pursue more speculative investments — potentially to their own detriment.

SEC headquarters in Washington

The SEC proposal would require activist investors to disclose a position of over 5% equity within five days, half the current 10-day disclosure period.

Photo: Saul Loeb/AFP via Getty Images

The SEC is proposing a rule change that would make it easier for tech companies to ward off activist investors. While tech executives may welcome the proposal, some investors worry that it will allow corporate mismanagement to fester. On the flip side, the change could give tech executives greater leeway to pursue so-called “moonshot” projects that have more speculative upside and often draw criticism from hard-nosed investors.

The SEC proposal would require activist investors to disclose a position of over 5% equity within five days, half the current 10-day disclosure period. The change is intended to reduce information asymmetries that can give some investors an unfair advantage. The SEC introduced the rule in February and is now observing a 60-day comment period. Democratic SEC commissioners, who currently hold a 3-1 majority, favor the proposal.

Five fewer days might not seem like such a big deal, but for activist investors, it can be the difference between profit and loss. Activist investors typically try to establish a sizable equity position before announcing to the world — and the company itself — that they intend to steer the targeted firm in a new direction.

Once an activist investor makes a public disclosure, the targeted firm’s stock price typically jumps (assuming markets agree with the activist’s thesis). For example, Twitter’s stock jumped nearly 8% after Elliott Management revealed that it had accumulated a stake with the intent of removing then-CEO Jack Dorsey.

The timing of a price jump is important because it increases the cost of purchasing more equity. Higher costs mean lower profit, and that can make activist investing less attractive in the first place.

“This is a sad day for many American businesses, which need to replace incompetent chief executives rather than entrench them,” Carl Icahn said of the rule proposal. According to Icahn, the rule change would particularly hurt investors that rely on outside funds to fuel their campaigns.

Republican SEC commissioner Hester Peirce likewise felt the new rules could harm rather than help markets. “Information asymmetries in this sense — where investors have equal access to disclosure from the issuer and insiders, but come to different conclusions about the long term prospects of a company based on their respective due diligence — are a feature, not a bug, of our capital markets,” Peirce wrote in a dissenting statement.

Some research backs up these assertions. For instance, a prominent 2014 research paper concluded that firms targeted by activist investors become better innovators in the five years following an intervention. This improvement came despite a drop in R&D expenditures at most targeted firms during that time. The researchers considered several plausible explanations, including that the firms became more focused on their core expertise, that they had better aligned incentives and that they more efficiently allocated innovative resources (e.g., patents and innovators).

Regardless of this theoretical upside, it’s safe to say no tech CEO wants to hear that an activist investor is targeting their firm. The industry is littered with instances of contentious battles between activists and executives. In 2013, for example, Icahn took an activist stake in Apple, pressuring the company to use its cash troves to pay dividends. Icahn also pressured eBay to spin PayPal off into an independent company. And before Elliot Management attempted to show Jack Dorsey the door at Twitter, ValueAct Capital helped oust Steve Ballmer from Microsoft.

These cases raise the larger question of whether activist investing needs to be so hostile in the first place. Could investors benefit from communicating with the target company earlier in the process? Would the companies even be receptive to outside guidance that isn’t backed up by the threat of a boardroom proxy battle?

“I think the [targeted] company would also say that their ability to talk to investors and to provide more context or disclosure and not have the information be one-sided or incomplete is also — from their perspective — a benefit to their shareholders,” Elizabeth Bieber, counsel and head of shareholder engagement and activism defense at Freshfields, told Protocol.

Bieber added that the existing 10-day period “does not sound like a long period of time, but is in this world.” As Bieber sees it, the 10-day period allows the activist investor to be “working in the market and the company to be in the dark until a point significantly in the future, when it is really hard to kind of catch up and to speak to their stakeholders and to sometimes correct misinformation.”

One realm in which tech companies often struggle to communicate with investors is “moonshot” investments. Any given moonshot is unlikely to pan out on its own, but the upside of even one success can theoretically be worth the effort.

Google popularized the idea of the moonshot, and Facebook has followed in its footsteps with recent metaverse activity. Moonshots often work to imbue these gigantic tech firms with an aura of innovation, but in truth, most of their revenue growth has come from either their core businesses or from more predictable growth areas, such as cloud computing. The Big Tech moonshots that have generated a lot of buzz — internet balloons and virtual reality, for instance — have struggled to move the revenue needle.

Peter Cohan, a senior lecturer of strategy at Babson College, said if major companies were more focused on financial discipline, they wouldn’t invest resources in these moonshot projects. “A lot of these companies basically entrenched the founders after the company went public and they could basically do whatever they wanted,” said Cohan. He pointed to Google as an example, claiming the company hasn’t really diversified from its core advertising business, “which is so lucrative and growing so fast that it almost doesn’t matter.” Still, Cohan said, there’s a case to be made Google would be even more profitable without the moonshot activity.

Should the SEC ruling go into effect, it would likely matter more for the next generation of tech companies rather than the current giants. Given the trillion-dollar market caps of Big Tech, investors would have a hard time accruing a position of greater than 5% equity. Will the new rules make it easier for younger tech firms to repeat the mistakes of their predecessors? Maybe. But it’s not going to be easy convincing firms of that when their predecessors are so dominant and successful. Activist investors may still have a point, but it’s so subtle — and relies on so many what-ifs — that they will have a hard time ever saying, “Told you so.”


Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep ReadingShow less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep ReadingShow less
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep ReadingShow less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep ReadingShow less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.


Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep ReadingShow less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories