Investors are worried about possible federal antitrust action on big technology companies, and that’s one factor contributing to the technology sector struggling in recent weeks.
For example, iShares U.S. Technology ETF IYW, +1.88% is about 4% below its April high, even as the S&P 500 SPX, +0.94% has rallied to a new all-time high.
Investors would do well to review the stock market’s reaction to past antitrust actions. Consider the suit filed in January 1969 against IBM IBM, +2.03% , in which the U.S. government sought to break up the company. Fifty years ago IBM was “Big Blue” — far and away the most dominant technology stock in the S&P 500. It was that earlier era’s equivalent to today’s Apple AAPL, +2.71% and Facebook FB, +0.81% .
After 13 years of litigation, the government in January 1982 dropped the case against IBM. This was regarded as an “unqualified victory” for the company, according to a fascinating history of those years that appeared in The New Yorker in 1993.
Over time, however, IBM’s victory turned into a curse. James Stewart, the author of The New Yorker article who also is Professor of Business Journalism at Columbia Journalism School, wrote that “nearly everyone in the computer industry agrees that, following its antitrust victory, IBM complacently retreated into the mainframe world it dominated — a strategy that was rewarding in the short term but has now proved disastrous.”
This is well illustrated in the accompanying chart, which plots IBM’s performance relative to the S&P 500 over the 10 years following the government’s decision to abandon its antitrust case against the company. After initially outperforming the market, IBM’s stock went into a long period of decline. Net for the entire decade, IBM’s performance was less than half that of the S&P 500.
It’s instructive to compare IBM’s fate over that decade with that of AT&T T, +0.27% , which the government (in an announcement on the same day in January 1982) broke up into a number of smaller companies. The “Baby Bells” (the regional Bell operating companies) were born out of that settlement. Though many initially considered the government’s decision to be “disastrous” for AT&T, its performance over the subsequent decade was the opposite of IBM’s.
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Taking into account the shares of the Baby Bells that were distributed as part of the breakup of Ma Bell, an investor who bought AT&T stock on the eve of the January 1982 settlement came out far ahead over the next 10 years than an investor who bought and held IBM stock over that period. AT&T’s CEO at that time later observed: “We were forced by the divestiture to make changes that probably were good for us. We went through some tough years, but it paid off. We may have been more fortunate than IBM in that change was forced upon us.”
It would be easy to dismiss this walk down memory lane as irrelevant to today’s technology companies, which operate in a wholly different, “winner take all” world. But some analysts are already calculating that investors would benefit over the long term by breaking up the big tech companies.
One analyst recently argued that “a Facebook breakup could be a windfall for investors.” Another concluded that “Breaking up Amazon AMZN, +1.90% , Apple and Facebook could drive more innovation.” Yet another analyst believes that “Alphabet GOOG, +2.14% GOOGL, +2.04% shareholders could see 50% upside in break-up scenario.”
To be sure, it’s important not to get too far ahead of ourselves. The antitrust case against IBM dragged on for more than a dozen years, and over the first four years after the government’s decision to drop its case, IBM’s stock significantly outperformed the U.S. market. So, to the extent we draw an analogy to what happened with IBM and AT&T, it would take many years for investors to come out ahead from a breakup of any of today’s big tech companies.
Furthermore, there may be other, perfectly legitimate, reasons why you think the big tech companies are overvalued. But if you are shunning them solely because of a concern about the potential impact of antitrust actions against them, you might want to think again.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. Hulbert can be reached at mark@hulbertratings.com
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