Activist investors’ appetite for technology has remained strong through the 2023 proxy season. The tech sector received the most activist investment in the first quarter, resulting in the biggest campaigns and, so far, generating some of the strongest returns on investment, likely refilling activist war chests deflated during last year’s stock downturn.

“Tech has all the hallmarks of what activists are looking for in terms of opportunity,” Andrew Freedman at law firm Olshan Frome Wolosky told Insightia. “There is a lot of dislocation, a lot of volatility up and down and, as they get further away from their IPO dates, the share structures at many of these companies have become more activist friendly and less insider.”

Big investments

The technology sector saw the largest number of new investments in the quarter ending March 31, according to Insightia data, the fourth consecutive quarter that the sector topped the popularity list.

Bill Ackman’s Pershing Square Capital Management led the buying with new stakes in both the B and C shares of Google parent Alphabet, worth close to $1.1 billion. Dan Loeb’s Third Point also disclosed a new $500-million stake in Alphabet’s A shares.

Alphabet was already facing calls from activist TCI Fund Management to take action to cut costs. In a November 15 letter to the board, TCI stated that the cost base for Alphabet was “too high” and called on management to take “aggressive action.”

According to Third Point’s first quarter letter to shareholders, their decision to invest was due in part to Google’s commitment to “durably reengineer its cost base” following the TCI engagement. In the letter, Loeb also said he believes fears around the potentially negative impact that AI and ChatGPT/Microsoft may have on Google’s business “created a unique entry point into one of the best consumer internet assets and businesses of our generation.”

Other examples of tech companies seeing heavy activist investment were ValueAct’s position in Spotify Technologies and new investments by Third Point and Engine No. 1 in Micron Technologies.

Big campaigns

The tech sector has already generated some of the highest profile activist campaigns of the year, such as ValueAct’s campaign at Salesforce, which saw involvement by Elliott Management, Starboard Value and other activists, and a campaign led by TCS Capital Management at online business review company Yelp. More are in the works.

“There are a number of under managed technology companies that have not adjusted to the new market realities that make very interesting investments,” Chris Kiper of Legion Partners told Insightia. On June 1, Legion disclosed that it was in talks with U.S. customer engagement platform Twilio, with the activist pushing for profitability improvements among other reforms.

The discussions come as Twilio’s dual class stock structure is understood to expire in the coming months. CEO Jeff Lawson controls almost 22% of the vote by virtue of owning a majority of the Class B shares.

Another campaign was initiated last month when Jeff Smith’s Starboard Value nominated a slate of directors for the board of LivePerson, arguing the online business services company needs new management, a refreshed board and a strategy to unlock shareholder value.

That effort follows another Starboard win in the tech space. In February, engineering company Rogers Group avoided a proxy contest with Starboard by agreeing to name two new directors to its board. Starboard had nominated six directors, including three of its own executives.

Big returns

The spending on tech has proven to be a wise move given the rebound by the Nasdaq and many of the leading names in the sector, likely reversing some of the steep losses suffered by activists in 2023.

Since the start of the year, Alphabet’s stock is up almost 40%. That’s good news for Third Point, which says its portfolio returned -4.2% during the first quarter of 2023, compared with the S&P 500 Index return of 7.5%. The quarter could have been much worse without tech. The top five positive contributors for the period were Salesforce, Advanced Micro Devices, and Microsoft.

Micron is also up more than 35%, providing a windfall for Third Point as well as Engine No. 1. But an even bigger winner for Chris James’ ESG-focused fund is Nvidia, which has seen its stock increase by 80% year to date.

Can it last?

After a 31% surge in the U.S. technology-heavy Nasdaq 100 Index this year, there are now questions about whether the tech stock rally is sustainable.

In a May 30 note, Citigroup strategist Chris Montagu noted that long positions in Nasdaq 100 futures are at a three-year high and profit levels are elevated. “Position risks are very much biased toward profit taking, which could create a headwind against the on-going rally,” he observed.

Shareholder activists may well be among those profit takers, providing cash for future investments and campaigns. Given the trends of the last six months, many of those bets will be in the technology sector.