The Push to Break Up Big Tech Stocks Has a Silver Lining for Investors

The brewing antitrust crackdown on the big tech stocks may not be as bad as many investors fear - and could even prove beneficial in the long run.

What's becoming clear is that some sort of antitrust action against at least four big tech companies - Apple Inc. (NASDAQ: AAPL), Alphabet Inc. (NASDAQ: GOOGL), Facebook Inc. (NASDAQ: FB), and Inc. (NASDAQ: AMZN) - is practically inevitable.

The drumbeat started in earnest in March, when Sen. Elizabeth Warren (D-MA) wrote an article on Medium outlining her plan to break up Amazon, Google, and Facebook. She argues that the companies have abused their power to stifle competition and has made breaking them up a major theme in her campaign for the 2020 Democratic presidential nomination.

In the weeks since, other prominent Democrats, including Sen. Bernie Sanders (I-VT) and the young firebrand Rep. Alexandria Ocasio-Cortez (D-NY), have endorsed breaking up big tech companies.

But things really got serious in the first days of June, when a series of news reports revealed that the Department of Justice and the Federal Trade Commission (FTC) had "divvied up" the big tech companies. The FTC is looking into Amazon and Facebook, while the DOJ is thought to be investigating Apple and Alphabet, specifically its Google subsidiary.

The news took a toll on the big tech stocks.

Although AAPL stock was only dinged by about 1% (with strong product announcements out of its WWDC conference June 3 possibly mitigating the damage), AMZN fell 4.6%, GOOGL 6.1%, and FB a painful 7.5%.

Each of the big tech stocks has recovered to varying degrees since then, but the dark cloud of antitrust sentiment continues to make Wall Street anxious about what will happen next.

In addition to the investigations by the FTC and DOJ, Congress is getting in on the act. The House Judiciary Committee has announced its own investigation into the anti-competitive practices of the big tech companies, starting with a hearing today (Tuesday) on the impact of digital platforms on the news media.

And missteps over the past year or so by all four, especially Facebook, has soured the public on big tech as well.

But despite all the anxiety, the wave of antitrust sentiment is likely to leave investors in big tech stocks better off in the long run...

Why the Big Tech Stocks Have Nothing to Fear

To get an idea of what might happen to the stocks of Amazon, Facebook, Apple and Google, we can look back at past antitrust actions.

Take one of the most famous antitrust cases of all time, the breakup of John D. Rockefeller's Standard Oil.

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At the time, the antitrust mood was running high, and Standard Oil was the biggest trust of them all. When the DOJ broke up the company into 34 separate entities in July 1911, it was considered a great victory for the "trust-busters" of the era.

But if Standard Oil investors were weeping over the dissolution of the company, they had plenty of dollar bills to dry their tears. One year after the breakup, the value of the shares of the successor companies had doubled.

As the years went by, these companies merged and evolved into such oil majors as Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX). Anyone who held on to the shares that resulted from the breakup of Standard Oil would have enjoyed huge gains.

Now let's fast-forward to the 1990s...

Lessons from the Last Big Tech Antitrust Case

An even more illustrative case is that of Microsoft Corp. (NASDAQ: MSFT) in the late 1990s. The DOJ went after Microsoft for abusing its dominant position in the tech world - a scenario that directly applies to the big tech companies facing antitrust scrutiny today.

Not only did it have a near-monopoly in PC operating systems with Windows, it had a near-monopoly in productivity software with Office. And in the late '90s, Microsoft used that power against the Netscape browser in an attempt to gain control of the Internet.

After five years, Judge Thomas Penfield Jackson recommended that Microsoft be broken in two (Windows was to be spun off as its own company). At the time, MSFT stock plummeted 14%.

Microsoft appealed that decision and won - it remained intact, but it didn't get away unscathed. In the 2002 settlement, Microsoft agreed to share some of its programming code with third-party developers. Years under the antitrust microscope also softened the company's aggressiveness toward competitors.

For long-term investors, the case had little impact. Although Microsoft stock stagnated for a decade afterward, that was more due to mismanagement by then-CEO Steve Ballmer, who failed to recognize and seize the opportunity presented by the smartphone revolution.

The proof that Microsoft wasn't crippled by the antitrust case had to wait for the arrival of CEO Satya Nadella in 2014. His focus on the cloud put the stock back on track. Since Nadella took over, MSFT is up 220%, and the company's market cap is now hovering near $1 trillion.

Investors who kept the faith were rewarded.

This all bodes well for shareholders of Amazon, Facebook, Apple, and Google as those companies face their own antitrust troubles.

Given that we're very early in this process, the cases against the big tech stocks could go in a number of directions.

But here's what we think shareholders can expect as this unfolds...

How the Big Tech Stocks Will Fare in an Antitrust World

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First of all, as the Microsoft case demonstrated, it's pretty unlikely any of the big tech companies will get broken up.

And despite the Microsoft case, U.S. antitrust laws are pretty much the same ones crafted in the late 19th century and ill-suited for taking on the big techs of 2019.

"There would have to be a sea change first in how the antitrust enforcement agencies think about antitrust and then in how the courts think about it," Prof. Daniel A. Crane, senior professor of law at the University of Michigan Law School, told Variety.

Money Morning Executive Editor William Patalon, III, agrees. But though the chances may be slim, he says investors still need to watch for any big tech breakups.

"A breakup would basically be a spin-off," Patalon told me. "And corporate spin-offs are one of my favorite transactions."

He pointed to research that shows spin-off stocks beat the general market averages for as long as three years after the split takes place. One Penn State University study found a three-year return of 76% -- enough to beat the market by 31%.

"It's about as close to 'free money' as you'll find in the modern stock market," Patalon said.

Of the four big techs in the regulatory crosshairs, Google and Facebook are the most likely to have one or more pieces broken off.

Warren suggested in her article that Google's ad exchange, its businesses on the exchange, and search be split apart. Facebook may be compelled to divest some of the social media platforms it's acquired, such as Instagram and WhatsApp.

But investors don't necessarily need big tech spin-offs to profit from antitrust actions.

New curbs on big tech should open the door to new investing opportunities...

Restrictions on Big Tech Will Let Startups Bloom

One of the root concerns behind antitrust laws is companies that become so powerful they crush potential rivals before they can get any traction.

When Microsoft's attempt to gain control of the Internet was halted, it left niches for companies like Google and Facebook. With no corporate "bully" to knock them out, those companies grew into formidable tech titans themselves.

The Microsoft case was "extremely successful in creating the conditions for the Silicon Valley boom in the beginning of this century," Harvard Law School Professor Lawrence Lessig, who worked on the case as a special master (fact-finder), told Business Insider. "And we ought to learn that lesson."

For investors, this is an ideal situation. Startups that target new, growing areas of tech have been a tremendous source of wealth over the past 30 years. Restraining the big tech companies will allow the next Facebooks and Amazons to flourish until they can go public.

And that's exactly what Sen. Warren wants.

"Weak antitrust enforcement has led to a dramatic reduction in competition and innovation in the tech sector," Warren wrote in her Medium post, noting that antitrust efforts aimed at promoting competition "allows new, groundbreaking companies to grow and thrive."

As the big tech stocks evolve into blue chips, the best outcome for investors would be a new wave of tech IPOs with the potential for massive growth and monster gains.

So don't sweat any chatter you hear in the financial media about how bad these antitrust proposals will be for big tech stocks.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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