Regulatory probes against Facebook Inc. (FB), Apple Inc. (AAPL), Amazon.com (AMZN), and Google parent Alphabet Inc. (GOOGL) that have the potential to result in antitrust lawsuits could significantly undercut the growth, profit margins, and share prices of these companies. Past cases of antitrust lawsuits, such as occurred with AT&T Inc. (T), Microsoft Corp. (MSFT), and IBM Corp. (IBM), led to declines in the stock values of those companies and a downward shift in the trajectory of sales growth, highlighting the risks facing today’s "superstar" tech giants, according to Goldman Sachs.
“Regulatory risk is back in focus for equity investors amid reports of potential government antitrust investigations,” analysts at Goldman wrote in a recent report. Advising investors to reduce their exposures to stocks that become subject an antitrust lawsuit, they added, “In the past, stock valuations and share prices declined between lawsuit filing and resolution (after years of litigation), and was followed by a downshift in the trajectory of sales growth.”
Antitrust Lawsuit Fallout: Microsoft
- Falling valuations after lawsuit launched in 1998
- Company ordered to change practices in 2000/2001 settlement
- Slower growth, falling valuations after resolution
- Stock trades sideways for 15 years
Source: Goldman Sachs; Yahoo! Finance.
What It Means for Investors
The starkest example is the antitrust case leveled against Microsoft in 1998, which caused the company’s valuation to fall right up until the case was resolved in 2000/2001. Following the settlement, which involved the company having to change its practices, growth slowed and valuations continued to fall through to 2011—the stock essentially traded sideways for about 15 years.
Antitrust lawsuits against IBM in 1969 and AT&T in 1974 also led to falling valuations before both lawsuits were eventually settled in 1982. In the case of IBM, the lawsuit was dropped, but the company’s growth slowed, and while valuations initially started to climb, they soon reversed and continued their previous downward trajectory. AT&T was broken up, and while valuations rose, growth slowed.
Since these three cases, U.S. equity markets have become increasingly concentrated, renewing calls for regulators to step in and ensure markets remain competitive. Facebook, Apple, Amazon, and Alphabet have all quickly garnered a large share of their respective industries’ sales, have significant pricing power and high margins. Such characteristics, while earning the companies who exhibit them the label "superstars," also tend to grab the attention of regulators.
“The current landscape suggests there are only one or two significant players in important digital spaces, including internet search, social networks, mobile and desktop operating systems, and electronic book sales,” U.S. Assistant Attorney General Makan Delrahim, the Department of Justice’s (DOJ) top antitrust official, said on Tuesday.
The DOJ is reported to have begun investigating Google and Apple, the Federal Trade Commission (FTC) is ramping up an investigation on Facebook and Amazon, and the House Judiciary Committee is launching a more general Big Tech antitrust investigation.
As of yet, no lawsuits have been launched against these companies, a fate that they and their shareholders will no doubt hope to avoid. Of course, supposing the investigations determine that any one of these Big Tech firms should be broken up, there are some who believe that such a move would actually be a boon, not just for competitive markets, but for the shareholders as well. NYU professor Scott Galloway, believes a break up would foster greater innovation, growth, and valuations.