Why Carl Icahn Won't Go Activist on Google or Facebook

Three reasons why the famous corporate raider won't take on the two tech giants.

Mar 1, 2014 at 4:00AM

Carl Icahn is on a roll. He seems to be winning left and right. He hit a home run with his investment in Netflix. He won with Actavis's $25 billion acquisition of Forest Labs

He is now calling for eBay to spin off PayPal. It seems corporate boardrooms across America listen to the activist investor.

That being said, here are three reasons why Carl Icahn won't go activist on Google (NASDAQ:GOOGL) or Facebook (NASDAQ:FB):

Growth stocks are harder to unlock value from
First of all, Google and Facebook are growth stocks. Most of a growth stock's value is in the future. A spin-off or stock buyback for a growth company would not unlock value because there isn't that much value right now.

Stocks are on a roll
Second, these companies are already on a roll. Google is up over 50% over the past twelve months while Facebook is up 150% in the same time frame. The investors of Google and Facebook are probably very happy. Happy shareholders don't want change. 

Founders own the majority of the voting stock
Third, and most importantly, the two companies are controlled by their founders. Even though the founders don't own the majority of the shares, because both companies have dual class share structure, the founders own the majority of the voting rights. So even if Carl Icahn managed to convince all the other shareholders, if Mark Zuckerberg or the Google guys don't go for it, it would be a wasted effort.

The bottom line
Because the Google and Facebook founders have majority voting control, Carl Icahn is not likely to go activist.

I think it is good thing that those founders have majority control.

Founders tend to manage companies for the long term rather than the short term. In technology, where things change very quickly, running a company to meet quarterly numbers when competitors are focused on the long term is pretty dangerous.

A great example of this would be Facebook and MySpace. Because News Corp (NASDAQ:NWS) acquired MySpace, MySpace executives ran the website to optimize profits. They added ads to the site while Facebook did its best to keep ads off. MySpace users didn't like the ads and flocked to Facebook. Facebook is now worth around $170 billion while News Corp sold MySpace to Specific Media for about $35 million.

Having majority voting control also allows the founders to take chances that a normal CEO would not take.

It allowed Mark Zuckerberg to spend $1 billion to buy Instagram, which for all intents and purposes appears to be a great acquisition. Admittedly, this is early in Instagram's monetization stage, but user growth is encouraging.

It allows Larry Page to support Google X, which is working on many innovative products that may pay off big-time. 

While that type of spending would likely put pressure on any normal CEO, having majority voting rights insulates the Google founders and Zuckerberg. It allows those founders to plan for the long term rather than pleasing Wall Street every quarter. It also keeps Carl Icahn from being an activist investor for their stock.

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Jay Yao has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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