The ‘Antitrust Bark’ Is Much Scarier Than Its Bite

By Joel Litman, chief investment strategist, Altimetry

Google parent Alphabet (GOOGL) is constantly under the microscope…

Time and again, headlines have focused on the tech giant’s legal issues… both in the U.S. and abroad.

The European Union (“EU”) began investigating Alphabet back in 2014… It suspected that the company was abusing its dominant market position and violating the EU’s competition laws.

And sure enough, the EU filed (and won) several lawsuits against Alphabet…

Altogether, the tech giant has paid more than $8 billion in fines due to antitrust activities… These include prioritizing its own shopping services in search results, forcing mobile networks to install Google apps on Android devices, and restricting competing search engines.

More recently, there has been a lot of focus on Alphabet’s battles with the U.S. Department of Justice (“DOJ”)…

In 2020, the DOJ accused Alphabet of paying billions of dollars to device manufacturers, like Apple (AAPL), to make Google their default search engine… The court found Alphabet guilty in August 2024.

The DOJ hit Alphabet with yet another suit in early January… And this time, it’s coming after the company’s $20 billion ad tech business.

Investors instantly worry any time the topic of litigation comes up. Yet as we’ll explain, they don’t need to panic… The latest case could actually be good news for Alphabet and investors.

History shows that corporate restructuring may not be a bad thing…

In fact, some of the biggest and most litigious spinoffs in U.S. history turned out to be the most lucrative. Standard Oil and AT&T (T) are good examples…

Standard Oil controlled almost all the American oil production between 1870 and the early 1900s. In 1911, the U.S. Supreme Court determined that it had engaged in antitrust activities.

As a result, Standard Oil split into 33 companies. Many of those became some of today’s largest oil corporations, including ExxonMobil (XOM), Chevron (CVX), and Marathon Oil (MRO).

Stockholders received shares in each new entity proportional to their original holdings. And as the companies flourished, investors grew their wealth…

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Business magnate J.D. Rockefeller, who owned Standard Oil, nearly tripled his wealth… His 25% stake in Standard Oil transformed into a 25% ownership of every company that spun off.

More than 70 years later, a U.S. court ruled that AT&T’s Bell System violated antitrust laws in the nationwide telecommunications market.

Its breakup resulted in seven regional companies, known as “Baby Bells.” (AT&T retained its long-distance services.)

This restructuring led to massive growth in just a few years… AT&T’s market capitalization was roughly $48 billion shortly before the spinoffs. By early 1990, the “Baby Bells” were worth $127 billion.

The bottom line is, Standard Oil and AT&T were both better off after their split-ups. And that’s because…

Spinoffs can create more wealth for investors…

Breaking up big companies into smaller, more focused entities streamlines operations. That means they can better tailor strategies and make quicker decisions… saving time and money.

Spinoffs can also reveal hidden value for shareholders. The stock prices of divested businesses can skyrocket once they have room to expand.

And smaller companies are better positioned to innovate, which can fuel massive growth. Divested entities can more easily develop new products because of flexible access to capital markets.

Think of contemporaries like PayPal (PYPL), spun off from eBay (EBAY) in 2015… and GE HealthCare Technologies (GEHC), spun off from General Electric in 2023. These companies revolutionized their industries, outperformed their parents, and rewarded investors.

Alphabet’s businesses could follow in these companies’ footsteps… and generate big returns…

That’s because Alphabet is well-suited for a split-up.

It has several valuable ventures, including its core search engine, advertising platform, YouTube, Android, and Google Maps.

If these businesses split off, we’d likely see a repeat of Standard Oil and AT&T… meaning Alphabet investors would get shares in each resulting entity, businesses would continue growing, and investors would grab the windfall.

These Google franchises have already created tremendous wealth for investors. And they’re likely to dominate the market for many years to come.

So if the court rules against Alphabet in the latest DOJ case, investors shouldn’t slam the brakes… Its spinoffs could hand them much bigger returns in the future.

Regards,

Joel Litman
October 10, 2024