U.S. News

Activist urges ‘fix’ for Silicon Valley

By Stephen Foley in New York and Tim Bradshaw in San Francisco

One of the West Coast's leading activist investors has added to the growing criticism of corporate governance in Silicon Valley, and of Google in particular, amid fresh warnings of a bubble in tech valuations.

Jeff Ubben, whose hedge fund ValueAct is an investor in Microsoft, eBay and Adobe Systems, singled out what he said was excessive compensation for Eric Schmidt, Google's chairman.

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"Jamie Dimon [chairman of JPMorgan Chase] gets hauled over the coals in New York for his $20m, but Eric Schmidt presides over four board meetings and gets paid $100m," he said, referring to the Google chairman's 2011 package.

David Einhorn, the activist investor behind Greenlight Capital who has taken on Silicon Valley companies such as Apple in recent years, warned on Tuesday that excessive enthusiasm about "cool kid companies" had created a new bubble in tech valuations to rival the late 1990s.

Speaking at the Active-Passive Investor Summit in New York on Tuesday, Mr Ubben said: "We've got to fix tech."

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Silicon Valley's approach to shareholder rights and to pay put it out of line with governance practices elsewhere in corporate America, Mr Ubben said.

Companies such as Facebook and LinkedIn have floated on the stock market with dual classes of shares that give founders and early investors greater voting rights and therefore power. The tech industry says the protections are necessary to guard against the short-term demands of some shareholders, which might include activists.

Google has come in for particular criticism after last month introducing a third share class with no voting power at all, further entrenching the power of Mr Schmidt and the search group's two founders, Larry Page and Sergey Brin.

Silicon Valley's correction
Silicon Valley's correction

The governance structure holds the "seeds" of problems for shareholders in the future, Mr Ubben said. "What comes out of Google 10 years from now is probably dysfunctional."

Google declined to comment.

Jesse Cohn, head of US equity activism at Elliott Management, said that weak corporate governance would itself attract activism.

"Tech still remains a club, where the view is 'We're different from other boards, we can have clubby boards.' For us, that is an opportunity."

Greenlight Capital said in one of its regular letters to investors: "Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it. In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalisation stocks and much less public enthusiasm."

Tech companies' rejection of "conventional valuation methods" in favour of "eyeballs" or price-to-sales ratios, and "huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital", were signs that the bubble was "pretty far along", Greenlight wrote.

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Having held off shorting stocks that were "disconnected from traditional valuation methods", Mr Einhorn said he had now created a group of unnamed "high-flying momentum stocks" dubbed "The Bubble Basket", which he believes could lose at least 90 per cent of their value.

"While we aren't predicting a complete repeat of the collapse, history illustrates that there is enough potential downside in these names to justify the risk of shorting them," Greenlight said.

The Active-Passive Summit brought together numerous activist investors and their advisers to discuss the rising power of these hedge funds, and their differing strategies for winning returns.

Where some activists argue for short-term increases in share buybacks or financial re-engineering, particularly at cash-rich companies such as those in the tech sector, ValueAct is among those that typically hold stakes for many years, place a representative on the board and help to nurture a new management team. At Microsoft, the fund contributed to the retirement of Steve Ballmer as chief executive last year.

Mr Schmidt received $101m in total compensation in 2011, the year he stepped down as chief executive to become executive chairman, including a $55.6m stock award that vests over several years.

His $1.25m salary, bonus of $6m and another $11.4m in stock awards, plus $708,196 in "other compensation" that includes life assurance premiums and personal use of company aircraft, took his total compensation last year to $19.3m.

Google's annual report to investors says that equity compensation ensures a "long-term focus". Its estimate of the value of Mr Schmidt's unvested stock options and Google stock units stood at $63.3m at the end of 2013.