Home / Business / A growing number of Wall Street heavyweights are sounding the alarm about regulatory pressures around America's biggest behemoths

A growing number of Wall Street heavyweights are sounding the alarm about regulatory pressures around America's biggest behemoths

FILE PHOTO: Facebook CEO Mark Zuckerberg testifies before a House Committee hearing on energy and trade regarding the use and protection of user data on Capitol Hill in Washington, DC, USA April 11, 2018. REUTERS / Aaron P. Bernstein / Photo FileReuters

  • High-tech companies like Alphabet, Apple and Facebook have been strained in light of reports of federal investigations into competition and privacy issues.
  • It is unclear whether stock prices of companies will suffer in the long runCertainty surrounds the range of the probes.
  • But market strategists and legal experts warn large technology investors that they face major risks.
  • Visit the Market Insider homepage for more stories.

Federal regulators knock on Big Tech's door.

The US Federal Trade Commission will monitor any antitrust investigation to determine if Facebook's practices are hurting competition in the digital market, the Wall Street Journal reported earlier this month. The news plunged the social network's actions and dragged the entire technology sector down.

Alphabet and Apple saw their shares fall on similar news items on the same day that the US Department of Justice was preparing antitrust probes in each company. At the same time, Senator Elizabeth Warren – a Democratic presidential candidate in Massachusetts and the United States – proposed earlier this year a plan to dismantle major high-tech companies, including Amazon, Google and Facebook.

Although it remains to be seen whether polls and reported proposals regarding antitrust issues and privacy concerns will sound the death knell Facebook and Google parent Alphabet – as the scope of probes remain unclear – experts warn investors against potential risks.

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"From a strategic point of view, we believe that uncertainty is still too great to recommend investors to avoid actions in the limelight of regulators," strategists said on Tuesday. from Goldman Sachs led by Ryan Hammond.

They added: "Although the impact of today's stock-based regulation is dependent on the situation, similarities between historical results suggest that investors should reduce their exposure to any stock price action. the subject of antitrust action. "

Strategists discussed past regulatory events, with a nuance of today's concerns, which resulted in significant business losses.

For example, Microsoft's 1998 antitrust lawsuit eventually resulted in a court-ordered dissolution and settlement with the Department of Justice. The company then experienced "substantially" lower sales growth as a result of its 2001 decree, which expired ten years later, according to Goldman. In the meantime, they found that the antitrust lawsuit of IBM in 1969 triggered a "steady decline" in revenue and margin growth.

IBM's multiple actions in response to regulatory events.Goldman Sachs

Other investment firms point to similar risks, which investors should be aware of, even as the extent of investigations by various regulators is a false map.

While issues such as data security and the overall health of technology platforms are becoming more prevalent, companies are facing a "higher cost of doing business," Morgan Stanley strategists wrote in a report. published in late May.

"Outside of China, regulatory risk limiting foreign investment in local businesses could be an obstacle to the international growth and profitability of some of our businesses," they wrote.

Read more: Facebook actions drop sharply after e-mails revealed that Mark Zuckerberg was aware of "problematic privacy practices"

At the company level, the company said that the cost of compliance and regulatory overload would remain a risk for Facebook and Alphabet, while Amazon could face "escalating protectionist regulations" that would reduce international growth potential.

"Each government has its own nuanced approach to these issues, and our universe may have to adapt to an environment in which protectionist / nationalist behaviors shape the decision-making process as differences between national regulations and regulatory regimes arise. Taxes are becoming clearer, "writes the strategists, adding that the political rhetoric the US presidential election of 2020 could inject volatility into space.

Sundar PichaiAP

Some experts are skeptical. Large technology companies will face ruptures, but say that risks still abound.

According to Glenn Manishin, managing partner of ParadigmShift Law and former attorney of the DoJ's antitrust division, court-ordered ruptures have rarely been implemented in the history of the United States. He worked on the American cases against AT & T and Microsoft.

Given its acquisition with Instagram, Facebook is most likely to part with other major technology companies, followed by Google, Apple, and then Amazon, said Manishin during a conference call this week with Instinet analysts .

Read more: The information industry joins the attack against big tech companies like Google and Facebook

Specifically, the fact that the Google case started at the FTC and now belongs to the DoJ could have negative consequences, given that the last unit's focus on monopolization claims and on the unfair competition methods.

Risks to advanced technologies were highlighted this week when Makan Delrahim, Deputy Attorney General at the Antitrust Division of the Justice Department, addressed the issue at a conference in Tel Aviv, Israel.

"The Antitrust Division does not take a shortsighted view of competition," Delrahim said. "Many recent calls for antitrust reform, or more radical change, are based on the misconception that antitrust policy is aimed only at keeping prices low. it is well established that competition has price dimensions and not prices. "

Read more: A senior DOJ official just explained why the agency has everything it needs to tackle Big Tech – and Facebook, Google and Amazon should be nervous.

The DoJ has "the tools to enforce antitrust laws in cases involving digital technologies," he added, adding that US antitrust laws were flexible enough to apply to "old and new" markets. ".

This sounded the alarm for Nicholas Colas, a seasoned analyst and co-founder of DataTrek Research. Investors should be prepared to hear Delrahim's name "a lot more," he told customers in a note published this week.

"It is difficult to read this speech and not to think that the Justice Department aligns its arguments in favor of a clash with Big Tech," wrote Colas. "What comes from that is what everyone assumes."

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