Anirban Sen and Svea Herbst-Bayliss by David French

(Reuters) – Amazon.com Inc. (NASDAQ:) is the most prominent technology company to resist the trend towards major conglomerates dissolving. This was due to its bright growth prospects, which shielded it from the pressure of other investors and dealmakers to do the same.

In recent years, investors have fallen out love with conglomerates which hold different businesses. Many corporations have taken notice, General Electric (NYSE:) Co, Johnson & Johnson (NYSE:) and Toshiba (OTC:) Corp announcing plans to break up in recent months.

Hedge funds argue that Amazon Web Services’ $1.6 trillion market capitalization is misleading. It could actually be worth nearly as much as its separate entity.

The hedge fund Third Point sent a last week letter to investors from Daniel Loeb, which contained ammunition. It argued that the company was undervalued and had “significant sum of parts value”. Third Point hasn’t asked Amazon for its dissolution.

According to investment bankers, Amazon is unlikely to sell its huge cash cow cloud business. This helps to fund Amazon’s expansion in new markets and pays for less profitable divisions with strong revenue growth such as third-party merchants and advertising.

Michael Kagan said, “In comparison to other industries that companies may have business that is not clearly connected, or with very different financial profile and capital needs, large technology companies have plenty of access to capital and have yet to reach maturity.” Citigroup Inc (NYSE 🙂 North America’s head of structured and shareholder advisory.

The opportunities for long-term shareholder benefit by separating into “pure plays” may not be as obvious both operationally and financially.

Amazon representatives declined to comment.

Amazon thrived due to its ecommerce business and high-profitably Amazon Web Services. Even as Amazon made inroads into other areas by building these or adding on through large acquisitions, it also made substantial investments in new industries, such as big-budget filmmaking and online groceries.

Many U.S. legislators have been alarmed by its rapid growth, and in the past years failed to push for Amazon and other big tech peers to be disbanded over data privacy and antitrust concerns.

These founders (including Amazon’s Jeff Bezos) have been rebuffing, saying technology holds their various businesses together.

“In the world of tech, there typically is an underlying technology that permeates the various segments of a conglomerate entity,” said Richard Grossman, an M&A partner at Skadden, Arps, Slate, Meagher & Flom LLP.

“By contrast, in the classic type of conglomerate there will be less overlap between the various companies.”

Amazon’s stock rose at the start of the COVID-19 epidemic in 2020. People opted not to buy in shops and instead tended to order more online. The shares rose only marginally in 2021 despite the huge gains made by the and other large-tech companies, due to global lockdowns starting to ease and customers relying less on online shopping.

Amazon has been gaining more support from analysts. After its quarterly earnings report, which this month revealed strong growth in several non-ecommerce businesses, Amazon shares rose.

BREAKUP MANIA

Dealogic reports that 56 of these companies reported a breakup last year, which is an increase from the 41 announced in 2020 and 47 for 2019.

GE announced last year that it would divide into three publicly traded companies in order to lower its debt and streamline its business. Days later, Johnson & Johnson said it would split off its consumer business to focus on its core pharmaceutical business.

After the announcement, shares of both companies saw a surge in value. Japan’s Toshiba announced that it was to split into three separate companies in the same week. This decision came after pressure from Elliott Management Corp.

Technology is an entirely different story. Amazon (NASDAQ:), Alphabet (NASDAQ :), and Apple (NASDAQ 🙂 have a history of expanding their empires and are now looking to expand into areas such as autonomous cars and groceries.

Citi’s Kagan explained that the fact that so many tech titans remain under control of their founders makes it less likely they will succumb to external pressures to dissolve anytime soon.

Kagan explained that the “continuing founder voting control” protects boards of tech companies and management teams against significant outside influence and activism. This is a major driver behind separation activity.