When investing in a publicly listed company, there are a number of factors investors need to consider. Profitability and margins, product market fit, competitors, industry and total addressable market (TAM) are all common characteristics investors like to investigate before putting their money in tech stocks. However, a risk that is easily overlooked is regulatory risk. Regulatory risk just refers to any new rules, regulations or procedures imposed on a company by a governmental agency that could prohibit certain business operations. Oil and gas companies operating in the U.S. will have to follow drilling rules handed down by the Federal Energy Regulatory Commission (FERC), and similarly, overly acquisitive technology companies will need to watch out for the Federal Trade Commission.
Below is a list of three tech stocks to watch as regulators challenge their prospective mergers.
Broadcom (AVGO)
In May 2022, Broadcom (NASDAQ:AVGO) announced its intent to acquire all of the outstanding shares of VMWare (NYSE:VMW) in a $61 billion cash-and-stock transaction. Broadcom is a large, yet lesser-known, semiconductor company. Specifically, the company specializes in designing systems-on-a-chip (SoCs) for telecommunication equipment, data centers, broadband and home connectivity applications. VMWare is a leading provider of multi-cloud software solutions for cloud management and infrastructure, networking, security and digital workspaces. While Broadcom does sell software solutions through Broadcom Software Group that are tailored for the semiconductors it designs and sells, the motivation for the merger was to expand the suite of software solutions already available on Broadcom’s platform. Through the acquisition, Broadcom plans to rebrand and operate the Broadcom Software Group as VMware, incorporating Broadcom’s existing infrastructure and security software solutions as part of an expanded VMware portfolio.
The deal needs to maneuver around regulatory hurdles in the U.S., E.U. and U.K., and regulators across the board seem concerned with Broadcom having secured an unfair stranglehold on the software that operates the hardware used in network infrastructure and security applications. If Broadcom remedies these issues, the deal could be approved in the EU soon, but the FTC in the U.S. and Competition and Markets Authority (CMA) regulators in the U.K. are still in the middle of their investigations with decisions predicted to come out sometime in July.
Microsoft (MSFT)
The computer software and consumer electronics giant Microsoft (NASDAQ:MSFT) announced a $68.7 billion acquisition of game developer Activision Blizzard (NASDAQ:ATVI) in January of last year. The deal took market-watchers and regulators by surprise and, with the deal being the biggest ever in the gaming industry, it was obvious there would be a great deal of obstacles to face in order to get regulatory approval.
Microsoft boasts a large gaming division that owns not just the Xbox but also a number of gaming titles, such as The Elder Scrolls, Fallout and Wolfenstein, but the company has seen its gaming business struggle recently. Microsoft reports gaming revenue under its ‘More Personal Computing’ segment, and the company reported in its recent Q3 earnings that revenue for this segment declined 9% year-over-year with gaming revenue overall declining 4% year-over-year.
In hopes of jumpstarting its sluggish gaming business, Microsoft pursued the acquisition of Activision Blizzard, which would provide the company access to titles such as Call of Duty, Candy Crush, Diablo and World of Warcraft. However, the FTC argued that the deal would give Microsoft’s Xbox console exclusive access to Activision games, possibly leaving competitors, such as Nintendo (OTCMKTS:NTDOY) and Sony (NYSE:SONY), at a disadvantage. Microsoft executives and FTC officials will appear in court this week in San Francisco to argue their respective cases.
Adobe (ADBE)
Adobe (NASDAQ:ADBE) announced it would acquire Figma, a developer of collaborative web applications used to design app interfaces, for approximately $20 billion in a cash-and-stock deal. On the one hand, the acquisition appeared to make sense from a business standpoint: Adobe specializes in creating collaborative digital experiences through a variety of its popular creator applications, and Figma would be another layer in its product stack. On the other hand, regulators on both sides of the Atlantic remain skeptical about what the deal could spell for competition in the technology industry. Antitrust regulators generally do not like to see a large company buying up a smaller, yet formidable, competitor. European antitrust regulators announced in June that they would begin a ‘lengthy’ investigation into the merger later this year, which could ultimately collapse the deal altogether. Meanwhile, regulators in Washington D.C. and London are expected to begin their investigations as well.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
