Activist Investor Likely To Push Akamai For Cost Cuts, But Is That The Right Move?

Elliott Management and Elliott International disclosed a joint 6.5-percent ownership stake in Akamai Technologies, Inc. AKAM Dec. 15. 

The Analyst

Morgan Stanley's Keith Weiss maintained an Underweight on Akamai and increased the price target from $46 to $52.

The Thesis

In the 13D filing, Elliott referenced operational improvements, capital allocation to boost EPS, strategic action and assessment of management and the composition of Akamai's board as potential courses of action, Weiss said. (See the analyst's track record here.)

Operational improvements sought by activists are often achieved by significant margin expansion via cost cutting, and Weiss said  sees cost cutting is a likely focus in fortchoming proposals from Elliott. 

Cost cuts, share repurchasing and the potential impact of tax reform could boost fiscal 2019 and 2020 earnings per share by approximately 20 percent and 40 percent, respectively, but Weiss said he wonders if cost cutting is the right plan for Akamai.

The company's cost structure is reflective of the nature of the core markets in which it operates, rather than excessive spending, the analyst said. 

The Price Action

Akamai spiked almost 14 percent on the news that Elliott bought a stake in the company. It was trading 0.69 percent lower at $64.97 at the time of publication. 

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