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No-Hiring Practices Could Harm Apple, Facebook, Others

Monday - 4/8/2013, 5:13pm  ET

While it's easy to say that the very largest tech companies are fierce competitors, it appears that ferocity doesn't apply to all aspects of their business. Or at least, it didn't.

Several high-profile executives of big firms have been – or soon will be – questioned regarding their efforts to not hire each other's staffers. Current media darling Sheryl Sandberg -- currently COO at Facebook and a former VP at Google  -- is the most recent exec to be ordered to testify about her company's actions concerning hiring and recruiting.  Execs' obligation to talk about company policies may open those companies to lawsuits. That may explain why no one at any of these firms wants to open up about it.

Hands-Off Policy

At issue is an informal agreement that several firms had about not actively pursuing each company's employees. According to court documents, companies as non-diverse as Apple , Google,  and Facebook all settled a similar suit with the U.S. Department of Justice for an undisclosed amount and a promise to abandon the policy going forward.

Still, the settled DOJ suit hasn't prevented more of the same. Recently, Intuit and eBay were both subject to a DOJ suit – still unresolved – about entering into an agreement with each other. The best guess there is that it'll end the exact same way.

Competing Means Not Colluding

What this tells me – and should tell investors – is that the big companies that people like to invest in and talk about are less competitive than we've commonly thought. While they like to portray an image of straightforward capitalistic growth, these businesses are quite willing to take care of each other to provide stability. While this can mean good things for investors, it can mean bad things for the employees working for those companies.

That, in turn, can come around to hurt investors even more. While the DOJ settled against Apple, Google and Facebook, the employees who were locked out of applying for jobs didn't. A group of those people are currently suing several of the firms, and seeking class action status.

While I can't help but think they're spitting into the wind to go against the financial and legal muscle that these firms can bring, the potential payoff for high-profile lawyers is essentially unlimited. If a ruling comes down against these five firms (and possibly others) the payout could be astoundingly big. Similar discrimination suits indicate that each plaintiff could received several hundred thousand dollars from a company.  Multiply that by the number of plaintiffs and it could be a serious drain on the company's cash reserves.

Hammered Investors

That's where the shareholders get involved, of course. By allegedly colluding – apparently illegally – to control the tech hiring market, the tech giants may have committed crimes. And the biggest fish aren't immune to being dragged before a judge. I already mentioned Sheryl Sandberg as having to testify. The judge ordered Apple CEO Tim Cook to answer questions as well. Allegations like these, if batted about in the press, can reduce a company's shares just by media pressure.

Sure, these businesses will survive it. They're too big to be brought down by a case like this. But the time, effort, bad PR, and eventual payouts will all eventually reduce the valuation of each of these companies. That's something no investor wants – especially if you're already elbows-deep into any of these companies. So savvy investors had better pay close attention to news of the case. Keep a wary eye out for rejected settlement offers. Each one of those indicates that some company wants out to protect itself.

Heck, it's always a good idea to hedge one's technology investments. The very biggest players are getting to the point where they believe they're untouchable. That sort of hubris always comes before real troubles. Stay invested in these guys -- I still think these companies (except Facebook) are good plays -- but be a little bit warier than you might have been earlier.

Good luck!

Follow Nate on Twitter: @natewooley

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This article was originally published as No-Hiring Practices Could Harm Apple, Facebook, Otherson Fool.com

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