00:00:17
In your view, are there any difference
00:00:20
that we can expect in terms of the
00:00:21
recovery if we compare the post uh 2000
00:00:28
bust of the dot-com
00:00:30
to what we can expect moving forward at
00:00:33
this particular time given changes in
00:00:35
the marketplace, regulatory changes, and
00:00:38
perhaps changes in investor psychology
00:00:40
as well.
00:00:41
Happy to answer that. Um just a little
00:00:43
bit of historical perspective in the
00:00:44
technology IPO market, which has been my
00:00:46
privilege to uh participate in since the
00:00:49
early 1980s.
00:00:50
Uh it's been a market that was in the
00:00:53
'70s kind of a backwater. It was kind of
00:00:54
a buy exception market. That was the
00:00:56
time when company great companies like
00:00:57
Intel and Rome and Tandem went public.
00:01:00
But back then, there was only about
00:01:01
maybe five companies a year that came
00:01:02
public. The average deal size was maybe
00:01:04
10 million. It was really Apple's IPO
00:01:06
and Genentech's IPO in 1980 that started
00:01:09
to institutionalize the market. And so,
00:01:11
in the '80s
00:01:13
uh that that decade that was um
00:01:16
uh
00:01:16
a personified by Apple
00:01:18
there were 32 uh IPOs a year in
00:01:21
technology.
00:01:23
Um
00:01:24
if you look at the the time frame where
00:01:26
Cisco and Netscape and the internet
00:01:28
started to be formed the first half of
00:01:30
the '90s there were over 100 IPOs per
00:01:33
year in the technology sector. Uh the
00:01:35
first wave of the internet uh which
00:01:37
captured Amazon's IPO, which I had the
00:01:39
privilege of leading uh there were 240
00:01:42
deals a year. And in the crazy years of
00:01:44
1990 and 2000, there were almost 400
00:01:47
deals per year.
00:01:49
Uh now, after that bubble burst uh there
00:01:52
was there were a couple of years where
00:01:54
it was really lean, but for 2001 through
00:01:57
2007
00:01:58
there were 62 deals per year and 80
00:02:01
billion dollars of proceeds were raised,
00:02:03
about 11 billion a year. Um
00:02:05
in the last 2 years, just to put that in
00:02:07
perspective, there my numbers are
00:02:08
different because I'm dealing with
00:02:09
global uh tech IPOs and not just venture
00:02:12
back, but there are only 18 a year. Um
00:02:16
and the market is uh is about 3 and 1/2
00:02:18
billion per year. Those statistics are
00:02:20
lower
00:02:21
than the 1980s.
00:02:24
Uh sort of puts you between the '70s and
00:02:25
'80s. And so, it's really very very
00:02:27
dramatically different. And and
00:02:30
will it recover to the same extent? I'd
00:02:32
say no. And I think some of the key
00:02:34
differences this time are the fact that
00:02:36
in the uh '99 2000 bubble, it was really
00:02:40
focused on
00:02:41
uh internet and telecom. And it was
00:02:43
mostly a US kind of phenomenon. And the
00:02:46
broader S&P, the broader industries,
00:02:48
they didn't go down nearly as much.
00:02:50
NASDAQ down
00:02:51
over the 2000 to 2003 time frame was
00:02:54
down 80%. I don't think the S&P got down
00:02:57
more than 30% during that period of
00:02:59
time.
00:03:00
This time, it's been uh much more deep,
00:03:02
much more broad, much more global. Uh
00:03:05
the the bust this year
00:03:07
I'm sorry, this this time uh took 17
00:03:09
months to reach down 50%. It was down
00:03:12
50% not just in NASDAQ, but in S&P, in
00:03:15
the Dow, and the financial services
00:03:17
industry, which is the real big change
00:03:19
this time, was down 83% during that that
00:03:22
period of time from uh from October 2007
00:03:26
to March of 2009 when things bottomed
00:03:28
out.
00:03:29
The thing that brought the market back
00:03:31
last time were big IPOs for Google and
00:03:34
VMware, but also the fact that there was
00:03:36
a lot of credit flowing through the
00:03:38
markets. The LBO firms started to become
00:03:41
a big part of both
00:03:42
um
00:03:43
the M&A market as well as the IPO
00:03:45
market. Uh in technology, that was
00:03:47
unheard of. About 25% of the market
00:03:49
during that mid-2000s time frame both
00:03:52
the M&A market and the IPO market came
00:03:54
from LBO firms buying big technology
00:03:57
companies and taking them private and
00:03:59
then taking them back public again.
00:04:01
This time, there's really no credit.
00:04:02
It's it's really a have and have not
00:04:04
market. The top dozen tech companies
00:04:06
that have 5 to 30 billion of cash have a
00:04:08
big advantage over the others, but
00:04:10
credit is largely unavailable to uh to
00:04:13
the mid-sized companies. And so, that's
00:04:16
one of the main changes. Also, the the
00:04:18
number of suppliers of the service
00:04:20
underwriting taking companies public has
00:04:22
shrunk dramatically due to companies
00:04:24
going out of business, companies
00:04:25
merging, and such. And then the big
00:04:27
companies now sort of have a chokehold
00:04:28
on the distribution and they're not
00:04:30
letting companies come public unless
00:04:31
they have very very large revenues and
00:04:34
prospects for
00:04:35
uh for big market caps. So, I think it's
00:04:37
different. I think it's going to take a
00:04:39
longer time to to come back. Uh I think
00:04:41
we're going to need to get the credit
00:04:43
flowing in the economy again before
00:04:45
things really open up again.
00:04:48
Meanwhile, we live in a world where
00:04:52
M&A transactions are the dominant form
00:04:55
of uh
00:04:56
exit.
00:04:57
If I look back to 2009, in Q3 of 2009
00:05:02
uh
00:05:04
11 out of the 22 disclosed deals were
00:05:07
transactions that were valued at less
00:05:10
than investment.
00:05:12
Only two of the 22 disclosed deals had a
00:05:15
10x or higher return.
00:05:19
So,
00:05:21
Frank, you're an investment banker,
00:05:23
prominent investment banker
00:05:25
would you offer any thoughts on your
00:05:27
views on whether the M&A market in 2010
00:05:31
is likely to recover? We have had a slow
00:05:33
January. Most of the indices are down.
00:05:36
What's your view?
00:05:37
So, I I want to emphasize and agree with
00:05:40
what Ted said. It's a fallacy that when
00:05:42
stock prices go down, M&A activity goes
00:05:44
up because when stock prices go down,
00:05:47
the buyers have lost confidence. And you
00:05:50
need the CEOs of the big companies to
00:05:52
have confidence, predictability,
00:05:53
visibility into their own businesses
00:05:55
before they're willing to pay
00:05:56
imaginative prices. So, if you're in the
00:05:58
middle of a credit crisis when there's
00:06:00
maybe only 10 technology companies that
00:06:02
could buy properties for cash, but
00:06:04
they're worried, you know, are they
00:06:05
going to have earnings in the next
00:06:06
quarter and are they going to have
00:06:08
customers because all their customers
00:06:09
can't afford to buy the products
00:06:10
anymore, they're not going to be
00:06:11
thinking too much about M&A. So, my
00:06:14
statistics showed that
00:06:16
uh in the the fourth quarter of uh
00:06:19
of last year, of '08 um rather What
00:06:22
improvement? In the fourth quarter of
00:06:24
'08, the annualized M&A volume in tech
00:06:27
was only 13 billion. And that was our
00:06:29
brokerage foundry deal times four.
00:06:31
And uh there wasn't a whole lot of of of
00:06:33
deals happening. In '08 as a whole, it
00:06:36
was 77 billion. And last year, we we
00:06:38
track it at 90 billion. So, there was a
00:06:39
slight
00:06:40
increase year to year, but most of that
00:06:42
activity took place in the second year
00:06:44
in the second half of the year. So, we
00:06:46
we think that that activity is in fact
00:06:48
accelerating. And there is a variety of
00:06:50
reasons. One is interest rates remain
00:06:52
low.
00:06:52
Uh so, the opportunity cost of taking
00:06:55
cash off your balance sheet and buying
00:06:57
earnings is it's it's a good deal.
00:06:59
Secondly, confidence is returning. Uh we
00:07:01
think that we've bottomed. March of '09
00:07:03
is generally what people think was the
00:07:05
bottom of the
00:07:07
uh stock market and the economic
00:07:08
problem. Now, we're not recovering as
00:07:09
fast as people would hope, but I think
00:07:11
people are now saying, "Okay, it the
00:07:13
worst is over. Now, I need to go take a
00:07:16
look at what's happening." Do you
00:07:17
believe in that? Yes. Well, I do. I also
00:07:20
think, however, that stocks are way
00:07:22
ahead of where the actual economic
00:07:23
recovery pace is going to be. So, I
00:07:26
think that we're, you know, if things
00:07:27
don't really start growing, there's risk
00:07:30
in PE levels right now in the
00:07:31
marketplace. But getting back to why M&A
00:07:33
is going to improve, there are some
00:07:35
structural things going on in
00:07:36
technology.
00:07:37
Some industry trends that are really
00:07:39
really much more powerful than stock
00:07:41
market fluctuations that are driving it.
00:07:43
We're going from a world where there
00:07:45
were horizontal specialists, you know,
00:07:47
Oracle in database, Intel in chips, HP
00:07:49
in servers, Cisco in networking, EMC in
00:07:51
storage uh
00:07:53
to one where now
00:07:55
a few very large companies want to
00:07:57
control it all, back to the mini
00:07:58
computing mini computer and mainframe
00:08:00
days. So, Cisco is in the computer
00:08:01
business, slapping HP and IBM and Dell
00:08:03
in the face. Uh
00:08:05
HP's bought 3Com, they're redoubling
00:08:07
their efforts in networking to compete
00:08:09
against Cisco. Dell bought Perot Systems
00:08:11
to be in the system integration business
00:08:13
when all they've got to sell is servers,
00:08:15
but they're going to probably want to
00:08:16
flesh out their technology stack. Oracle
00:08:19
bought Sun, they're in the hardware
00:08:20
business now.
00:08:21
Um they can control everything from
00:08:23
servers through applications. And
00:08:25
Oracle's now controlling the agenda in
00:08:27
the industry. And so, before when you
00:08:30
were a networking startup, the only
00:08:32
company really that could pay a big
00:08:33
price for you was Cisco. Now, you've got
00:08:35
six companies, all of whom came from it
00:08:37
from a different perspective, hardware,
00:08:39
software, internet, you know, whatever,
00:08:41
and they all want to buy a networking
00:08:42
company. So, we think that the buyers
00:08:45
for individual technology components
00:08:48
uh are broadening. And so, that's
00:08:49
creating competition. And you're seeing
00:08:51
even some public bidding wars like our
00:08:53
Data Domain deal with EMC and NetApp.
00:08:56
You're also seeing some trends in in
00:08:58
mobility such as, you know, Apple
00:08:59
getting into the cell phone business.
00:09:01
Apple and Google's in the cell phone
00:09:03
business. Apple and Google used to have
00:09:04
common board members. And so, now these
00:09:06
two are competing for mobile advertising
00:09:08
properties. Apple hasn't bought anything
00:09:11
historically. They've got three, five,
00:09:13
40 billion dollars of cash on their
00:09:14
balance sheet. Apple getting into the
00:09:16
acquisition business is the best thing
00:09:18
I've seen happen in a long time.
00:09:22
Uh so, uh and then you see you see this
00:09:24
new world called software as a service
00:09:26
in the cloud. That's a new area where
00:09:28
there's no ground rules and where these
00:09:30
former partnerships that governed, you
00:09:32
know, this Cold War, it's it's like the
00:09:34
wild wild west again. So, we think
00:09:36
there's a lot of structural change going
00:09:37
on in the technology industry across all
00:09:39
of sectors. And that 5 years from now,
00:09:41
you won't be able to tell a storage
00:09:43
company from a networking company from a
00:09:44
software company from an internet
00:09:45
company. Everybody's going to try to do
00:09:47
everything and grab that land again. So,
00:09:49
I think it bodes well for for strong M&A
00:09:51
activity going forward.
00:10:05
Mhm.
