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In this episode, Ron interviews Marc Lipschultz, one of the true pioneers in private equity, on how he has been able to build Blue Owl into a $160 billion company focusing on permanent capital.

What is an exit? You need to sell your company or sell some of your shares? How is the market for that, right now? All things M&A, IPO, Secondaries, etc. 

Navigation:

• Intro (01:34)
• What is an exit? (02:17)
• Stats on M&A and IPOs (17:50)
• What’s ahead? (42:02)
• Conclusion (59:48)

Our co-hosts:

• Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder of App Annie / Data.ai, business angel, advisor to startups and VC funds, @bschmitt
• Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro

Our show:
 
Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news

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Bertrand Schmitt

Welcome to Tech DECIPHERED Episode 49. This will be our Exit episode. What do we mean by exit? Exit, it’s really when you need to provide liquidity to your shareholders. It’s when you sell your company as a whole. You sell some shares in a public market, meaning that ultimately that will provide not as fast liquidity as getting acquired, but will provide liquidity for those that want to leave the business as shareholders in a gradual way. In this episode, we are going to talk about all things M&A, IPO, secondaries. But let’s start with more details about what is an exit.

Nuno Goncalves Pedro

More generically, an exit is on the eye of the beholder. An exit for a company, as you mentioned rightfully so, is the sale of normally most of its stock. It could be not all of the stock; sometimes it is all of the stock. It could be a sale of most of its stock or the taking that stock public in some way.

Nuno Goncalves Pedro

We’ll come back to this notion of what selling stock means, but in general, selling stock, even when you go IPO, there is a selling of stock. There is a transformation of stock in some way. But it could be for an investor. What is an exit for an investor? Or what is an exit for a founder of a company? In that case, I would say an exit is, again, when you sell the majority of your stock that you have for that specific entity.

Nuno Goncalves Pedro

For a founder, it would be, “I’m selling most of my stock in that company.” For an investor, “I’m selling most of my stock in that company.” We could then basically say, is it a full exit or not? But it’s an active element of liquidation at scale. For me, takes into account majority. It takes into account that the majority of what you put or that you have, you’ve sold. A liquidation means you’ve liquidated part of your position. It could be actually a very small amount of stock. That is the definition of exit and the definition of liquidation.

Nuno Goncalves Pedro

There’s different types of exits and elements of liquidation. There’s mergers and acquisitions whereby two companies—normally it’s two companies—come together as a merger. We always talk about this notion of mergers of equals. There is rarely mergers of equals. There is always one party that is slightly bigger than the other. Even in the case of a merger, there is one party that in some ways is acquiring the other. Then there’s straight-up acquisitions, the ability for a company to acquire another company and take over that company. That’s M&A.

Nuno Goncalves Pedro

In M&A, normally the majority of stock is taken by the acquirer or by the entity that is merging that is slightly larger than the other one. There’s what we call a change of control. The entity that got sold is now taken by the new entity or by the entity that bought it. That’s a change of control. A lot of people know the sexier type of exits, which is IPOs.

Nuno Goncalves Pedro

An IPO stands for initial public offering. It’s an offering of stock to the retail market, to the public market. Why it’s the public market? Because people like you and me and people that necessarily are not accredited investors can actually invest in public markets. It’s what we call retail markets. Anyone can invest in it in effect. There is no limitation for me to invest in that market. Whereas in private markets, we have the notion of accredited investors. We won’t go a lot into that, but we can explain that at some later episode.

Nuno Goncalves Pedro

In public markets, it’s retail, so the public can buy. What that means is there’s a portion of the company that is so-called floated onto the public market so that the retail investors—anyone really—can buy stock in those companies. It ends up happening when there is an IPO that there are large players that take large amounts of stock in the companies, institutional investors, for example, other types of players in the market, hedge funds, and other such entities. But it’s again, a market that is open to the public. Anyone in the public can buy stock in that market and in what is floated.

Nuno Goncalves Pedro

Maybe one or nuance, and we can go back and forth on different types of approaches to the exit, is secondary transactions. This is particularly true in private market. Secondary transactions as opposed to primary transactions. A primary transaction is when, for example, a venture capital firm is leading a new round in the company. What ends up happening is there’s issuance of new stock in that company. There’s issuance of stock that gets purchased at a certain price by these new investors that come onto the company. That’s a primary transaction. I’m getting stock in the company, but that the stock is effectively being issued.

Nuno Goncalves Pedro

A secondary transaction is that there’s stock that’s already been in the hands of someone. It could be an investor, it could be a founder, it could be someone inside the company, and that person or that entity decides to sell that stock to a third party. That person or that entity owns stock and decides to sell that stock to a third party.

Nuno Goncalves Pedro

We normally mention secondaries only, again, in private markets. It’s basically, let’s say, I have 5% in this startup, I’m a founder, an early founder, maybe not the founder-CEO, but one of the early founders and I want to sell 1% of my stock or 1% out of the 5%, so basically 20% of my stock holdings to a third party, and I’m allowed to do that. There’s a party that comes in and acquires that stock for me. They take that percentage from me and they take the rights that I have in that stock with that. That’s called a secondary transaction.

Nuno Goncalves Pedro

Why is secondary transaction is becoming more interesting? Because of what I just said. Because entities or individuals at a certain point in time want to generate liquidity, but they don’t want to necessarily generate liquidity on all of their stock. Or if you are a venture capital investor, by definition, normally you’re a minority investor in the company, you want to sell a part or all of your stock but the company is not necessarily entering into a M&A transaction or IPO-ing or getting into public market. It’s another vehicle for you to actually effectively sell your stock, liquidate it, get money in return without necessarily the company having to go through a change of control type scenario, be it an IPO or be it an M&A transaction.

Nuno Goncalves Pedro

That’s why secondaries are so popular. They’re popular for investors. They’re very popular, obviously, for founders who get some liquidity for them to buy their homes or buy a car or get married or do whatever they need and they need cash. Because in many cases, founders are very badly paid. They don’t want to sell all their stock holdings in the company. They want to ride that wave, but they do want to have a little bit extra liquidity to live a daily life. Secondaries have become quite popular.

Bertrand Schmitt

Maybe to add to this, one reason secondaries became popular is because it has been taking longer and longer to go public. We have seen that the average age of a business to become a public company is around 10-12 years to IPO from funding the business. It means it can take a while that you get some liquidity for your shares. Again, once you’re IPOed, it’s easy to just sell a portion. You might not want to sell everything as a founder, but if it takes a long time before you get to this liquidity option, then secondaries can be a great stop bit not just for founders. It can be a great stop bit for execs, for team members, for employees.

Bertrand Schmitt

The bigger the business, the more everybody could end up being involved in a secondary. Each time a private company is a huge success, you will see actually pretty significant secondary offering programs because the need is there to sell and there is also market to buy if you are already successful company.

Bertrand Schmitt

Maybe another point to touch quickly as well is concerning IPO. It’s considered the graph for a lot of companies, founders to go through that because it’s a way to provide liquidity to your investors. Typically in a startup, VC business, you have to provide that liquidity. You get money in exchange of, at some point, the ability to get your money back and hopefully more than what you put.

Bertrand Schmitt

But with an IPO, it’s a way to provide liquidity to your investors. But it doesn’t mean that you end up being forced to yourself, liquidate your investment and sell to somebody else. With IPO, you can keep going your own way, your own path. Usually, that’s also typically the most rewarding path if you are a great company. Most of the great technologies companies end up being public companies and went through an IPO process.

Bertrand Schmitt

Maybe one more step is that at the same time, the IPO process has become more and more complex, more and more expensive, probably more difficult to go through, especially during this period, 2022, 2023. It’s a pretty highly random process. Sometimes the IPO window itself is closed and might be closed for two, three years plus, not easy to time.

Bertrand Schmitt

The other piece is that it costs a lot. It costs a lot of legal fees, finance, diligence. You don’t start selling to retail investors so easily. They have to be protected. You have to follow a lot more regulations because you have to assume your new shareholders are not just going to be accredited investors like business managers or VCs, they’re going to be retail.

Bertrand Schmitt

There is a lot more regulations. One could argue it might have become actually too onerous. Maybe that’s why we have less and less actually IPO and public company as a whole. That means that for many founders, actually, IPO might not be considered the best exit, or at least it’s delayed until it’s becoming more and more inevitable because you have too many shareholders in your cap table because it’s been too long since you got investment and that’s the best way to find liquidity. It’s not an easy path.

Bertrand Schmitt

Maybe last point, you have to be big enough in order to do an IPO. The old rule for an IPO is to really target to be at least a billion-dollar company at IPO. Why a billion-dollar company market cap? It’s because you want enough float, you want enough liquidity. And in case of a downturn, either a downturn in the general market sentiment or because you don’t deliver good results, there is some slack you have before going to a $500 million threshold, more or less, where below that it’s becoming very difficult to justify being a public company.

Nuno Goncalves Pedro

Let’s unbundle this a little bit. Some of what you said is absolutely applicable to any type of IPOs in the world. The regulatory environment, the fact that you have to have reporting back to investors in general to public markets, so you have to divulge information in a public manner that anyone has access to. There’s obviously a lot of different elements that are true when you become a public stock, as you mentioned quite correctly, Bertrand.

Nuno Goncalves Pedro

When you start talking about valuation, you need to be aiming at it because you’re a billion-dollar company, etc. We’re talking more about the American Stock Exchange market, New York Stock Exchange, Nasdaq. Nasdaq is obviously normally more linked to high tech. New York Stock Exchange was historically more linked to industrials, but it’s not true anymore. New York Stock Exchange also has tech companies today as well in there. There’s other stock exchange in the US that are a little bit smaller, but these are the big ones. You want to be a New York Stock Exchange company or you want to be on the Nasdaq. That’s basically it.

Nuno Goncalves Pedro

Obviously, there are other stock exchanges around the world. The London Stock Exchange, the bar is different. Within the London Stock Exchange, there’s always aim to serve for smaller vehicles and smaller plays in the market. The Tokyo Stock Exchange is the median and average valuation of a company when the IPO is actually not very high in general. There are some really large companies, but in general, the IPOs in the Tokyo Stock Exchange are much smaller. We have ASX, which has done a lot of movement—that’s the Australian Stock Exchange—in recent years, which obviously much smaller IPOs.

Nuno Goncalves Pedro

Although it holds true that obviously the onus reporting to public investors and retail investors, etc, is much higher, it also very much depends on which stock exchange are you going to go for. And we have seen people and companies that IPOed in specific stock markets, and you’re like, “Well, but it wasn’t a very significant IPO.” Again, Nasdaq, New York Stock Exchange, even within Nasdaq and New York Stock, depends on the reg that you’re coming on under. But obviously, Nasdaq and New York Stock Exchange are the holy grail, to your comment earlier.

Nuno Goncalves Pedro

Then there’s other stock exchanges around the world where it might be that you’re a large-cap play in that market. We have a large capitalization and you’re a very large company in that stock exchange, but those stock exchanges normally are smaller. They have less volume, they have less transactions, there’s less depth in it, etc. Again, you can IPO and still not be a huge success. We’ve seen companies IPO very early in their history and not be a huge success. At the same time, you could have a case where you IPO with a small valuation and it doesn’t appear to be a great valuation, but it might be a great outcome for your investors.

Nuno Goncalves Pedro

My first investment was in a company that IPOed on the Tokyo Stock Exchange, more specifically on the mother side of that. It was a very small valuation when they IPOed, but it was a great return for everyone involved. It provided liquidity—to your point—to all of those that wanted to have liquidity, which is great. Again, a little bit of nuance around that.

Nuno Goncalves Pedro

One final piece on the secondaries. I didn’t want to lose this point. It’s a really hot market for secondaries right now. The reason for that is when you start having realignments and valuation in the market, what ends up happening is you have a lot of private investors in particular who hold stock in companies that are not worth what…

Nuno Goncalves Pedro

In some cases, they paid for it or that are in need of liquidating their positions or part of their positions to move their cash elsewhere to compensate, for example, for public equity losses, etc. This right now is a great market if you’re in secondaries because there’s a lot of activity. There’s a lot of players that want to buy stock actively that want to get into the market and think they can get great discounts because people just need to liquidate and get cash out. Very, very interesting market.

Nuno Goncalves Pedro

It’s a market that happens… The secondary market has developed a lot over the last 10 years, and this is probably the first bump on the road in markets that is dramatic where there’s a lot of arbitrage. Very exciting market to watch right now.

Bertrand Schmitt

You’re absolutely right that it depends on the market in terms of valuation you’re looking for. I was more thinking, in general, of what are the expectation of your typical big tech VC investor in Silicon Valley and what type of clothes they would put in your investment. Typically, they would only recognize and agree to some IPO by default. If you reach a threshold in terms of market cap, they would only recognize some stock markets, not all of them. They put some constraints typically on you.

Bertrand Schmitt

Maybe another type of exit we didn’t really touch yet is the acqui-hire type of exit. This one is very, quite different. Typically, you’re still a very small company, 10, 20, 30 employees. You never managed to get to good product market fit and a real acquisition is not really on the table. However, some big tech companies, especially when times are hot and they are looking to hire quickly, they might believe that hiring a team that is focused on a topic of interest for them might be a shorter path to success for them.

Bertrand Schmitt

Obviously, in markets like this, when big tech is firing people like it has been for the past 18 months, this is probably not the best season for acqui-hires. But this is the type of opportunity that might come along and might be an acceptable outcome, even if it will not provide a great return or even a return to investors.

Nuno Goncalves Pedro

It’s still an acquisition. It’s still normally the business gets purchased or part of the business or the IP gets purchased. But to your point, the mindset is not the acquisition of the business or the IP. It’s the mindset of acquiring resources, normally specific resources. It might be engineering talent, it might be the founders of the company. Although most acqui-hires are very small—to your point, a couple of million dollars, maybe 10, 15 would be already a very nice acqui-hire—we’ve had some incredible acqui-hires in my point of view.

Bertrand Schmitt

Which one?

Nuno Goncalves Pedro

Yes, we had Marten Mickos with Eucalyptus for HP. We had—I forget the name of the company—Diane Greene’s company to Google so that she would become the CEO of Google Cloud. That was a huge acqui-hire. Probably Diane wouldn’t agree.

Bertrand Schmitt

Very rare.

Nuno Goncalves Pedro

But I feel that was the play. The play was, “Let’s acquire this company so we get our next CEO or we get our next EVP or we get whatever.”

Bertrand Schmitt

Probably right.

Nuno Goncalves Pedro

You pay a lot for that. But in general, to the point that Bertrand was making earlier, acqui-hires are much smaller and investors in some cases don’t even make their money back. It might be they only clear their principal or even get cents on the dollar, but it’s the exit of the company. It’s a path forward for the founders, for the team.

Bertrand Schmitt

Yes. Let’s provide some stats about all of this. Let’s talk about some more recent acquisitions and IPO. First, there was a number that was pretty dramatic early this year, the year-over-year. If we look at Q4 2021 versus Q4 2022, there was a 94% decrease of M&A. Basically, it has been a pretty damn catastrophic M&A market since some time mid-2022. That’s when the market started to turn and to go very negative. I’m talking about the startup M&A market, not existing big tech companies, but more recent tech startups. This was a pretty bad number.

Bertrand Schmitt

2023, I don’t have the latest number, but it’s just focused on startups. It’s probably a bit better, but I don’t think it has been great either.

Nuno Goncalves Pedro

This is a bit anecdotal. We don’t have all the data behind it. But from everything I’ve been hearing, it has picked up midyear into quarter three, but it’s still very much the low-cap market, the small-cap market, smaller acquisitions, etc. We’ve had a couple of big ones, which we’ll talk about in a second, a big headline M&A, but certainly it’s been the small size of the market that is picked up.

Bertrand Schmitt

Yeah. If we talk about some of the startup M&A, the biggest one, and it was last year actually in 2022, was the acquisition of Figma by Adobe. This one was a $20 billion acquisition while Figma was still relatively small, highlighting how desperate probably was Adobe to do this acquisition. You don’t typically do that if you believe you can get away with this competitor or you can outbuild them. This one is not yet over. Obviously, there is some regulatory approval needed and the bigger the acquisition, the more time it takes, the more risky it is. Again, not yet approved and this was initiated in 2022. Do you have more comments on Figma?

Nuno Goncalves Pedro

I think it was a great exit for everyone involved. We’ll see how that will pan out in Adobe’s landscape. The word desperation is maybe well-founded, I don’t know, but it allows them to really get into the creators environment at scale, which I think Figma was incredibly well-positioned in. You could argue it was overpayment. These things you only know after a long time.

Nuno Goncalves Pedro

We all said back in the day that WhatsApp was usually overpaid, and now you’d probably argue that it wasn’t for Facebook. So who knows? It feels a little bit like overpaid. The granddaddy of them all was the Microsoft one, right? That was started beginning of last year, the acquisition of Activision.

Bertrand Schmitt

Yeah, I was focused more on startups, but yes.

Nuno Goncalves Pedro

Yes, that was not a startup. That is correct. Activision was not a startup. But that was $68 billion, I believe, and it just closed last month, was that it? So it took almost two years to close.

Bertrand Schmitt

A good year and some level of fight to go through.

Nuno Goncalves Pedro

And a lot of fighting. Back to the startup’s point. Figma, I think, was a very interesting acquisition. I feel there’s a little bit of overvaluation there. Let’s see how it pans out. The acquisition of MosaicML by Databricks is another significant one at $1.3 billion. Obviously, the shoring up of AI capabilities by Databricks and taking it to the next level, amazing exit. I know some of the investors there on the Mosaic side. Pretty amazing exit there.

Bertrand Schmitt

They just raised $64 million. I guess it was not too long before selling the business. It’s an amazing outcome. One of the first, I would say, new edge AI type of acquisition to go through.

Nuno Goncalves Pedro

Exactly. Great returns, I’m sure, all around for all the core investors across the board. Then Loom by Atlassian for, I believe, $800 million?

Bertrand Schmitt

Interestingly enough, there was some level of controversy by some journalists, especially TechCrunch. I think it was more like 975 million sales actually. It was crazy how it was looked negatively by some journalists. Basically, the point of the journalists, that’s where you see that they didn’t understand why the tech business, that they say it was bad because the last valuation was at 1.5 billion.

Bertrand Schmitt

Basically, they saw less at the last valuation at which they raised their last financing, which was for 130 million financing. But at the end of the day, it doesn’t really matter as long as you are selling way beyond everything you raised.

Nuno Goncalves Pedro

They raised what, 200 million? They had raised, I believe, a bit over 200.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

That’s what they needed to clear on the principal side from investors. They cleared well above that to your point, 975 million.

Bertrand Schmitt

Exactly. That’s my point is that if you sell way beyond 2, 3, 4X more than what you raised, everyone would be happy. Yes, there might be anti-dilution clause, there might be that and stuff because it was below the last valuation. But ultimately, most investors will make great returns.

Nuno Goncalves Pedro

Well, the early-stage guys will likely make silly returns.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

The late-stage guys, not so much.

Bertrand Schmitt

Not so much. But you could argue not so much, but they would have done probably worse in the public market as well. It’s also a question of what is your benchmark. It’s too easy to talk about returns in absolute. It’s always relative to your other opportunities and your sector of expertise.

Nuno Goncalves Pedro

If the $130 million, the guys put in, I think, the last $130 million in clear 2, 3X, that’s actually probably not a bad outcome. That’s pretty good. Obviously, the early-stage guys could probably a lot more than that, even after dilution.

Bertrand Schmitt

The funders probably had an amazing return, an amazing exit. Most employees got great returns. I would say another group that probably didn’t get what they wanted was probably the late employees. Late employees, their stock options were probably at a discount of the last valuation, but still how much of a discount? We don’t know. So maybe for them, it might have been a wash and not a special exciting outlook.

Bertrand Schmitt

But again, what is your alternative? What would have been the other business you would have been in? I would say on and all, given the market circumstances, it was an amazing outcome for everyone involved. I think the lesson for everyone is to be careful when reading some analysis from journalist. I guess you have seen these days as are pretty hard on tech for, in some cases like this one, absolutely no good reason.

Nuno Goncalves Pedro

Maybe moving to the big blockbuster non-startup acquisition, to your point, I’m not sure Figma was a full-on startup, but anyway, let’s say they were. Loom will probably wasn’t either. But we talked about the Microsoft one. The other big one obviously is Splunk. It’s a huge acquisition, a public company already 28 billion by Cisco. Announced, not closed yet to be clear, but huge.

Bertrand Schmitt

It’s huge. I would say that Cisco has probably a mixed track record of acquisitions. They did some that were turned amazing and some that were a total flop. I think you might remember that camera company that got acquired a year before the success of the iPhone or something and became a total absolute flop for Cisco. They have a mixed track record and it’s not easy for Cisco. They are more and more in the mature business, so they need to reinvent themselves.

Nuno Goncalves Pedro

Was that flip video?

Bertrand Schmitt

I think so, yes.

Nuno Goncalves Pedro

Cisco are the… I mean, just to be very clear here, they’re the grandaddies of two things at scale, M&A.

Bertrand Schmitt

Tech M&A.

Nuno Goncalves Pedro

They, for a long time, had the best playbook in tech M&A around. If you go back to the ’90s, early “naughties,” when you were thinking about tech M&A, you’d look at guys like Microsoft and them.

Bertrand Schmitt

Indeed.

Nuno Goncalves Pedro

This is before Google scaled, and now obviously Google has become a great case study or has a lot of great case studies around M&A. But they were the granddaddies, and they were also the grandaddies of corporate venture capital. Maybe after Intel Capital, but certainly relatively early on.

Nuno Goncalves Pedro

A lot of the people that led corporate venture capital at Cisco and had significant roles there went on to become some of the top investors in today’s world, like Mike Volpe at Index. He was a Cisco guy, if I’m not mistaken. It’s pretty amazing track record. To your point, not all of their M&A has been amazing recently. We’ll see if these new playbooks work. We’ll give them the benefit of the doubt, but let’s see if it works.

Bertrand Schmitt

I agree with you. 20, 30 years ago, they were considered amazing, best in class. The reference on how you acquire, I mean, the playbook integrating businesses, from what I’ve heard, are nothing short of amazing. They really not only built a machine to buy, but a machine to integrate and to get value out of these acquisitions. The past 10, 15 years, I think it was more mixed, but definitely wishing them the best.

Bertrand Schmitt

Going back to Microsoft, it’s a pretty interesting one because you could argue that in some situation, it’s becoming harder and harder for some of the biggest tech companies, especially the Microsoft, Google, Apple, Amazon, Facebook of the world, NVIDIA as well. The fact that Microsoft managed to get away with a huge acquisition was pretty interesting.

Bertrand Schmitt

I guess the case was probably that in that situation, Microsoft is not the big dog. If you look at video consoles, video gaming, Sony has been doing very well. PlayStation 5 doing much better than Xbox. I think that was the fair point that Microsoft needs to do something to stay in the loop, to stay relevant, and they gave some significant concession in terms of support of Sony PlayStation for Activision going forward.

Bertrand Schmitt

You could argue it makes also business sense because an acquisition at this price point without supporting PlayStation 5 anymore might be a tough one in terms of returns.

Nuno Goncalves Pedro

Microsoft, I would say, has been quite acquisitive, right?

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

On the gaming side, for example, Bethesda, I think Zenimax is the name of the company, Zenimax Media. They obviously did the Activision deal, which, as you said, wasn’t without its complexities, but it’s like a big bet on it. I mean, it’s 68 billion of a big bet. They’ve been quite active. Obviously,

Nuno Goncalves Pedro

Google keeps having probably one of the best playbooks in tech M&A. They’ve really benefited a lot from tech M&A. We’ve discussed it one of our past episodes. Now, YouTube, Android, part of what became Google Maps. I mean, they have actual, maybe they flopped it a bit on Nest, but they’ve done really well with this relatively arm’s length, which by the way, was Microsoft’s playbook.

Nuno Goncalves Pedro

The old Microsoft, Bill Gates, Steve Ballmer play, well, it was really more Bill Gates, was the whole discussion on we don’t fully integrate them, we just let them be. And we keep this bridge between both of us with a very senior person in between. Think of it as a senior mega program person that connects both sides, the new mothership and the company that got acquired.

Nuno Goncalves Pedro

It’s worked really well, and Google did that. I was just a session with meeting up with Steve Chen in Taipei a couple of weeks ago. This is public information, he’s shared it a couple of times. But YouTube was about to go on a rampage. I don’t know if they’ve gone on there pretty quickly or not, but they were going on a rampage of being taken to court by everyone and their mother. They got acquired by Google for a really good price.

Nuno Goncalves Pedro

If you talk to Steve and to other people, they speak very highly of the Google guys. They allowed us to run stuff, to have access to resources, to scale up, et cetera. Again, M&A, there’s this unfortunate thing, which is the transaction is everything. People look at the transaction and then it’s all about return and whatever.

Nuno Goncalves Pedro

M&A only starts the day after the M&A is actually complete and closed. It’s like when the entities get integrated. That’s when you can see if there’s something coming on. That’s when you can see if the synergies are going to be realized or not. That’s what you can see if the people are going to work well together or not.

Nuno Goncalves Pedro

A lot of people forget that. The transaction is interesting, but it’s like everything is dependent on post-merger integration, on how do you operate a company afterwards, how much does it scale, et cetera. That’s why we always have total dudds of M&A that we just referred to a couple of them. But then you have some amazing blockbuster M&As. Google’s acquisition of YouTube, I’m pretty sure, was a great return on investment. Very good return on investment.

Bertrand Schmitt

YouTube and Android were amazing. I mean, that’s a business type of acquisition. I mean, not really bad because they could afford it, but definitely in terms of changing the trajectory of the business were amazing. There was also this acquisition by Google of this company to manage our advertisement.

Nuno Goncalves Pedro

AdMob was one of them.

Bertrand Schmitt

AdMob was acquired and was really a good success story for Google because it became the backbone for their mobile advertising, thinking about their core advertising business.

Nuno Goncalves Pedro

Was it DoubleClick?

Bertrand Schmitt

Yes, I think it was DoubleClick. There were a few that were significant as well. But I think of lately, it doesn’t feel the same in terms of Google acquisition, in terms of success.

Nuno Goncalves Pedro

Motorola was awful, but Waze was great.

Bertrand Schmitt

It was a time where Microsoft bought Nokia. That’s why when you talk about Steve Ballmer acquisition, I was like, Okay, Nokia. That was not the best one. But yeah, there is definitely a history of amazing acquisition, usually when the companies are more up-and-coming. But I would say Microsoft, we talk about Activision, but they made the acquisition of LinkedIn, of GitHub.

Bertrand Schmitt

I guess these are really good acquisition for Microsoft in terms of how good this business have become, but also how synergistic they have been probably with the business, and also how in terms of branding, it has changed Microsoft. I’ve seen in a different light, not opposed to open source, for instance, in the case of GitHub, actually an enabler of open source.

Bertrand Schmitt

You could have been worried that they would not succeed much with this acquisition, but it went very well. They managed it very well, probably thanks to their project to keep the business somewhat independent. I think that’s, for me, very impressive to see how Microsoft has been of late in terms of running successfully some acquisitions of this size and scale. But how much can they do going forward, especially the closer it is to their core business, would be interesting to see.

Nuno Goncalves Pedro

I feel that these players have just, I mean… As I said, Microsoft was one of the granddaddies. They were very good at M&A very early on. If you have a track record of… I think they have acquisitions going back to the ’80s. So if you have a track record of 40 years, almost of acquisitions where you have quite a lot of successes along the way, they’ll probably be fine.

Bertrand Schmitt

We have seen with Cisco, at some point, you can lose it.

Nuno Goncalves Pedro

But it’s 40 years, Bertrand.

Bertrand Schmitt

There was a Nokia episode. I think there were some low points.

Nuno Goncalves Pedro

They do low points like Google as well, but you have to risk it, right?

Bertrand Schmitt

You have to agree that Satya Nadella, all of the latest good, successful acquisition from Microsoft were under Satya Nadella. You could argue some would not have sold to Steve Ballmer, actually. It would have been impossible for him to acquire a GitHub.

Nuno Goncalves Pedro

Agreed. I’m not sure I would use the word impossible, but I think it would be extremely complex and difficult.

Bertrand Schmitt

Extremely unlikely.

Nuno Goncalves Pedro

Unlikely, yeah. That also matters, who the person is on the other side and what they put at the table. But looking maybe at recent IPOs this year, it’s not been fantastic. We’ve had the Instacart one. We’ve had a few interesting IPOs this year, and they’ve not done great.

Bertrand Schmitt

It’s also not easy when we look at which ones weren’t IPO. We have Arm, it’s a cheap company. We had NVIDIA, unsuccessfully tried to acquire. We have Instacart, we have Klaviyo, and there is even another one. This one is a tech company, but a shoe company, Birkenstock got one IPO.

Bertrand Schmitt

When you look at the numbers, and I saw that some journalist was also trying to put that in not a great light, but if you look at some of these IPOs, it’s pretty recent. I mean, it was started mid-September to mid-October. I mean, what happened during that time? We got a war in the Middle East. Starting, we got the Fed. Indirectly, the outlook coming from the Fed has been pretty, has been somewhat scary.

Bertrand Schmitt

Basically, investors understanding that it’s going to stay longer, to stay higher for longer in terms of rates. These companies have, as of today, and were recording November 8th, has been plus or minus 5%, 8%. You could argue, actually, they have been priced to perfection. You don’t have the usual 40% pop.

Bertrand Schmitt

But at the same time, if you are running these businesses, are you ready to leave 40% pop on the table when your valuation at IPO is probably way lower than your previous private market valuation? I mean, if I take Instacart, they were probably worth three or four times that at some point during the pandemic.

Nuno Goncalves Pedro

A couple of notes. I mean, Instacart as in today’s valid is 27 or 28 bucks. They’ve down 20% from IPO price, which was around $34. It’s just close to 34. To your point, they went down much more than that, actually, in October, but they’ve now gone up a bit. Let’s say they’ve lost 20% overall in valuation since they IPO. That’s not dramatic. It could be worse, I would say.

Nuno Goncalves Pedro

But let’s not forget an important piece of some of these elements. Again, IPO as an exit, and this episode is really around exits. Investors that want to exit their position, I am pretty sure they’re locked up. The lockups normally are six months. Investors will only be able to get their stock out and get money in return once their six months from the IPO, which was in September, to your point, I think mid-September. That’s next year into March.

Bertrand Schmitt

Investors and employees.

Nuno Goncalves Pedro

Yeah, investors and employees. Let’s see what the value is around that time. Clearly, the stock didn’t really pop. Clearly, the stock has gone down. It went down for a bit. It’s now seemingly going a little bit up. We’ll see where it will end up. But that’s the real risk.

Nuno Goncalves Pedro

Markets are very fickle. We know from the times of our bubble in ’99, 2000, that bubble. We know from those times that some investors made a lot of money because some of the lockups were there and they did exit and they did things and they made a ton of money and then the companies collapsed afterwards. In some ways, to your point, they’ve right price. Maybe there’s now appetite for an upsurge on the valuation. We’ll see where we end up.

Bertrand Schmitt

But yeah, in the case of Arm, Instacart, for me, Arm is definitely a blue chip. Their products are core to a lot of industries. I don’t see a collapse for Arm anytime soon. Instacart as well, I think has been more stable. Definitely, they had too good of a run during COVID. So that in some ways has been unfortunate for them. The reality has been harder post-COVID. But I think we’re probably in a more stable situation in terms of their demand for their services and their own competitive environment. I’m somewhat hopeful.

Nuno Goncalves Pedro

One of my investments, DraftKings, their public company has been public for a while. During COVID, they went through the roof. I think they were as close as 30 billion. I’m not even sure they got 30 billion. Then it was slaughter. I don’t remember what their lowest was, maybe five, and they’re now at 16. These things pop again if there’s intrinsics in the business. If there’s no intrinsics, that’s a different matter. Maybe we should talk about WeWork.

Nuno Goncalves Pedro

But certainly, these things go up and down. That’s the fickleness of public markets. Public markets, there’s reaction. There’s reaction to earnings announcements. You need to start managing your company in a very different way. I remember there was a… I believe it was Porsche at some point that got delisted or they decide to get delisted. I may have gotten the automotive OEM incorrect, but the point is still true.

Nuno Goncalves Pedro

When they asked the CEO at that point, why was that the decision? They said, we just can’t deal with this whole monthly results, quarterly earnings, et cetera, because it drives a lot of short-term decision-making. It drives the next earnings announcement. The problem with that is that’s not necessarily always good for the future of the company long term. In some ways, you’re mortgaging the long-term success of the company by putting your assets at the table.

Bertrand Schmitt

For sure, that’s a big question. It’s how do you manage your reporting, your growth under Wall Street. A watchful eye, definitely, Wall Street can be very fecal. A change in projection of where you’re going to land by a bit can have a dramatic impact on your stock price. At some point, you can argue this situation is true of very highly valued, very perfectly valued companies, so that’s always the risk. It’s tough not to talk about WeWork because they just went bankrupt, actually, not exactly two years after going IPO. It was a pretty poor IPO in the first place who was back.

Nuno Goncalves Pedro

This is Chapter 11, just to be clear. We should clarify they filed for bankruptcy under Chapter 11 in the US, which, in some markets, is a different type of bankruptcy. They’re protecting themselves from creditors, et cetera.

Bertrand Schmitt

You’re totally right. It’s not a liquidation of the business in the sense the business will stop to exist. It’s more reorganization of the business. In terms of one side, it’s reorganization with our creditors because they had to manage that better. But also, I understand that they’re going to definitely renegotiate all their lease.

Bertrand Schmitt

That’s probably the biggest issue for them is that they paid crazy prices for these leases at top of market, in some cases, way beyond everybody else. Now, we are facing the worst possible situation ever in terms of business real estate.

Bertrand Schmitt

Obviously, there is a total mismatch between what they are paying in terms of rent versus what should be because they didn’t negotiate well to be clear this rent. They should have a different type of clothes. They didn’t negotiate well. They put a lot of effort to make this office great. To be fair, it’s an enjoyable experience, but there is a mismatch for them. The business is not viable in the current situation.

Nuno Goncalves Pedro

It’s a bit strange that the height of it said that we work. I think they were still private back then, but at the peak of it, they were 47 billion in valuation. As of right now, they’re 44.49 million. It’s just a couple of orders of magnitude. It’s not a lot. It’s just a couple of zeros.

Bertrand Schmitt

A couple of zeros.

Nuno Goncalves Pedro

That went away. Just three zero. It’s not much, really. It’s just three zeros.

Bertrand Schmitt

Yeah, that’s four years from their failure. Their peak was probably around four years ago. That’s a proof that private or public, you can go from 50 to zero in a few years, unfortunately. It’s a very sad story. No one can find happiness in that.

Nuno Goncalves Pedro

I’m sure some investors made a lot of money still. It’s irrelevant, right? They made a lot of money.

Bertrand Schmitt

I think the one that managed to make some good money was the one who sold at pre-IPO times, or let’s say, who sold at SoftBank times. When SoftBank came, if you took the opportunity to do a secondary, as you explained, as an investor and maybe saved 30%, 40%, 50% of your investment that way, you might have indeed had amazing returns.

Bertrand Schmitt

But I think WeWork is also raising more the question of, can any company be a tech company, in a way, can marketing go too far. I think WeWork is a great example of a company that was not a tech company, that was a real estate play, and that was real estate play actually badly executed from a real estate play perspective, amazingly executed from the perspective of marketing it as a tech business.

Bertrand Schmitt

But ultimately, reality find its way. There is only so much you can, in a way, bullshit your way about what you really are as a business. I think that’s a lesson for a lot of funders that you want to be real. You want to be realistic about your business. It’s good to dream, to have aspiration, to have vision, but vision has to match reality of what you can achieve, your industry, your business.

Bertrand Schmitt

If it’s too disconnected, then at some point, it doesn’t work. The magic of being a great salesman like the CEO of WeWork was, Adam Neumann, at some point, it just stop working. It cannot be only just that sales pitch. It has to be connected to reality and especially a tech reality if you want to benefit from tech valuations.

Nuno Goncalves Pedro

Before we start, this is not fraud. This is before we talk about fraud is because FTX just found guilty of that. This is not fraud. If you exaggerate a lot and there’s no story behind it, it will catch up with you at some point. In a nutshell, IPO is not great this year. Maybe the next year will be better, we’ll see. M&A is picking up, but still very, very low. Secondary is at all time high as we know. A bit of a mixed bag as it’s normally the case, we’ll see what next year holds.

Nuno Goncalves Pedro

We’ve seen actually in the last six months or so, and this actually is not super connected to the burst of the bubble. We’ve seen that in the past, even on bubble times. A lot of window shopping and a few deals that don’t go through, at least the feedback I get from a lot of bankers. Some companies are still assessing how their stock is doing. If you’re a public company trying to acquire something on the cheap and you’re figuring through is this cash or is this stock, how should we do it? Normally, stock is nicer and easier. But there’s a lot of debate right now around companies that really have lost quite a lot of value as public equities and don’t really have the capacity to go after deals in the way that they did in the past.

Nuno Goncalves Pedro

There’s a little bit of that, and that is a little bit problematic for companies that want to be acquired because you can spend months on these transactions and then nothing happens. There’s costs included in these transactions with lawyers and with bankers, and everyone who’s at the table wants to get paid. I feel that we’re going to have more aggressive clauses in the future of, “I get paid no matter what.” Or “You pay for the cost of the lawyers if the transaction doesn’t go through.” People are getting a little bit smarter about this.

Nuno Goncalves Pedro

Breaking clauses. We have to have a breaking clause like, “If you stop the transaction at a certain point in time, you have to pay us something, or at least you need to cover all our cost plus, plus.” It’s a huge amount of attention that gets taken away from management of a company because the company goes into a mode of we’re going to be acquired.

Nuno Goncalves Pedro

That’s obviously extremely impactful, I would say in some cases, more impactful even than the cash consideration on paying service providers, et cetera.

Bertrand Schmitt

Yes, and we’ll talk more about it, but especially in a world where regulatory approval is becoming more and more complex to get. You cannot afford to try to do a transaction, go through it, wait for a year to get regulatory approval and it doesn’t go through. This can be catastrophic for the business, how it’s run, how you manage it, how employees feel during that time. It’s something that you absolutely have. I think it’s becoming a great friction now for acquisitions by big players because you have a need for these closers. Where even if it doesn’t work out, you still have to pay sometimes very significant fees if the transaction doesn’t go through.

Bertrand Schmitt

We have seen also how other players, like the case of Twitter, when they agreed to transaction, when the price was high, they tried to get away from it, but it didn’t work out. You really have to negotiate extremely well. Some technically small negotiation point can have a huge dramatic impact.

Bertrand Schmitt

Another piece is that you might get an LOI, but once you sign an LOI, you are really tied up. My advice here is to be extremely careful about how you negotiate your LOI because the probability that there is a revision of the price, of the terms, of the clause during the later on agreements can be quite significant, especially in these markets where many companies are saying, “You know what? I might walk away. It’s not such a big deal.”

Bertrand Schmitt

But then it’s definitely a lot of trouble to renegotiate back as you know, and find another buyer. It’s something to keep in mind. How do you negotiate the best? I would say probably you want a detailed LOI, make sure that there is not so much to agree on later on. Especially during that clause of you are going to go through exclusivity post LOI and you are really tied up. Your ability to negotiate a better outcome is near impossible as a seller, while as a buyer, your ability to negotiate a lower outcome might go stronger.

Bertrand Schmitt

You need to be extremely, I think, clear and detailed in your LOI to basically remove the probability of that fate. As you say, put some closers to make sure that there is not an easy walkout when you’re selling your business.

Nuno Goncalves Pedro

This is not like a VC term sheet where there’s a lot of trust implied in it, et cetera. Term sheet, sets of terms, LOIs are, in principle, mostly non-binding. To your point, you talked about exclusivity, clauses, and confidentiality clauses. Those normally are the key binding clauses. They’re binding legally.

Nuno Goncalves Pedro

In an environment of M&A, you need to put more stuff in the binding side. It’s like breakup clauses like, you’re going to pay our fees if this gets thrown away for reasons that do not relate to some issue on the due diligence, but you need to find what an issue in due diligence is. You need to specify what is the process. You need to specify certain expectations.

Nuno Goncalves Pedro

As detailed as you can be on an LOI and term sheets and heads of terms, ultimately it’s actually what pieces become part of the binding side versus the non-binding side. Because if it’s still mostly non-binding, cool, but it’s just a gentleman’s agreement. It doesn’t really lead anywhere. I think in M&A, we’re going to start seeing more aggressive terms that are binding under the LOI or heads of terms or term sheets. I think we’re going to see more of that.

Bertrand Schmitt

I agree. That will be my expectation too. It’s too easy to do window shopping or to do offers in order to win the bidding and then negotiate, I mean, renege on your offer step by step and go to a lower price point. Maybe the price point you want to go to early on, but you knew you would not win the bidding with a lower price point, so you bid higher, but you were organising yourself and preparing yourself to go lower.

Bertrand Schmitt

Unfortunately, especially in tough market, you might start to see some pretty poor behaviours from acquirers trying to take advantage of the situation.

Nuno Goncalves Pedro

I have gone into being board member of some of my companies, I’ve gone into some potential M&A transactions in the past. As a board member, not requiring breakup clauses, those times are done. I’m sorry. You come to the table, you put something at the table as a term sheet or LOI, in that term sheet or LOI, there needs to be a breakup clause. How much are you going to pay us if this doesn’t go through? It has to be clearly defined. I’m sorry. Because in particular, these are companies acquiring startups. We’re making jokes out of it, but this can actually kill a startup. I can go for an acquisition transaction that doesn’t go through and just the cost of the acquisition transaction kills the company. It’s not impossible.

Nuno Goncalves Pedro

Again, right now as a board member, this is a manifestation for whoever’s hearing that is on the other side, the larger corporations doing corporate dev, et cetera. I feel we figured out this game. It’s a startup, but you have to put money at the table. I’m sorry. If it doesn’t go through, it doesn’t go through. It’s life, but you have to pay something.

Bertrand Schmitt

Yeah, I agree with you. I think this is a very wise perspective as a board member of startups. I think in the mind of many people and all the transactions we talk about were actually strategic acquisitions. You get acquired by a strategic acquirer, and they are considered strategic because they are another operational business. They see synergy with our business. It’s our cost synergy, a portfolio of product synergy, a broader platform strategy. But it’s not the only acquirer to be around.

Bertrand Schmitt

Actually, there are a lot of PE firms, private equity firms that might be interested to either directly acquire or to finance indirectly some acquisitions. You could be a public company, for instance, get financing from PE firms. What’s your take? I guess the players are there, but are they willing to pay a premium?

Nuno Goncalves Pedro

I feel this is a buyer’s market right now. If you’re a PE firm, a particular buyout firm and you’re like, I just see this asset, it’s super undervalued. I can just take it at a discount and immediately make money first year, two years in, why wouldn’t you? Honestly, I see actually even more than this. It’s not just long-term focused PE firms that are thinking through holding periods of, I don’t know, three, five years. There’s even rapid flipping. I could just take this, do nice things to it, and then do M&A in one year and a half or an IPO in one year half or two years. Because the market will eventually pick up. This is not going to be forever and ever like this.

Bertrand Schmitt

Indeed.

Nuno Goncalves Pedro

I’ll take the discount right now. I’ll buy out at the discount and then I’ll build it up. I don’t even need to build up a lot. Obviously, this is not what a good PE firm would do, but it can be done. You can do this type of flipping. If you get 2X, 3X in one and a half years, two years, that’s incredible return. Just the IRR on that is silly.

Bertrand Schmitt

At this scale, for this stage, yes.

Nuno Goncalves Pedro

Yeah. I feel we’re going to have more of that. The issue with the buyout firms, it’s a two-edged sword. The buyout firms, on the one hand, this is a buyer’s market because they are undervalued assets. On the other hand, if you’re a buyout firm that uses significant leverage for your transactions, you’re based on that, this is a bad time to do that. There is a couple of private equity firms that only do it with equity or that have very low levels of leverage. For those, it’s probably a great buyer’s market. For those who have huge amounts of leverage that they always put at the table, this is a really tough market because of interest rates, et cetera.

Bertrand Schmitt

I guess also PE firms are definitely looking at public-to-private type of situations as well. We talk about valuation on some market. At some point, if your valuation becomes low enough, that might be a real trouble to stay a public company. It has a cost, inherently, to stay public. A significant cost, unfortunately, these days because of regulations. That means that you might actually be looking forward to exit the public market because your valuation doesn’t sustain your presence as a public company.

Nuno Goncalves Pedro

There might be some highway robbery situations where I take you private and you have more cash than I’m paying for you magically, or I’m taking you private and there’s a bunch of assets that you have that I can just sell quickly and make money quickly. I think we’ll see some of these transactions and we won’t see the results immediately, but probably one, two years out there will be articles on Wall Street Journal, on New York Times, whatever saying, “Oh, these companies have been ripped off all their assets. All the employees have been fired and laid off, and these PE guys ran across with cash.”

Nuno Goncalves Pedro

Well, that’s what the industry does. It is a financial industry focused on returns, and whatever the returns are, I’ll get them. Sadly, not all of them are ethical. It is what it is. But I see a lot of news around that a couple of years out after this wave of transactions over this year and next year. There’s definitely going to be a bit of that.

Bertrand Schmitt

Maybe to finish on the topic, there is a big one we briefly touched, which is regulations, especially antitrust type of regulations. In the US, it’s led by the FTC. But as a big global tech business who is interested to do acquisitions, you probably have to not just face the FTC in the US led by Lina Khan, but also the UK, the EU, China. If we look at NVIDIA failed acquisition, it was definitely not a US issue. That’s something new and scary, I would say. Scary because it doesn’t sound, in many situations, very reasonable in term of the regulator side, the arguments.

Bertrand Schmitt

And scary because it wasn’t [inaudible 00:50:50] exit for investors, for VCs, in term of selling to these big tech companies. If you cannot sell your startup to one of these big 5, big 10, or even in the case of Adobe, I don’t know if they are big 20 tech companies, because there is that risk of antitrust blocking your acquisition after a year of negotiation and work, it could change dramatically the profile of returns. If it changed dramatically the profile of returns, then suddenly the whole equation, the whole VC equation could change dramatically. What’s your take, Nuno?

Nuno Goncalves Pedro

One clarification, there are two big enforcers of antitrust in the US. FTC is obviously one of the key ones, the other one is the Department of Justice. They have an antitrust division as well.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

Those are the two guys, the two agencies that are responsible for enforcing antitrust laws et cetera.

Bertrand Schmitt

Why not just one agency when you can have two?

Nuno Goncalves Pedro

Because it’s the United States of America. United, I guess, there’s several.

Bertrand Schmitt

You have to feed the lawyers, government lawyers.

Nuno Goncalves Pedro

We were recently talking about USDA versus FDA. There’s agencies looking after food as well, and they have different remits. Someone created them and they exist and they have different remits and they do what they do. I understand some of the differences between both of them. I can’t understand all of them. I’m sure they overlap. It is what it is.

Nuno Goncalves Pedro

But to your question, I don’t know, I feel we’re going to have an environment of more aggressive regulation and antitrust in certain areas for sure. If we all agree with Bill Gurley in his statesman speech of late that regulation always favors those who lead the industries, then whoever gets regulated next, that’s going to be an industry that’s going to be subject to decreasing innovation. I hope it’s not tech. I hope it’s not some of the key areas of tech because that would be destructive for all the actors involved. That’s a clear agent of innovation as an industry in the world.

Bertrand Schmitt

I would be so worried because in a way, we can talk about the world at large, but that’s a bright spot in the economy. It’s tech and it’s innovation, how it has changed life for the better. If it becomes over-regulated especially in industries where it’s still new, and I guess we’ll talk more about, in a later episode, what’s happening for artificial intelligence and the regulatory capture happening there. It would be a very scary place.

Bertrand Schmitt

Personally, I definitely agree and thank Bill Gurley for his interventions on regulatory capture because he’s really touching a very important point and issues that most regulators either don’t understand or ignore or conveniently ignore.

Nuno Goncalves Pedro

It goes against the ethos of what regulation was in the US versus Europe, which is regulation in Europe is always around market share and HHI and effect in general on the market. Whereas in the US, it was always about impact on consumer.

Nuno Goncalves Pedro

In some ways, we’ve seen regulatory capture or regulatory interventions in the US that I’m not sure are always in the benefit of consumer. Certainly, the measurements taken after the regulatory action are actually not positive for the consumer. Maybe it’s coming from a good positive angle, but what ends up being the settlement or the decision is worse off for the end consumer.

Nuno Goncalves Pedro

I mean, the telco world, which is one of the examples Bill gives, is a clear example. I don’t want to bad mouth AT&T just for the sake of it or Verizon, all these guys that are just doing whatever they need to do in the market they’re in. But this market in the US is really not a great value for money market. It’s behind on so many dimensions as a telecom market, both in fixed and wireless that it’s really unacceptable. How one of the leading countries, if not the leading country in the world in terms of technology innovation, is standing behind on value for money for telecommunications. How does that work? Things like that I don’t believe are acceptable.

Bertrand Schmitt

I think that’s really the big question for me is antitrust going to destroy many opportunities. That would be a very, very negative outcome. I guess some of this is pretty connected to which party is in power, at least in the US. All of this overreach in term of regulators has been happening since the Biden administration. Change within power in Washington could dramatically change what’s happening, how it’s written.

Bertrand Schmitt

I can imagine 100% how some big tech acquirers are hopeful and preparing for a change of administration in a year from now, thinking, “You know what? No need to bother trying to do some acquisition. It’s too painful, too risky, too difficult to just go through and to convince someone to get acquired, where maybe in a year from now, everything change.”

Nuno Goncalves Pedro

We will have more interventions, not just the US, but all over the world. In China, Europe, UK, and other parts of the world. I believe regulatory intervention is here to stay. It’s part of this world that we’ve described in the past that is more siloed, that is apparently less globalised. The world is not fully flat anymore. In some ways, it’s become siloed.

Nuno Goncalves Pedro

One of the key ways to make that world siloed is regulatory intervention, it’s changing of laws, it’s application and exercise of those laws over companies. In many cases, there are companies that actually are not local companies, so external companies to those markets or are not domesticated on those markets.

Nuno Goncalves Pedro

In other cases where there’s other special interests at play where you want to basically have some control of some position of the market that you’re not willing to allow these companies to go into, even if they’re local companies, and it’s here to stay.

Bertrand Schmitt

I would say that one, again, it might depend on who is in power in different market. I think geographically, I would expect that the Chinese regulators will have less influence, the more the Western and Chinese economies, unfortunately, step-by-step, keep disconnecting and distantiating from each other. When you have no more market in China, you don’t really care about the opinion of the Chinese regulator, for instance.

Bertrand Schmitt

The other piece is that some regulators might just be in charge of a too small market. I mean, take the UK market, and right now they have influence. We have seen that they had influence on Microsoft Activision acquisition, but somewhere floating as well that you know what? That UK market, 5% of our revenues? Do we really care? That would be a big question for a lot of companies and regulators. Are you big enough for a market to really have an influence? Or will you be bulldosed on your way by some of the players?

Nuno Goncalves Pedro

I agree with the comment, and not to just thump on China, but China has huge impact globally on many companies that might not be super-exposed to China in terms of its consumers, but they are exposed to China on manufacturing and a variety of other things. So huge impact if there’s any type of regulatory activity. It could be something that is not regulatory activity. That could be just economic activity with taxation and a variety of other things, which it’s not regulation it’s just, taxation is taxation.

Nuno Goncalves Pedro

There’s other mechanisms for you to implement barriers to entry, barriers to exit, and all sorts of things. Movements of capital and some of it is regulation, some of it is not. But yes, I feel the next few years will be about more and more siloed world rather than this globalised world.

Bertrand Schmitt

It’s clear that governments all over the world have taken notice about its importance and wants to rein in for different reason in different countries what’s happening in tech. Antitrust and blocking M&A is just one weapon, one tool at their disposal.

Nuno Goncalves Pedro

Absolutely. This concludes our episode 49 on exits. We discussed what an exit actually is, not as simple as it seems. We discussed stats on M&A, IPOs. Finally, we looked ahead. We looked at what’s the future holding in particular in the next few years. Thank you, Bertrand.

Bertrand Schmitt

Thank you, Nuno.