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Show Notes
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’