Frank Quattrone: Lessons from 650 M&A Deals Worth Over $1TRN & Taking Amazon and Cisco Public| E1121

Intro (00:00:00)

• Frank Quattrone is known as the "OG of M&A."
• Regulation has not killed M&A, but it acts as a filter for companies going public.
• M&A activity is expected to increase as interest rates stabilize.
• The way deals are done has not changed significantly.
• Frank Quattrone met Steve Jobs when he was 25 years old.
• Jobs was looking for someone to take Apple public.
• Quattrone was impressed by Jobs' vision and passion.
• Quattrone helped Apple go public in 1980.
• The IPO was a huge success, raising over $100 million.
• Apple's success helped to launch the personal computer revolution.
• Quattrone has been involved in over 650 M&A deals worth over $1 trillion.
• He has learned many lessons from his experiences, including:
  • The importance of trust and relationships.
  • The need to be prepared for anything.
  • The importance of being creative and innovative.
  • The value of hard work and dedication.
• Quattrone offers the following advice for entrepreneurs:
  • Be passionate about your business.
  • Build a great team.
  • Be prepared to work hard and never give up.
  • Be willing to take risks.
  • Don't be afraid to fail.
• Quattrone believes that the future of M&A is bright.
• He sees a number of trends that will drive M&A activity, including:
  • The rise of technology.
  • The globalization of the economy.
  • The increasing demand for resources.
  • The need for companies to innovate and grow.

Meeting Steve Jobs (00:00:56)

• Frank Quattrone's experience as a teaching assistant at Stanford, where he worked on porting software to an Apple II personal computer, inspired his career in investment banking.
• While working on the Apple II project, Quattrone recognized the potential of personal computers and witnessed the company's early days and culture.
• During an Investments class, Quattrone and his classmates were tasked with pricing Apple's initial public offering (IPO) before the underwriters, with Steve Jobs presenting the company's vision.
• Quattrone was impressed by Jobs' passion and the potential of personal computers to revolutionize various aspects of life.
• Despite Morgan Stanley's lack of experience in high-tech IPOs, they became the lead manager for Apple's IPO and opened a San Francisco office, highlighting the significance of the tech industry.
• Quattrone declined an offer to return to Morgan Stanley's M&A department in New York and instead joined the firm's new San Francisco office to work with tech companies like Apple.
• Quattrone led the technology practice at Morgan Stanley to become the largest industry group at the firm within 15 years, adding 20 to 40 new clients annually through initial public offerings and other products.
• Venture capitalists welcomed Morgan Stanley's involvement in the tech industry, as it brought credibility and reputation to the emerging sector.
• Morgan Stanley strategically focused on taking the top 10% of tech companies public, establishing a reputation for quality and attracting high demand for its services.

Dot-com Bubble & Technology Pervasiveness (00:10:37)

• In 1981, when Frank Quattrone returned to Morgan Stanley, the technology industry was still in its early stages, with few companies having a market cap exceeding a few hundred million.
• Netscape's successful IPO in 1995 caused unprecedented demand and nearly overwhelmed Morgan Stanley's telecommunications system.
• Amazon's IPO in 1998 led to a resurgence in interest in internet offerings after a period of decline for internet stocks.
• During the internet boom, successful IPOs were expected to yield returns of 100% or more on the first day, leading to a "crazy" market environment.
• Valuations for technology companies skyrocketed, reaching 100 times the number of eyeballs for concept companies with no revenues.
• The recent surge in cloud software companies' valuations, reaching 30-40 times revenues, was unsustainable due to the low cost of capital.
• The COVID-19 pandemic created a similar situation, with companies facilitating remote work experiencing unprecedented valuations.
• Despite the remote nature of business during the pandemic, 2021 was the best year for M&A deals, driven by new buyers with even higher valuations.

Has Regulation Killed M&A? (00:17:48)

• The speaker expresses concern about the lack of liquidity and believes the M&A environment is dead.
• Regulations have prevented several M&A deals, including Plaid and Figma.
• The speaker does not believe regulations have killed M&A but acknowledges that the past two years have not been as good as 2021.
• Market crashes, rather than regulations, are the worst times for M&A.
• During market drops, sellers are unwilling to accept lower valuations, while buyers are hesitant due to uncertainty.
• Buyers are most bold and imaginative when their own visibility and predictability are at their best.
• The best times to buy companies were right after the great credit crisis, when companies like Cisco and IBM were available at attractive valuations.

Impact of Rising Interest Rates on M&A (00:19:26)

• The current market situation, characterized by high-interest rates, increased cost of capital, and a shift in investor sentiment, has led to a freeze in M&A deals.
• This lack of M&A activity affects venture investors who rely on successful exits through M&A to realize returns on their investments.
• Stricter regulations, especially in the tech sector, have further contributed to the slowdown in M&A deals.
• The shift from zero interest rates to higher rates has made high-yield bonds riskier, limiting the pool of investors and the availability of funds for M&A deals.
• Companies are delaying going public due to the availability of late-stage capital and the involvement of sovereign investors pre-IPO.
• To be serious about acquisitions, companies need a public currency for acquisitions and access to public debt markets.
• Public investors prefer to buy public companies due to easier entry and exit and lower risk compared to private companies.
• Companies need to increase their valuation and the next generation must be willing to go public at a more reasonable valuation.
• It is easier to advise a company when there is buying interest, but sometimes this interest needs to be created.

Role of Investment Bankers in M&A (00:25:59)

• Only 10% of companies go public, while 90% get liquidity through mergers, so it's important for private companies to create and perfect a merger option.
• Building trust with potential buyers and educating them about a company's value proposition is crucial.
• Frank Quattrone facilitated a deal between Qualtrics CEO Ryan Smith and SAP CEO Bill McDermott, introducing them at a conference after Smith's presentation on experience management interested McDermott.
• Quattrone advised Smith and McDermott to openly communicate their interests and needs to bridge the gap and reach an agreement, which they successfully did, writing down the deal on a cocktail napkin.
• Quattrone emphasizes the importance of creating demand for a company that may not have it initially, as he had to help Smith and McDermott recognize the strategic value of their collaboration.

Competitive Deals & Driving the Highest Price (00:33:19)

• LinkedIn received interest from multiple parties, with Microsoft and Salesforce emerging as the primary bidders.
• The bidding process was highly competitive, with both companies submitting very close prices in each round.
• Microsoft eventually won the bid with an all-cash offer, despite Salesforce's attempts to counter with higher offers during the exclusivity period.
• The board chose Microsoft due to the certainty and greater value of their offer.

Common Reasons for Deal Failures (00:36:01)

• Approximately 90% of deals fail during the M&A process.
• The most common reason for deal failures is valuation, with sellers often having unrealistic expectations and buyers being cautious about setting precedents.
• Cultural fit can also be a significant factor, as companies may find that they are incompatible despite the deal appearing good on paper.

Challenges in the M&A Process (00:37:47)

• Lengthy approval processes can significantly alter the original deal's value.
• Sellers may agree to a price based on the buyer's high stock value, which can drastically change during valuation corrections.
• Uncertain regulatory environments can extend deal timelines up to 24 months, creating challenges for sellers who must adhere to covenants during this period.
• Regulatory scrutiny can have both positive and negative impacts on companies involved in M&A deals.
• Buyers typically pay in cash, while sellers must consider the potential fluctuations in their own stock value during extended regulatory periods.
• Boards may request a portion of the deal in cash to mitigate downside risks associated with prolonged regulatory limbo.

Buyer Sentiment in the Current Market (00:41:17)

• There are more bargains in the market compared to 2021, especially in the cloud and software sectors.
• The financing and regulatory environments are more challenging.
• Strategic buyers are now more focused on buying private companies.
• Private equity firms have been responsible for a substantial percentage of public company acquisitions in recent years.
• Buyers are not viewing the market as either a bargain phase or a crazy phase like in 2021.
• M&A activity is expected to pick up as interest rates stabilize and visibility improves.

Future of M&A in a High-Rate Environment (00:44:00)

• Interest rates are likely to remain high for a prolonged period due to underlying inflationary pressures.
• M&A activity may remain frozen until sentiment becomes familiar with the new environment and stabilizes.
• A period of stability in valuations and interest rates is necessary for M&A activity to progress normally.
• The upcoming US election could create uncertainty and affect M&A activity later in the year.

Influence of Trump on M&A (00:45:44)

• Frank Quattrone does not believe that a Trump presidency would significantly impact the M&A environment.
• Trump's economic policies may lead to economic growth and favorable stock market conditions.
• Antitrust regulations are unlikely to change significantly under Trump.

Changes in Deal-Making Strategies (00:46:56)

• Frank Quattrone's approach to deal-making has remained largely consistent over the years.
• The M&A market for tech companies has evolved significantly since the 1980s and 1990s.
• Deals have become more common, valuations have increased, and there are more buyers and sellers.
• Today, most companies achieve liquidity through M&A, unlike in the past when most companies went public.

Selling to Private Equity vs. Other Strategics (00:48:39)

• The decision of whether to sell to private equity or other strategics depends on the situation.
• Private equity buyers focus on moderate growth and seek to improve margins by reducing marketing and sales expenses.
• Private equity firms typically offer lower valuations compared to strategic buyers.
• Strategic buyers are willing to pay higher valuations but may face limited competition in negotiations.

Quick-Fire Round (00:50:21)

• All-cash deals typically involve a single closing where all funds are transferred, and founders may receive retention, new stock options, or a mix of stock.
• During the credit crisis, deal activity declined, making it challenging to attract bankers from large firms.
• Bill Gurley, a visionary investor, recognized Jeff Bezos's potential and played a crucial role in Amazon's success by helping raise funds.
• Despite challenges, Jeff Bezos's charm and charisma won over investors during Amazon's IPO roadshow, leading to a successful IPO priced at $18 per share.
• Frank Quattrone, an experienced investment banker, emphasizes the importance of staying ahead of technological trends and identifying "killer apps" like generative AI and ChatGPT.
• Quattrone believes artificial intelligence will revolutionize industries, leading to new leaders and market shifts, and suggests that his investment bank, Catalyst, should focus on the changing landscape of technology to remain successful.
• Quattrone used ChatGPT to write a letter to Catalyst team members, demonstrating its potential and impact on various industries.