BI Weekend: OpenAI, AMD Deal, New Verizon CEO

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1:49On today's Bloomberg Intelligence show, we dig inside the big business stories impacting Wall Street and global markets. Each and every week, we provide in-depth research and data on some of the 2 ,000 companies and 130 industries our analysts cover worldwide. Today, we'll look at how AMD landed a deal with OpenAI to build AI infrastructure. Plus, why Dell Technologies is roughly doubling its growth estimates for sales and profit for the next two years. But first, we begin with a big deal in the banking sector. This week, Fifth Third agreed to buy Comerica for about$10.9 billion in stock. It is the largest U.S.

2:21bank deal this year. The deal will create the ninth largest bank in the country with about$288 billion in assets, according to the two companies. So we called in Herman Chan, Bloomberg Intelligence Senior Analyst for U.S. Regional Banks. And we began by asking Herman for his take on the deal. Yeah, I think it's a win-win for both. Comerica has been sort of in the doldrums over the past couple of years after the SVB debacle. It's taken some long time to get it under its own footing. and they've gotten a lot of agitated investors and activists pushing for a sale. And this was a great outcome. On the other hand, for Fifth Third, it's a great deal.

2:58It moves them into growth, growthier markets in Texas and California, supplements their Michigan presence and really builds out their branching presence across the Southeast and Southwest. So within the regional banking space, what does this deal put pressure on? Who does this deal put pressure on to make a move of their own? Yeah, so that's a question, the follow-on question, like who's next? So there are other banks that are operating within the size of a fifth third that have also done deals like a PNC and Huntington. And the others that are still on the sidelines are banks like Regions in the southeast, Key Corp in Ohio as well, and M &T and Citizens in the northeast.

3:42So those are the ones that probably are going to get asked a lot of questions on the 3-2 earnings call about M &A. So what do we know about the Trump administration and its view towards bank consolidation? Are they opined on this at all? Yeah, so we can see that these bank deals are getting approved at a much faster clip. So I mentioned Huntington earlier. They're buying a bank in Texas named Veritex. That's right. And it's going to take them about 98 days from deal close from merger announcements. and that contrasts with under the Biden administration, it's taken 400 to 600 days for a large bank money deal.

4:17So these deals under Trump are being fast-tracked and it's really encouraging the management teams to really go out there and search for deals. So for so long, a lot of people had commented that the U.S. is overbanked. By one count, there's almost 4 ,500 FDIC-insured banking institutions here. Are we still overbanked, Herman? I would say so. There's a lot of competition. And that's the reason why Comerica is looking to sell, because they were lacking in a retail branch presence. They mostly bank middle market commercial customers that are great, but it doesn't create the diversity that they needed during times of stress like the SVB environment.

5:01And so that was a lesson learned for a lot of the banking industry that you need to diversify your deposit base. And one way to diversify is to sell to a larger organization. Which segment of the banking industry is bloated, needs to streamline the most? Yeah. So you mentioned 4 ,500 banks. Like, does there need to be that many banks within the United States? Probably not. They don't have the scale to operate a retail branch presence. They don't have the capabilities on the fee side and the advisory side to really help their customers on the commercial side. And you see so much competition from not only larger banks, but also the fintechs that are just biting at the heels on the consumer side.

5:47So it's a really tough operating environment. And we expect more consolidation over the next several years. All right. Riddle me this here. Why do banks even have branches? I hear banks talking about adding branches. I haven't been into a branch in years. Across the street from Bloomberg headquarters. City branch right across. A lot of it is marketing, and a lot of it is scale. So for a bank like Fifth Third, they're growing organically in the southeast, and that's been a major growth driver for them. But I need a branch? You don't need a branch, but you need the branch for a marketing aspect.

6:25So it's like a big billboard. Right. It's a big billboard. Big expensive billboard. in markets where you have a lot of foot traffic and higher growth markets. So it's a big billboard and it's been a proven growth driver for banks. But on the other hand, branches are declining. So if you have critical mass and scale in your existing markets, you can trim your branch presence and not affect your depositors. But if you're entering new markets, then opening new branches is the way to go. I don't even think I could find my checkbook. Well, that raises a question. Does a fintech that wants to be a bank need to therefore have a retail presence?

7:00Do they need to open up a branch also across the street from our office? So that's the beauty of the FinTech mottos that they're issuing the branches. It's not a requirement. It's a lower cost to serve because you don't have the physical retail presence. And it's one way to really compete effectively with these legacy banks where you have a really easy to use app and you aren't burdened by this cost basis of owning the physical presence. All right. So when we had a couple little blowups in your world a couple years ago, I found this KRE, the SPDR S &P Regional Banking ETF. That's right. How are the regional banks trading these days?

7:43Yeah. So they're really doing all right. We're talking about price to tangibles around 1.5 to 1.0 times-ish During the height of the weakest point during the SVB debacle, it was less than one time. So they've rebounded really nicely, despite some of the uncertainty on the economy and with tariffs. And so we've seen some growth from them, especially on the commercial lending side, that's really helped grow their top line. Our thanks to Herman Chan, Bloomberg Intelligence Senior Analyst for U.S. Regional Banks. We move next to some news in the telecom space. This week, Verizon Communications named Dan Schulman as chief executive officer, replacing Hans Vestberg.

8:23The goal is to boost mobile subscriber growth and shares. Schulman is the previous CEO of PayPal and brings financial and operational leadership experience, as well as expertise in telecoms, technology, and finance. Vestberg will stay on for a year to help ensure a smooth transition. For more, I was joined by John Butler, Bloomberg Intelligence senior telecom analyst. I first asked John if this change was expected at Verizon. Not at all, Paul. I mean, you know, when you think Merger Monday, I've had a lot of busy Mondays lately. But the last piece of news I expected was this change in leadership at Verizon.

8:58The company had really been sort of, I guess, prepping the head of the consumer business, or grooming is a better word, Summer Ryan Sampath, who is just a phenomenal talent, in my opinion. And he's been sort of pushed out there doing a lot of investor conferences and giving the investment community the impression that he was the next in line. So when the news broke that Dan is taking over as CEO, it really surprised a lot of people, including me. So what's the company saying here? Why do you think they chose this outsider versus somebody that, again, an insider that maybe the street thought was going to be the next in line?

9:39You know, I think for telecoms, all three of the majors, the wireless business is slowing very rapidly on them. We're seeing subscriber growth down a lot this year. There's a lot of pressure on pricing. And I think the thought is Dan Schulman used to be CEO of PayPal. He's got experience at Amex in the consumer finance business. so they're thinking in terms of how to monetize the 150 million consumer relationships they have to move into adjacencies. The naming of Shulman in my mind tells me they're looking to tap the consumer finance market. You know they've already got a credit card business.

10:22I think it's probably doing pretty well but they're not actually in the loan business there but they're doing a lot of device financing. And so I think the hope may be, this is my speculation, may be that they can take that perhaps a step deeper into the consumer finance market and maybe other adjacencies to be able to monetize that base a little bit more and diversify away from the slowdown in wireless. Yeah, I know Verizon, they've kind of dabbled over the years in other businesses, purchasing AOL and Yahoo. So what's the focus going forward here? Is it to try to just manage the wireless business, you know, the decline in the wireless business as best they can?

11:08So again, the strategy here, Paul, I think, is to sort of build off that base that they have. The wireless business is stable. It's not going anywhere. It's typically a GDP plus business. Again, we're seeing a slowdown now, so it could move down to a GDP-like growth rate. But again, it's all about extensions. So all three of the majors here are pushing hard into consumer broadband. They're doing very well there, both in the fiber and the fixed wireless access business. But even that business is starting to mature a bit as it saturates here in the U.S. So the question becomes, what's next? And maybe the what's next could be consumer finance.

11:55If you look at T-Mobile, they've tapped the outdoor advertising market, which actually is growing double digit. I never would have guessed. But the thought is, hey, as people carry around these phones, we know where they are. Perhaps we can leverage that and come up with very innovative ways of increasing eyeballs on our outdoor advertising. So I think they're looking for that type of creative thinking to come up with new ways of generating growth. And again, you're trying to leverage that huge core base of wireless subs that you have. Just looking at their balance sheet, John, this is a company, Verizon.

12:36It's got$170 billion of total debt there. How does the market feel about their balance sheet? So I think of the big three, Verizon is probably at a point where they want to be in terms of financing the business. Can they load on a bunch more debt? It's hard to say. I'm going to defer to our credit analyst for that, Steve Flynn. But I don't view their ability to finance new ventures as an issue here at all. It's a very cash-rich business, wireless, that is. And, you know, I think that will allow Verizon to bankroll any of the new ventures they plan to push into from here. Certainly pro shareholders is 6.6 % dividend yield.

13:25Is that safe? I think it is safe. That's a good question. I think Verizon of the big three really sort of gets it when it comes to the importance of the dividend to the investment community. There's a lot of telecoms out there, AT &T included, that have cut the dividend in the past and learned the hard way that that really, I call it the third rail of telecom. I mean, you do not want to cut the dividend. Yep. So my call here is that I think the dividend is safe. Yes. Our thanks to John Butler, Bloomberg Intelligence Senior Telecom Analyst. Coming up, a look at how IBM is planning to integrate AI tech.

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15:21This is Bloomberg Intelligence with Scarlett Foo and Paul Sweeney on Bloomberg Radio. We move to some news in the tech space. This week, Advanced Micro Devices landed a deal with OpenAI to build AI infrastructure, and this gives the chipmaker AMD a chance to challenge NVIDIA in the AI computing industry. OpenAI will deploy AMD graphics processing units over multiple years. The deal also sets the stage for OpenAI to acquire a large stake in the chipmaker with the ability to buy as many as 160 million shares of AMD. So we asked for context from Ed Ludlow, B-Tech co-anchor. We first asked Ed what he makes of this week's deal.

15:57The specifics of the deal are really important. What is OpenAI going to use AMD's technology for? It's going to use it for inference. In other words, running the models that already exist, not training them. It is six gigawatts of capacity. The reason that that figure is critical is that it equates to the peak electricity demand of most major US cities. These are huge numbers, as you say. but it just speaks to what's happening to the mind of the participants in the industry which is they will need this capacity um you guys are using words like top and bubble and i think that's completely fair maybe you saw my column on the debt uh role that uh in what's happening but i would say that amd has done something interesting here which is different to what nvidia did which is they will issue stock to OpenAI, AMD shares going to OpenAI, but only once OpenAI has spent some money and actually built some stuff.

17:01So where's OpenAI going to get the money? Well, that's why Sam Altman has been traveling the world, meeting with all kinds of investors, trying to get some funding. You said the specifics matter, Ed, but we don't know how much this partnership, this deal is worth beyond the very generic tens of billions of dollars, right? That could be$10 billion, that could be$99 billion. Yes, that's correct. I mean, AMD CFO framed it as being tens of billion dollars of revenue opportunity. But that's why I think the specifics of the terms, I've made a careful examination of them, are really important to understand versus what NVIDIA did with OpenAI.

17:38So NVIDIA said it was going to invest$100 billion dollars into open ai we don't even know if that was cash or chips in lieu of cash but basically nvidia would get some equity in open ai in return in this instance amd and open ai open ai is getting amd shares but they are deliverable in tranches against milestones which relate to literally building the data centers so for each gigawatt of capacity that comes online amd would then say here is this tranche of stock. And that's why I'm saying focus on the open AI obligation here. They need actual money to dig up the dirt, put the foundations in, get the data center up and put the servers in before any of this stock comes into play.

18:24Our thanks to Ed Ludlow, B-Tech co-anchor. Staying with tech, this week, the tech company IBM announced a plan to integrate Anthropics AI technologies into its software solutions. IBM said it will make the startup's clawed family of large language models accessible for its clients. Shares of IBM jumped after the news. So for more, we're joined by Anurag Rana, Bloomberg Intelligence Technology Analyst. We began by asking Anurag how he evaluates this latest partnership. See, when you come to a company like IBM, I think they have done a very good job of being open and partnering with other vendors.

18:54I think the acquisition of Red Hat was the first such example a few years ago. And frankly speaking, the company has turned around quite a bit. Now it's more of a software company than it is a service or a hardware company. IBM still has a lot of footprint in legacy companies and their internal infrastructure, whether that's a regulated entity, whether that's an on-premise software. What they're basically saying is, for these companies who want to add more AI capabilities into their infrastructure, we're going to use one of the best models that's out there, and that's Anthropic. They're not just solely dependent on IBM's own internal models.

19:30But we see more and more of that happening, that companies like IBM and other services companies will go out and partner with Anthropic, with OpenAI, with Gemini, and give more enterprise capabilities to vendors or to companies, basically. How does Anthropic differ from OpenAI, if at all? That's a very good question, Paul. And right now, what we are seeing is Anthropic is pushing more and more stuff on the corporate side or the enterprise side. On OpenAI side, their core businesses still chat GPT, which is the app, and that's more of a consumer app right now. And the question is, which one of the models will somebody use?

20:07Whether if you are, let's say, a JP Morgan or a Citicorp, would you be going to be using one of their models or an open source model? I think they're going to be using all of the models. What anthropic relationship with IBM does, it actually helps them to spread the word out across their entire customer base. So if you are trying to get more coding done, for example, in an IT department, and you have all the legacy products that there, now you can use, you know, an AI model from Anthropic rather than using, you know, whatever tools you had before. Okay, so it makes sense why Anthropic is a good fit for IBM or how it's going to incorporate Anthropic into its software.

20:44But what does IBM specifically offer Anthropic? What access does IBM have that Anthropic wants and needs? Yeah, that's another excellent question. In this case, you're looking at IBM's entire customer base. IBM has a very large services business called IBM Consulting. These consultants will go out and sell Anthropic software into the enterprises and say, hey, bank, let me help you to automate this particular process and you can use it with this software. It drives their consulting business and it also helps out their software business, which is fairly popular right now. IBM hitting all-time Hi, Anurag.

21:21This stock has found a new life, hasn't it? Absolutely. And this is something that we've been saying it for almost five years now. The acquisition of Red Hat completely changed it. If you go back and look at some of the comments we've made on TV about IBM prior to Red Hat, it was a very closed company. It only wanted to sell their own products to people and was not very keen on embracing what I would say is open source. With the acquisition of Red Hat and the company saying, you know what, Red Hat can work with any cloud provider. I think that was the biggest difference to me was it allowed Red Hat to work with companies, but based on Amazon Web Services or Microsoft.

22:00So they were not just pushing their own cloud products. And I think that really made a difference. Their software business has been doing so well comparatively to the rest of the world. And I think that's where you see the market validation that this is the right strategy for them. Our thanks to Anurag Rana, Bloomberg Intelligence technology analyst. We move to some more news in the IT hardware space. This week at its Investor Day, Dell Technologies roughly doubled its growth estimates for sales and profit for the next two years. Dell also said demand for artificial intelligence products will extend those higher projections at least through 2030.

22:32Separately, Cisco Systems says it is releasing a new chip networking system to connect AI data centers across hundreds of miles. So for more on both of these companies, we were joined by Woo Jin-ho, Bloomberg Intelligence Senior Technology Analyst. We began by asking Woo to break down what we heard from Dell. This is a very seasoned management team. They have a tendency to give out three to four year guidance plans. I think the surprise here is what's driving that 7 to 9 percent growth outlook from 2026 to 2020 over 2030. And it's going to be AI servers, right? And one of the things that they said at the analyst day that AI servers are going to grow at a 20 to 25 percent compounded rate.

23:12I think there was some skepticism there heading into the print in terms of, is there an AI bubble? And by laying out a 20 to 25 % AI server growth going through 2030 off of already high numbers shows that there is some durability to AI server demand. So, Wood, when you get an analyst meeting together, it's a big day for a company. They put a lot of time and effort in getting their senior management together, putting together presentations, presenting a vision here. What were some of the two or three takeaways from you from this investor day? Yeah, so the one highlight here is the AI server demand, the durability of AI server demand.

23:50But more importantly, and we talk about this all the time, you know, Paul, it's about earnings and cash flow, right? And at the end of the day, we're talking about EPS growth about 15%. And how do we get to that 15 %? We're talking about 8 % of the sales growth dropping down to the bottom line. But given all that cash generation, there's going to be a fair amount of capital returns through buybacks. So you're going to get a lift on EPS there. So shareholders are going to be happy from an EPS standpoint. We're already seeing that from a valuation standpoint because it is lifting from an 8 to 10 times P.E.

24:28to about 15 times growth, which makes it into a 1 times peg. Ujin, another story that we're tracking here and that I've been fascinated by is this idea of legacy tech companies finding their feet in this AI wave, whether it's Oracle, whether it's Dell, and now Cisco as well. Cisco is releasing a new chip and networking system to connect AI data centers. And this is a move that pretty much puts it in more direct competition with Broadcom. How big of an opportunity is this for Cisco? And should Broadcom be worried? Yeah, so we publish and react and essentially I don't think Broadcom should be fully worried.

25:07There's a couple of things that I'll say right Cisco is actually one of the biggest chip networking chip manufacturers globally but more for their legacy enterprise IT chips right they produce their own chips that powers their own networking gear. They're fairly newer to the game in the the networking chip side from a revenue standpoint it's really not a big driver, but it may be able to push more boxes. A couple things that I'll say, they did about$1 billion in AI backend revenue, but to put that into context, they're doing about$55 to$56 billion in total sales. So from an overall percentage of AI as an overall percentage of sales, it's about 2 to 3 % of total sales.

25:54Are they going to challenge Broadcom? I doubt it, but I do think there'll be a second source to the cloud providers versus Broadcom. Wooj, in your coverage area, what's your best AI play? Because I'm sure you get that call from clients all the time. You know, I mean, I have a handful. Dell was one. You know, HP is another one to take a look out for. They have an analyst day next week. But from a networking standpoint, Arista has actually been one of the high flyers from a networking standpoint. So I would look at Arista and people have been taking the AI networking angle and using Arista as one of the tools.

26:41I like that, Arista. I haven't heard that one come up yet. HPE or HPQ, just to clarify? Oh, HPE. So think of it as a mini Dell and a mini Cisco in one. Our thanks to Woo Jin-ho, Bloomberg Intelligence Senior Technology Analyst. Coming up, we'll look at why the owner of the Corona and Modelo Spezial brands reported positive quarterly results. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries. You can access Bloomberg Intelligence through BI Go on the terminal. I'm Scarlett Fu. And I'm Paul Sweeney. This is Bloomberg.