EA Agrees to Largest Leveraged Buyout in History

16:22Ed Ludlow:Well, this one is going to be incredibly important for both President Trump and Prime Minister Netanyahu. As I mentioned, it comes on the heels of President Trump outlining how he can see an end of the war in Gaza, which he's feeling very optimistic about with this 21-point plan he discussed with Arab leaders. And I sat down with the Egyptian foreign minister on Friday who was optimistic after being in that meeting with President Trump that they do have a path forward on ending the war and reconstruction. Of course, the devil in all this is going to come in the details when it comes to the Israeli red lines as well as Arab leaders' red lines as well.

16:58Caroline Hyde:Bloomberg's Anne-Marie Hauden, thank you very much. And be sure to stay with Bloomberg for complete coverage of that meeting between President Trump and Prime Minister Netanyahu that's coming up at 1.15 p.m. New York time. Coming up on Bloomberg Tech, Huawei plans to ramp up production of its most advanced AI chips in a bid to take market share from NVIDIA. We have the details next. This is Bloomberg Tech.

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20:07Caroline Hyde:We're seeing live pictures of President Trump walking in with Israel Prime Minister Benjamin Netanyahu, who's just arrived at the White House. The two set to participate in a bilateral meeting in just a few moments time. Back to our other top story. Huawei is preparing to sharply ramp up production of its most advanced AI chips over the next year, aiming to win customers in the world's biggest chip market as NVIDIA struggles with geopolitical headwinds. Bloomberg's global technology executive editor, Peter Elstrom, joins us. We're talking about the 910C Ascend chip, right? This is kind of the marquee for Huawei.

20:40Caroline Hyde:Talk us through the numbers that we learned in the course of reporting about the next two years. Right.

20:46Ed Ludlow:Huawei, of course, is probably best known for its communications equipment, had smartphones for a long time, too. But it is also really the leading developer of semiconductors within China. It's put a ton of research and development into this process, and it's made quite a bit of progress. So what sources are telling us is that the company is preparing to ramp up production of some of these high-end chips that would be used to run AI models within the country and also train some models in the country. As you mentioned, the 910C is the most advanced chip that they have on the market right now. We understand from sources they'll produce about 300 ,000 this year, and they're planning on ramping that up to about 600 ,000 next year.

21:26Ed Ludlow:That's not enough to meet all of the domestic supply, but they're hitting the market at a very vulnerable moment for NVIDIA. NVIDIA had hoped to be able to sell a bunch of chips into China. There's a very vibrant AI scene there. Companies want to buy their chips. But there have been these geopolitical tensions where the H20 chip was banned for a while. Then Washington allowed it to be sold. But then Beijing pushed back and said they don't want their companies to buy that chip right now. So as NVIDIA stalls, Huawei is racing ahead and trying to fill that market need. Camera Con Technologies also trying to race ahead.

21:59Ed Ludlow:This is a moment for domestic chip making talent, but ultimately we're still worried about how SMIC can actually produce or manufacture and how powerful any of these next iterations that Eric Hsu, the rotating leader of the business, can actually be compared to NVIDIA. It seems as though analysts think they're not going to nearly rival the GPUs or the next iteration from NVIDIA. Right. They're still very far behind NVIDIA. I mean, NVIDIA is the most valuable company in the world. They have tons of resources to be able to throw at this. And obviously, they've helped companies in the U.S. like OpenAI and Microsoft a ton on this front.

22:34Ed Ludlow:Now, Beijing is very concerned about that reliance on American technology at this critical juncture. So as Xi Jinping and President Donald Trump enter into these trade negotiations, they have many issues on their plate, including TikTok. The Communist Party wants to do whatever they can to be able to wean themselves off of that American technology. So they poured a ton of resources into building these domestic capabilities. As you mentioned, CabraCon is coming on, one of the upstarts that's probably most promising in the market. And then Huawei is also spending a lot of money on this front. Alibaba, the e-commerce company, is investing in semiconductors too.

23:09Ed Ludlow:So you're seeing really this nationwide effort to try to make some progress in chip production. Again, And they're very far behind what the Americans can do and the Taiwanese can do right now. But they are making progress. And I think what sources are telling us now is they're making progress over the next year to an extent that we had not anticipated. Peter Elstrom, always breaking it down. We so appreciate that. Meanwhile, fitness company Peloton is set to unveil new products this week, refreshing its exercise equipment, hardware and its software lineup. Of course, it's including AI. Let's get more from Bloomberg Consumer Tech Managing Editor Mark Gurman.

23:41Ed Ludlow:And how wholesale is the change going to be for Peloton this week? This is going to be their biggest hardware revamp in at least half a decade. This is under new CEO Peter Stern. I know a lot of us love and use Peloton, but they've been struggling lately from a revenue perspective, from a sales perspective, from a profit perspective, management perspective, but also from a products perspective. And it's time for them to step it up under new leadership. And that's what they aim to do this week. Peter Stern will be holding a keynote address in the middle of the week and introducing an end-to-end hardware refresh that includes new bikes, new treadmills, new rows, a fully upgraded operating system across all Peloton hardware that deeply integrates what they call internally Peloton intelligence.

24:29Ed Ludlow:This is AI for personalized coaching and creating plans for users. So this is a big refresh. This is Peter Stern's moment to put his stamp on the company. The last CEO, Barry McCarthy, basically ran the company into the ground, something that they said was necessary after the CEO before him, co-founder John Foley, pulled some levers that put the company in a very bad financial position. So we'll see if Stern is the one to be able to turn things in the correct direction.

24:58Caroline Hyde:Mark, Cara and I are both users of the hardware and subscribers to the platform. There'll be an audience watching the show that have like deja vu and say, well, hold on, isn't this the latest of several turnarounds that have happened in the last many years?

25:11Ed Ludlow:The last turnaround was mostly focused on re-architecting the fundamentals of the company. They moved production to third-party manufacturers. They shut down facilities. They tried to right-size the company. They did, I think, four or five different rounds of layoffs. What Peter Stern is doing after that was done by the last CEO is actually trying to go into growth mode here, which means rolling out new products and new initiatives. No new products or major initiatives are rolled out under the prior regime. So this is about bringing new hardware into the market. And we'll see if that's successful for them.

25:50Ed Ludlow:You know, so far, they're up quite a bit on an annual basis.

25:56Caroline Hyde:Let's see if investors like the hardware. At the end of 2020, the pandemic year, this was a stock that was at$162. It's now just above$8. Bloomberg's Mark Gurman, a big week. Thank you very much. Now, coming up is EA goes private in a$55 billion deal. We're going to speak with Jason Chapman of investment firm Convoy on the impact to the gaming industry. This is a firm that only looks at the gaming industry. And we've gone over the details of this deal, Caro. We've looked at how historic it is from a financial perspective. But there will be gamers out there going, look, I love some of these EA games.

26:27Caroline Hyde:Why are you doing this?

26:29Ed Ludlow:My son recently new to the whole EA experience. But I'm looking, though, at the market effect. We're up 4%. But remember, the market moved on Friday. That was the initial reporting came out. It's a nice, tasty premium. We'll see what private equity could do for the business. This is Bloomberg Tech.

26:55Caroline Hyde:Welcome back to Bloomberg Tech. Electronic Arts, or EA, the video game company, is going private in the largest leveraged buyout in history. We talked about the structure of the deal throughout the program, but we still have the question, why? This is a five-year chart of the stock, And apart from that spike on the far right-hand side, which was the trading, remember,$210 per share is the offer. We're at like$203 right now. It's a stock that's traded sideways for five years. And there were a lot of questions about whether executives of EA saw the writing on the wall or on their console screen or whatever, that there's some uncertainty for the future, Caro.

27:30Caroline Hyde:And I'm still trying to understand it.

27:32Ed Ludlow:Well, we've got a good voice to dig into it. For more on the EA deal, Jason Chapman, Convoy Managing Partner, joins us. Convoy is an investment firm. It's dedicated to video game and interactive entertainment industry. You understand better than anyone the disruption that's happened within this industry. Is going private the right tactic for EA? Thank you for having me on again, Caroline and Ed. And I absolutely do think it is the right thing for EA to go private. And here's why. Today, EA has represented kind of the digital home for many core tenant properties and games. Think of the sports division, which composed about 60 % of revenue.

28:08Ed Ludlow:You've got the SINs. You've also got Battlefield, which is about to launch. And a lot of speculation for EA has been that they continuously go back to the well of producing the same types of IPs. And they haven't come up with anything, quote unquote, new in a while. Going private will allow them to take a risk to develop some new IP and also be a powerhouse once again for generating new experiences for gamers. And so, therefore, as a gamer myself, I like the transaction. You're investing at the frontier of gaming and the next experiment. So, what is it that they can innovate on at the moment? What are the trends that you're seeing in your portfolio companies that can be adopted by the bigger studios?

28:48Ed Ludlow:Yeah, so one of the challenges for large studio-driven public entities is that the public market cycle is difficult for developing new IP. And so, you know, you saw the Activision Blizzard acquisition by Microsoft. You're seeing this again. Finding homes where these companies can actually innovate in private. Think of like what Rockstar is doing with Grand Theft Auto. That is difficult to do as a public entity. It just is unless you have a multitude of properties that can kind of play defense for you in the short term. And so what am I excited about? I'm excited to see what that infrastructure optimized, let's call it further refined, which I have full confidence, the PIF.

29:30Ed Ludlow:and their other partners will do here in this transaction to see what they can produce on the other end. And they produced Battlefield. I don't know if you all saw that test, but it was the 19th most successful CCU event on Steam.

29:45Caroline Hyde:And Ed, I'm banking on the employee this game. No, I've seen the test, and like all over Instagram Reels and TikTok is the early access experience. What you just said about PIF, though, this is the letter that Andrew Wilson sent employees, right? And in the limited amount of time I've spent with EA's leadership this year, they've talked about IP in the context of going outside of games. And this letter, he talks about sports and he talks about gaming and he talks about entertainment broadly. This is something that Saudi Arabia has been working on for a number of years. Do they just give EA a new domain to move into?

30:19Ed Ludlow:Absolutely. So, you know, roughly right now, about 2 % of the PIF's assets are in entertainment and sports. that's going to move to about 3.5 % at the conclusion of this transaction. They've seen massive success with Scopely. They acquired that for just under$5 billion. They've rapidly expanded and acquired Niantic for an additional$3.5 billion. They are now looking at EA as the mothership of their gaming strategy outside of mobile. I believe that you will continue to see Scopely dominate their mobile strategy. And EA will now probably dominate their console and PC and alternative strategies outside of mobile.

30:56Caroline Hyde:And so this is a formative move by the PIF, and I'm excited to see what they do with it. I'm keeping a team in New York on their toes, but like Battlefield 6 we're showing on the screen right now, Sims, Madden, EAFC, formerly known as FIFA. What are the future of those properties? Do they change somehow? People are spending less time on new titles and more time on existing titles.

31:22Ed Ludlow:That's going to continue to propagate here. And that's why I look at this transaction by the PIF as a very intelligent move. EA has dominated the digital homes that we're familiar with for years. And that's what people want. They want innovation on things they're slightly familiar with. Also, they will have the ability when going private to risk it and go for some new properties that will come to love, like a new battlefield. I'm excited to see them challenge Call of Duty with their Battle Royale. And so for all these reasons, I like the transaction. What about consolidation? Do they start picking away at companies that you invest in?

32:00Ed Ludlow:I think when you have a new buyer in the market, which the sovereign wealth funds appear to be, one, we're seeing this with the PIF mainly, but secondarily, we're seeing this with Tomasik, with their move into keyword studios. So absolutely, having a new buyer on the scene is a good thing for the industry. It is not a bad thing, and especially one that's willing to pay a premium. You know, typically when you look at private equity, you're not that excited, given that the multiples you may receive are not quite what you would hope for if you're going to go public. But sovereign wealth funds are here to play.

32:30Ed Ludlow:They're here to play well. And I think having another place of capital liquidity is only a good thing for startups and for those who are motivated to build companies.

32:39Caroline Hyde:I saw a twitch in your eyebrow there. Very quick. I think Kara's question is, it's a good opportunity for your portfolio companies to get acquired by a bigger beast. Because, like, EA goes for very technical acquisitions.

32:50Ed Ludlow:Yes, yes, absolutely. And I'm very excited about this. I think it's a good sign for what is to come. And there's many good companies in our portfolio that I think would love to work with EA

32:59Caroline Hyde:and many of the parties involved in this transaction. Jason Chapman of Convoy, really appreciate you coming on Bloomberg Tech. Thank you very much. Caroline, we're looking at shares of Comcast. So much news coming out today. Basically, it's a very simple story. They're down three-tenths of a percent. Basically, flat, the story, Michael Kavan has been promoted to co-CEO. joining Brian Roberts. I don't know much more to say beyond that. The landscape's interesting.

33:23Ed Ludlow:It's interesting because he used to be heading up M &A and another big bank and institution before he came on board to Comcast. So clearly, we are dealing there as they particularly sell off some of their assets. But coming up, we're getting into the world of crypto ed. Summer Merzinger, CEO of the Blockchain Association, can be joining us to discuss the group's new campaign to defend the stablecoin legislation. It was only passed in July. More on that, this is Bloomberg Tech.

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36:28Ed Ludlow:SoftBank and ARK Investment are among potential investors in a major funding round for Tether Holdings, according to sources. The funding could give the company behind the world's largest stablecoin a value as high as$500 billion. Let's get the details of Bloomberg Finance reporter Catherine Doherty. And why are we seeing such a gargantuan overall valuation for this company? What are they thinking? What is ARK and SoftBank backing here? So there's a few against the backdrop of a changing regulatory environment. I would say that is probably the number one force behind the decision that firms like SoftBank and ARK Investment are looking into.

37:06Ed Ludlow:When you have a firm like Tether that has been at the forefront of stablecoin and emerging technology in the crypto space, these firms in putting their money behind a private firm and the development that Tether is working on behind the scenes is really a signal to the rest of the industry of where things are potentially headed. It also sets up the stage for a really increasing environment of setting up major firms in what they're trying to do in expanding into other forms of payment and lending. So it's really all eyes on how big the valuation really does become. The numbers that we're reporting out at Bloomberg are on the higher end.

37:49Ed Ludlow:So it really remains to be seen whether or not they come in or are lower than expectations.

37:56Caroline Hyde:You know, there's this moment in time about whether this round is sort of unique to Tether and what it tells us about valuation in a moment more broadly. Then there's the strategy. How does this backing help Tether grow as an issue of stable coins? Give us the one, two and answer those, Catherine. Yes.

38:12Ed Ludlow:Well, on the second point that you're making, it really is about where they're going to put their money, where they go next. I mentioned lending, payments. These are all emerging technologies. And Tether has always been a firm that is at the forefront. And now that the regulatory environment is changing, where there is engagement with the industry and regulators, that is really where the industry is going to look to see what happens next. And in terms of the actual size, that is really the big question here on if they do get the higher end of the range, how will they put that money to work? And what does that mean for the rest of the sector?

38:51Ed Ludlow:Will there be other firms that are looking to raise money either privately or going out and potentially we've been seeing some big IPOs. IPOs. And that really sets the scene when you have a firm like Circle that is out there publicly having to report to their investors and disclose what kind of money and the investments that they're making. That really sets up a stage between Circle and Tether. You have a public company and a private company both working in the same industry and looking to compete in the stablecoin issuance space.

39:23Caroline Hyde:Bloomberg's Catherine Doherty, great to have you back on Bloomberg Tech appreciate it. Elsewhere in the world of stable coins are battles brewing between crypto supporters and traditional finance over the Genius Act. Let's get the perspective of Summer Merzinger, CEO of the Blockchain Association context. The Genius Act creates a regulatory structure for the issuance of stable coins, a form of crypto pegged to the dollar. And it was just signed into law in July. And I think you and I talked about it shortly thereafter. Absolutely. You know, like we've discussed the idea that David Sachs is out there like talking, this is dollarization, this is fantastic, but we're talking about now tension between a more modern industry and traditional finance.

40:00Caroline Hyde:How, for your association, is that tension being debated?

40:03Ed Ludlow:Well, we're coming out pretty strongly against some of the proposals that the traditional banks have in front of Congress now. They'd like to roll back a lot of what the Genius Act does. They have claimed that they want to close some loopholes that truly are not loopholes. They were at the table when we negotiated this bill. So any concerns that they have now are kind of a late to the game concern. At the end of the day, stablecoins have the opportunity to change how we move money in the globe. And we want to make sure that the regulations are such that we can continue to see that innovation thrive and grow.

40:43Ed Ludlow:If you can't beat them, join them is the saying. So is the idea that I've heard of just bank after bank considering launching their own stable coins. Why then fight the Genius Act, which would allow them to do that? Yeah, I mean, I believe they will start to issue their own stable coins. This is a competition question. Right now, a lot of the exchanges are able to offer a reward around 4 % for stable coins. Your traditional savings account is offering less than 1%, and they don't want to compete. So the idea is, let's try to stop the competition and really kind of create a regulatory moat around traditional finance and let them get out ahead.

41:25Ed Ludlow:The stablecoin issuers are already ahead of the banks, and I think that's probably the biggest concern they have right now. You're sending a letter to Congress. You're arguing against some of these actions taken by the big banks. Ultimately, when you're looking at the broader context of Tether out there raising funds,$15 to$20 billion, maybe giving it a valuation of$500 billion, do you think those sorts of numbers are reasonable as to the market opportunity right now? Yeah, absolutely. When you think about how money moves in the world, it's slow, it's inefficient, there's a lot of friction. Stablecoins take that out of the system.

42:01Ed Ludlow:It's an opportunity to, again, move money quickly and efficiently. And it's something that I think the financial services sector has been waiting for. So I'm not surprised by the valuations we're seeing for these companies. I think there's just a lot of opportunity in the stablecoin sector going forward.

42:20Caroline Hyde:Real quick, as a point of clarification, Tether Holdings is a member of your association, somebody that you are supporting?

42:28Ed Ludlow:Tether, no, they're not a member. They just, you know, we were just at their launch for Tether US. Certainly somebody that we would love to see in our membership circles in our membership. So we do have stable coin issuers in our membership.

42:41Caroline Hyde:The reason I ask, I want to go back to the Genius Act point, which is that the banks want one thing and you or association members want something different. You basically don't agree. That being said, what is it that the banks are wrong about? Just distill that, please.

42:54Ed Ludlow:Yeah, so they're calling this loophole where the exchanges are able to offer a reward for people putting money in stable coins. This is no different than a reward you would get if you're using a bank credit card. Right. They are claiming that that is a loophole around the yield prohibition in the bill. This is not a yield offer. This is a separate reward offered by the exchanges. This is not the stable coin issuers offering yield. Again, it's the exchanges offering a reward. It's very different. It is not a loophole. And again, if the banks want to compete, they're welcome to do so by offering similar rewards or similar interest rates on savings accounts.

43:34Ed Ludlow:What's interesting is Tether, of course, makes its money by allocating the money it holds and the U.S. Treasuries it holds and farming yield from those. All of this is about regulation. Yes. You come from the CFTC. At the moment, the CFTC has one person in it. We've yet to see a new leader installed. Is there an anxiety? Is the anxiety that some have about a void of regulatory overseeing of this very nascent industry group, is that right or wrong in your perspective right now? I think there's some concern that there's not permanent leadership at the CFTC. That probably you see that play out more with potential market structure legislation that the Capitol Hill is working on.

44:17Ed Ludlow:But at the end of the day, you see very strong leadership coming out of both the SEC and the CFTC. They're holding a roundtable together today. So it's certainly, you know, even though there's only one person at the CFTC, that's not stopping the agency from moving ahead, doing what is necessary to ensure that they are allowing innovation to thrive. So I think the concern, while it probably is something to think about with market structure because they do need long-term leadership at the CFTC, right now the CFTC and the SEC is doing everything they need to be doing to make sure that innovation is going to thrive in the U.S.

44:55Ed Ludlow:Caroline Flam, Republican Acting Chair, the sole member and the member of the CFTC. It is great to have you here, though. So, of course, we really appreciate Sumner there. Coming up, Modal Lab CEO Eric Bernhardsen is joining us to talk about the AI infrastructure company Series B funding round at a$1.1 billion post-money valuation. This is Bloomberg Tech.

45:28Caroline Hyde:startup modal lab says it provides ai infrastructure for ai native startups enabling the building and testing of ai applications it's just closed a new 80 million dollar series b funding round led by luxe capital modal lab ceo eric bernhardson joins us now Caroline and I have been discussing all morning kind of a bit like the Salesforce question. What does Modal do? But I think the understanding is it's more analogous to a together AI and maybe nearer to a NeoCloud. But just explain that basic question to us to start.

46:01Ed Ludlow:Yeah, totally. And it's great to be here, by the way. So we build the infrastructure layer of a lot of AI applications. So if you think about a lot of all these AI applications, people building things like generative media or large language models or things like Vibe coding platforms, They all need a software layer to run that. And so we basically provide that software layer by aggregating a lot of underlying physical infrastructure, a lot of GPUs all over the world, and then make it easy for engineers to build things. On top of that, build things, whether that's related to training or inference or batch processing or code execution or many other things.

46:35Ed Ludlow:So we have a lot of customers like Meta, Lovable, Suno, Ramp, and Scale, a lot of happy developers who basically build things using our SDK on top of this infrastructure platform.

46:46Caroline Hyde:So that sounds very much like AWS and AWS Lambda. Is that fair? Like, what's the landscape here?

46:55Ed Ludlow:There are some similarities. Like, AWS Lambda is built for more of a traditional infrastructure. And I think what we realized when we started this company was basically a lot of traditional infrastructure, you know, things like, you know, AWS Lambda or Kubernetes or Docker, just isn't built for AI. So we realized that in order to build this new layer of infrastructure, to support all these applications. We basically have to throw out a lot of the existing infrastructure and build a whole new stack. But we're very happy customers of AWS. We run on AWS. We run on many other hyperscalers. We have great partnerships with them.

47:25Ed Ludlow:I think what they're good at is running all the physical infrastructure, all the data centers. And then what we're very good at is innovating in the layer above with the developer experience and building this platform that enables engineers to build all these AI applications on top of it. So you've got$80 million more in funding. We've raised more than$80 million, and now that takes you to$111 million. What do you need all the money for? What are your absolute costs, Eric? What's keeping you up? Yeah, for sure. So far, we've actually been pretty capital efficient, but we see a lot of demand out there.

47:56Ed Ludlow:There's so many customers building these applications, starting to see a lot of adoption also in later stage companies. A lot of enterprise companies are now taking what's maybe previously researched prototypes and putting it into production. And they need a platform to run these applications, and that's when they come to you. We think this is a massive opportunity. The market is exploding. So much demand out there. So we're going to take this money and, you know, first and foremost, hire a lot of engineers to build, you know, because we need to invest in this platform. We're building a very deep platform, but also invest, of course, in sales and marketing.

48:27Ed Ludlow:How hard is it to find the right talent? How expensive is it? It's hard. It's hard. I mean, we're in New York, so I think we're actually a little bit sheltered from the very worst part of it. But yeah, it's very hard to find all these people solving these hard infrastructure problems.

48:43Caroline Hyde:Eric, we're going to bring back some video. We're just showing the platform. It still comes back to access to infrastructure, the GPUs, the underlying technology, right? Are you taking on the capital burden of that? Like who's actually paying for access to lease or buy out the capacity?

49:01Ed Ludlow:No, we're trying to be very capital efficient in the sense that we don't actually own any underlying physical infrastructure. Like I mentioned, we run on top of a lot of different clouds. We run on all the major hyperscalers. We're adding a bunch of neoclouds. And so our view is that in order to move fast, in order to expand very quickly, it's much better to build an existing physical infrastructure. And we focus more on the layer above, the software layer. And that enables us to move very quickly and expand very quickly in a more capital efficient way. Eric, you're going global. You've got a lot of love from the likes of Scale.ai, but lovable as well.

49:32Ed Ludlow:That's more an overseas play. How much are you able to broaden this? A lot more. And it's great to see customers like Lovable. I actually grew up in Sweden, and so Lovable is Swedish. But yeah, most of the customers are in the U.S., but we're seeing a lot of very wide different types of use cases, right? Like I mentioned, things like generative media or large language model applications. But some of the stuff we've also seen more recently is a lot of computational biotech. Literally, I talked to a customer the other day who was literally using modal to cure cancer. and then, you know, weather forecasting.

50:06Ed Ludlow:There's many other applications, so it's super exciting. All right, Ben Hudson, it's great to have you on the show. Thank you, CEO of Modal Labs on the latest funding round. Meanwhile, that does it for this edition of Bloomberg Tech right here in New York.

50:17Caroline Hyde:Yeah, it's taken us 56 minutes, but I am here in New York this week. I'm really happy to be here. Incredible amount of news. Recap this show. EA, that's a big moment. Podcast, you know where to find it. Online, on the Bloomberg platforms. Let's do it. From New York to today, this is Bloomberg Tech.

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