20VC: Are IPO Windows Shut? Has Regulation Killed the M&A Market? M&A OG Frank Quattrone on Lessons from 650 M&A Deals Worth Over $1TRN and Taking Amazon, Cisco and Netscape Public

27:06They were right next to each other. And I think first it was Bill, and he's so energetic and visionary, and he tells such a great story that I'm looking, and I'm interviewing him, right, like you're gonna read me, and I'm looking out of the corner of my eye, and I see Ryan in the front seat, and I see him starting to lean in, and as I start to light up, because he thought SAP, big company, Germany, I should have used for that. And the way he saw Bill bring SAP to life and show off his, his culture and his personality, I saw Ryan, Ryan leaning in. And then very next speaker was Ryan and Ryan's also of course brilliant and he can tell a great story too.

27:42And the way he started to explain experience management and how it was going to just basically change how any corporation gather sentiment about its employees and customers and how that that factors in to daily decisions on who to pay more attention to and how to save customers, how to save employees from leaving. All of a sudden you could see and I had a corner out of the corner of my eye saw Bill and he was leaning in and his eyes were lighting up and I said, okay, this is pretty interesting. So I had to take a break before the third speaker and I was looking around and I couldn't find Bill or Ryan.

28:17And suddenly I get a text from Ryan and he says, we've just gone to the coffee shop a few yards away. I said, well, you want me to come down there?" He said, yeah, I wanted you to come down. So I see Bill and Ryan, and they're at this little coffee shop at Spanish Bay, and they look like two teenagers who know what they want, but they don't have the words to consummate the deal, if you know what I mean. And so there was still a gap in what they were looking for. And I basically went up to them and I said, you know, Bill, I know you're interested in Ryan's company. Why don't you tell him the three reasons why you want him to join forces with you and tell him what you need from him in order to bring you guys together and get across the finishing line.

28:57I said, Ryan, I know you're interested in Bill and SAP. Why don't you tell him the three reasons why you would be excited to join forces with him and what you need from Bill. Now I'm going to go away for an hour and then I'm going to come back and you guys better have this deal finalized. So I come back and But there's all of a sudden they're smiling and happy and joking. And I said, what did you guys do? And they hand me this cocktail napkin. And they have the price, they have the retention, they have a few key terms written on a cocktail napkin. Now I had heard stories for 30 years about deals being written down on a cocktail napkin, but I had never had one happen to me.

29:35And so there it was. But that was an example of having to try to develop demand for a company that didn't have it because too few people knew what they were all about and why they were strategic. Maybe I don't know 70 % 75 % of the time we react to a client who said we've just gotten an offer from so and so we think others may be interested we'd like you to run a process. Those are a little easier they take a little less time. Which deal way you've had to create you've got a buyer and you're trying to get lots more in? Essentially my question is what was the most competitive deal you have a what on and how did you drive the price?

30:12Yeah, all right. Well, all these details have become public and so with LinkedIn, we had interest from several parties, but it really kind of came down to Microsoft and Salesforce. And I've never seen companies bid privately and come up with such close prices on every stage. It was like 150, 151, 162, 163. It was very, very close. And Microsoft of course had all cash. And Salesforce had a combination of cash, stock, and Salesforce had to borrow a lot of money to get to the same aggregate price. And so it finally got to the point where we couldn't keep doing this. And again, George said, best and final, whoever comes up with the best price on the next ground, we're going to go exclusive with towards definitive agreement.

31:02And so very, very close, but the board decided to go with Microsoft. Like, we won't tell everybody everything that they want to hear as a buyer, but we won't be disingenuous with them, right? So when we say best and final, it's best and final. So in that case, the board chose Microsoft, it was best and final, and they went down to the definitive agreement. So they went into like a 30 -day ex -loosivity to try to get to definitive agreement. And during that period Salesforce lobbed in several offers that were higher. That meant that towards the end of that period we had to inform Microsoft, hey, your deal is no longer the best deal.

31:40If you want to end up with this, you're going to have to improve your offer. And so they got to the point where they had a deal that the board preferred over Salesforce towards the end of that definitive agreement. And by that point, Microsoft had done the due diligence, we had a definitive agreement that the board had approved. And there was a currency all cash that Microsoft, you know, it was greater certainty. At the end of the day, LinkedIn got an outstanding deal and they ended up going with the party that they wanted. Frank, what percent of deals die in the process of M &A and what are the most common reason or two reasons why they die?

32:17Honestly, the answer is probably a lot higher than people think, but 90 % of deals probably die when things get started. It's hard to get a deal done. A lot of times it's really valuation. Sellers have a very, very high view of themselves and are very optimistic about the future. Buyers are worried about precedent because if they pay 50 times revenues for a company, all of a sudden that will become the floor instead of the ceiling. But companies will say, but if I wait two years, I can go public at a lot more than 50 times the current revenues. And so mostly it's valuation, but sometimes it's cultural fit to companies get to the point where they think it's going on paper and strategically.

32:57It fits like a glove, but they just can't stand each other. And one that I have in mind is where the deal is literally on the goal line. And a CEO asked the seller, how long do you think you're going to have to stick around for this integration to work? And the seller said I think probably at least two years. And the buyer said thanks very much for telling me that there's no way this deal is going to happen. And that would have been maybe one of the large steels in the history of the industry. It's really mostly valuation and cultural fit that present the barriers. I spoke to one of the biggest buyers the other day and they said Harry, the reason why we're not buying now is because it takes so long for acquisitions to go through that by the time it completes, the original deal is so different to what it was.

33:45You know, it wasn't Figma or an Adobe, but you know, the Adobe Figma deal ended up being a $30 billion deal for Figma by the time it would have converted. It's a very different number than 18 billion. Some sellers also have the opposite of that, where they agree to a price when the buyer's stock is at an all -time high, and then there's a valuation correction and all of a sudden it's worth maybe 40 % of what it was worth at the time of signing and then it creates some very very tough dynamics. So yes, one of the biggest challenges now is how do you deal with an uncertain regulatory environment and before it was almost unheard of for deals to take more than six, nine months.

34:25Now it's 12 months, now it's 18 months, and now sometimes it's 24 months. To predict what's going to happen in a pure seller, thinking, well, I'm really going to be bound by some covenants for a really long period of time. If you think it's going to take two years to get a deal closed, what are you willing to give up about the stewardship of your company for almost two years? If the deal doesn't happen, where are you going to be? There was a deal early in the career of Georgia myself. We almost had them to it sold to Microsoft. It would have been a great deal for both sides Into it with their checkbook software had beaten Microsoft in a category for almost the first time and so and very few people It heard of into it at the time and Microsoft kind of they admitted defeat in this category And they had to sell off their own product in order for the deal to happen that deal was under intense regulatory scrutiny that was right around the time that Microsoft was being investigated for broader antitrust issues.

35:23And so they reached the conclusion that the deal wasn't going to happen. And you'd think, oh, poor into it, they've just been dragged through the the ringer here and what's going to happen to them. Absolutely. It was the best thing that ever happened to them because the fact that Microsoft endorsed their product and everyone now knew that they were the chosen ones, it just enabled them to take off. So, but yes, mostly the regulatory environment is a much more challenging one and to have to think through what constraints you're willing to put on your business to be willing to endure that kind of regulatory period is very, very challenging.

35:56And the buyer, most of the times buyers paying cash, and then the seller also has to realize, well, okay, if it's going to be 18 months and I'm accepting a fixed price in 18 or 24 months, is my own stock going to be much higher than that? Is it going to be much lower than that? Where evaluation multiple is going to go? You know, a lot of boards are going to are saying like, look, But if valuations are 50 times EBITDA, I want a little cash in that deal because if we're going to be in regulatory limbo for 18 to 24 months, that downside protection can really help us in that environment. Frank, how do you feel buying boards feel today?

36:30Do they feel, hey, there's a great amount of assets that we can buy cheaply? Or do they feel markets are bad, cash is tight, let's be conservative and not add? If you compare this market to 2021, there are a lot more bargains. I mean, a lot of the indices that come back too close to their old time highs, but it's been concentrated and now it's the magnificent 7 because Invidia is part of that. And Tesla and a lot of the comeback has been in those stocks, but if you look at the average cloud software play, which is where a lot of the activities happen in M &A, we're kind of back to that 68 times revenue area that it's traded at for most of its existence.

37:08And so there are relative bargains, but the financing environments harder, the regulatory environment is harder. Strategic are now more focused on buying private companies. A lot of the activity and buying public companies are private equity. A substantial percentage of the public deals have been private equity. I've seen numbers like 60, 70, 80, maybe even 90 % in recent years of public companies been bought by private equity firms. and I think with strategic say they have to recognize that sometimes it's better to buy a private company before it gets public and has a big aftermarket premium.

37:45Even if you're paying a higher multiple when it's private, you're paying a lower price. I don't think that buyers view this as either a bargain phase or a crazy phase like 2021. I think that we're in a phase where things are coming back in M &A. We've had two consecutive down years, but for the last six months, our business started picking up. So I think that when interest rates are stabilizing, and it looks like it's now only a question of when we'll start to see a more favorable interest rate environment, that the hardest part is when we're on this rise in interest rates from zero to five percent.

38:22No one knows when it's going to stop. That's when things freeze. Now, it looks like things are stable. And when visibility starts to improve, both in the buyers' businesses and the sellers' businesses and the financial markets start stabilizing. So I think ashy race will stay high for a prolonged period of time with a huge amount of underlying inflationary pressures that people don't often think about, if they do stay high, does M &A and do we still stay frozen or does sentiment just become familiar with a new environment and progress is normal? Yes. By the way, I agree with you. I think there's a lot of optimistic people that believe that rate cuts are going to happen much earlier.

39:01And I think the central banks were fooled, especially the US Fed, and they came out with this temporary inflation business, and it was shaming on them, and they're not going to let something like that happen again. And by the way, 5%, like we had 5 % treasuries right before the credit crisis, we had 7 % in 1999. These are not unusually high rates for someone who started his career when treasures were 16%. So 5 % is pretty still attractive. But I think you hit the nail on the head when you said, what really is a period of stability? When either valuations are coming down rapidly, going up rapidly, when interest rates are going up rapidly and valuations are coming down because the markets are just racked with this new environment where there's actually a cost of capital, that's when things freeze up.

39:45We've now, I think, had several quarters where things look like they're stabilizing. Of course, we have the US election coming up. That's another unknown. You know, no one really knows who the candidates are going to be, even though they appear almost certain to be Trump and Biden. But that could create a little bit of a crazy time later in this year, things get volatile. Trump wins. How does that impact M &A environments? Honestly, I don't think it's going to impact it much because, as we talked about earlier, Trump is not a classic free markets Republican. He's a populist. He has personal vendettas.

40:20He doesn't like big tech Because he views them as all You know run by a bunch of liberal people who hate Trump So I don't think we're gonna see much of a difference in the any trust environment if some of his economic policies Result in some of the economic growth and stock market conditions that we saw in the first few years before COVID I mean, you think about it. Trump's policies had the economy in a pretty good place. It was only really a pandemic that could have cost him probably to lose the second election. So if he comes back, I think it might be viewed positively for economic conditions, but I don't think any trust will change very much at all.

41:03Final one, Frank, is it easier to sell to P or to other strategics? It really depends on the situation. I mean, private equity buyers, are not looking for the highest growth names. And so they're looking for moderate growth. They used to be looking for very low growth, and just to turn around, then they started looking at moderate growth. And I think that the insight that they have was that tech companies pay an awful lot of marketing and sales money for the last few points of growth. So if we could subtract a lot of that S -GNA and maybe lose a point or two of growth but convert margins from 10 % to 40 % or 50 % will create a much more valuable company.

41:48And it was rare that they would pay 10 times EBITDA for a company. It was more like 5 or 6 times EBITDA. And now they're getting much more imaginative about the prices that they're rolling to pay. But they won't pay 20 times revenue or 30 times revenue or 40 times revenue like a strategic well. If there is a deal among PEs, there are normally three or five PE firms that all look at it and say, yeah, I want that. And it's just kind of a question of price. In many strategic situations, there might only be one buyer. And your job is to make sure that you can do a one -off negotiation with that buyer if there's not other buyer interest.

42:24And it's more rare, but not uncommon for there to be multiple buyers. I'd love to move into a quickfire where I peppy with questions and then we're all with that and 60 seconds per answer does that sound okay? I'll do my best when an M &A process happens and the deal gets done and it's all cash Does the money come in one go like does the founder just get like two hundred million dollars in their account? Is that how it works? Most all cash deals have a single closing and and all the money gets transferred on that day. Now, there's also other ways that founders can benefit. They often get tension, they get new stock options, and the like, sometimes, you know, there's a mix of stock and the deal, and founders get stock that may be locked up for a while.

43:12But most cash deals, yes, the money crosses the wire at the very beginning. Frank, hardest time in Catalyst Journey, the moment you thought, oh my God, the world is caving in. Being involved in the credit crisis. Yeah, I mean we started our firm and it was two days after Bear Stearns was sold in a forced sale for two dollars a share to JP Morgan Bear Stearns had been trading at 150 bucks a share a year earlier and then leaving when bankrupt six months into our Launch and deals just basically dried up and then Morgan Stanley and Goldman Sachs came this close like I'm holding my Ancient my finger and inch apart from going bankrupt and Paulson had to save gold because that's where he was from and he couldn't save a goldman without saving Morgan, but deals really dried up during that time.

43:56The beginning days of Catalyst, we found it a little bit hard to attract bankers from big public bullish bracket firms, but I remember one of my former colleagues from Credit Suisse who had run a sector for us had gone to Lehman. He was running all their technology practice, so when he started Catalyst, I asked him to come back and be one of our first partners. He said, all that would be really exciting. Get the old gang back together and be really fun to work with you again, Frank. like, let me just check in with my wife and this must have been like April of 2008. At that point, he had all his net worth tied up in Lehman's stock and he came back to me and said, I'm sorry, sorry, Frank, you know, we've got kids, we've got tuition bills.

44:33My wife just doesn't think it's time for us to take a risk with an unproven company. And so he didn't join catalyst, which you know, it would have been a pretty good deal for him to do that. Just three, four months later, Lehman went bankrupt and he lost all his net worth. That was a crazy time, because as I said before, that was a bargain basement hunting time for the big corporations who had a lot of cash, but no one could pull the trigger. And by the way, that first year, I didn't know if we could make payroll until our very first deal closed literally on December 25th. We got our first piece that we were able to make payroll.

45:08Frank, what makes Bill Gurbys such a good investor in your mind? Oh, he is brilliant. He's hardheaded, hard -nosed. He's visionary. I mean, I loved meeting Bill for the first time. He was still a research analyst for First Boston at the time, and he had a newsletter called Above the Crowd, which is so funny because he's six feet nine. He can see above any crowd literally, but he was thinking about things in the future, and not just writing about, you know, earnings and business models. Like, he was the closest thing to a visionary that I had seen in a research analyst. And we, we left Morgan Stanley and I thought for sure Mary Meeker who I had recruited more in Stanley as our PC software and hardware analyst and ultimately became our Internet analyst when we did deals for AOL and Netscape.

45:55I thought for sure she was gonna follow us and she didn't I had a recruit an Internet analyst I asked Roger Matt to me who was a very very smart investor who's the best Internet analyst and he said oh Bill girly you got to go after Bill girly so we came he came to Deutsche Bank and the two of us worked together on the Amazon IPO and he had written a report where he referred to some internet companies as wave riders. Back then a lot of people were focused on digital media companies but Bill was more focused on not picking the winner in any digital media or other internet category but who were building the foundation of the internet that could be the enablers and ride the wave no matter who was the ultimate winner on the top and when he showed that report to Amazon they really got it because that's what Amazon was.

46:42It was building an e -commerce platform, and it didn't matter what category of product. They only had books at the time, but that was a wave rider. And Amazon saw that bill was brilliant and influential and could be really helpful to them in bringing their story to investors. And it was that long -term vision of his that translated so well into his becoming a venture capitalist. He got along really well with entrepreneurs, and even the tough ones who were hard headed and stubborn because he can be that way as well. I knew he'd be successful venture capitalist but he just really over achieved anyone's expectations and really not to cover off the ball.

47:21So one of my favorite moments with Bill is when we had to price the Amazon IPO, it was again during a kind of a tough period in the internet. It wasn't frothy at all. When we took Jeff Bezos out on the road, the first thing that happened was that Barnes and Noble stewed him for false advertising because Amazon flogin at the time. You may remember, was Earth's largest bookstore. And Barnes and Noble had no sense of humor about that. And so they sued him. And so it was like this, ah, the big bookstores suing Amazon, it created a little bit of a conflict, but Jeff is so charming. And he had investors eating out of their hands.

47:57He's one of these guys that combines brilliance with humility and charm. And when he left, it's so hard not to laugh even louder, which makes him laugh louder and you laugh louder and everybody's having a good time, right? So we took him on the road and the book of interest was building rapidly. We were selling, we were trying to sell three Three million shares of Amazon at 12 to 14. Jeff did such a good job on the road that we said, hey Jeff towards the end We said the book is is really building. We have good news. We're gonna raise the range from 12 to 14 to 14 to 16 dollars to share and So he said great.

48:30Let's keep going. So we did Boston. We did New York again book is building like crazy and we say, Jeff really good news. You know that new 14 to 16 range we're going to be able to price it at the high end of the range. So this is the pricing call which usually lasts 10 minutes. The underwriter says here's the price. Yes, here's how we're going to allocate the shares. Great job. Okay, we agree. Done. So we had just delivered him this good news and he says 16, huh? Well, what about 17 and we say, well Jeff 17 would be a little risky. Now might be price too high and your initial investors might not like it too much.

49:05You're going to have to come back to the markets and raise more money. You want to leave a good taste in the mouse. You really have to focus on, you know, how the socks want to trade. And he said, Frank, would you guarantee me that if we price it at 17, it would be a colossal failure. And I've never heard that question before. Jeff, no, you know, we don't, we're not in the business of guaranteeing colossal failures. But, you know, we think it's risky. And he said, well, what about 18? And we went through another like round of this. This is like hour two of the pricing negotiation. And even John Doerr, who was a Jeff's lead venture capitalist, is always arguing for more for the entrepreneur, was trying to put the brakes on him, right?

49:42And so he asked me the same question. He said, Frank, 18, can you guarantee it's going to be a colossal failure at 18? I said, Jeff, I know, again, I can't guarantee a colossal failure. But there is a chance that at 18, this will trade below the offering price. And so if I were you, I wouldn't go there. because you don't want your stock trading down in the first few days of its IPO. And he says, Frank, the difference between $18 a share and $16 a share for Amazon. Those $2 times the $3 million shares, that's $6 million. That's a lot of money for Amazon .com. We could use that money to buy billboard ads that could drive a lot more people to our website.

50:22He says, I don't care what the stock does in the first two weeks or day or month. But if people buy Amazon at 18 they're gonna make a lot of money over the next 10 years So that was one of the very few discussions where we said, okay Jeff 18 it is and so we priced at an 18 on the first day it pops up during the day to 23 and pops right back down to 18 and you could have bought all the Amazon you wanted at 18 for about the first month until they Announced earnings and then it was off to the races by the way that 18 after all of the stock splits since then is seven and a half cents versus the $170 Amazon is trading today.

51:00So 2200 times the IPO price. Bill, by the way, as our analyst was not too pleased that we priced it at 18 versus 60. And shortly thereafter, he left to become a venture capitalist. Now, I don't think it was causation. But I always ask Bill, hey, Bill, what do you think about Amazon? Do you think we should price of an 18 after all. So we have a lot of check -als about that. Final one, which is when you look at M &A markets today, where do you think they and where do you think catalyst will be in 10 years time? Actually, fuck M &A markets. Let's just put our catalyst. Where do you want catalyst to be in 10 years time?

51:40We are going to try to continue to understand what are the themes that are driving change. So if you keep looking at the world the way you did 5 or 10 years ago, you're going to fall behind. Our first lesson in that was cloud and mobile, where we didn't do some of the first cloud software M and A deals, but we did the next three that were the most important. And all of a sudden, now we're the banker of choice and cloud, same way with mobile, when we did motor mobility. And now it's like, you have to recognize which trends are fake trends and which trends are real trends. Because it's a small firm like catalyst, and we have less than 100 people.

52:15I don't think we're ever going to be a lot larger than that. And so you have to organize the world in a way that makes sense. And so now we're grappling with artificial intelligence. Now, some people might think artificial intelligence that's really new. Artificial intelligence was coined as a phrase the year I was born, 1955. And there were some work done before that, eight, ten years before that, that you could have called artificial intelligence. But artificial intelligence needed its killer app. And it didn't have one for 50 years or 60 years. All of a sudden we have generative AI. That was what opened up my eyes.

52:49And a lot of times you don't have a killer app. And then you have a killer app and you have a product leader. And sometimes that product leader is becomes a leader and sometimes it never gets there. But when I saw chat GPT, to me it was the same reaction I had when I saw Google search versus the initial search engines. And all the sudden it changes the world. Google had built this entire business on paid search being the model where people find out things. If now with chat GPT you can ask in English questions and pay a subscription to that, what's going to happen to paid search? And so what I've been trying to do with our guys is to say, okay, here's where all the other technology breakthroughs just changed the world and all of a sudden we had a new group of leadership.

53:33When PCs came, it was no longer IBM, it was Intel and Microsoft and the industry fragmented. When Cloud came, it was no longer Oracle and SAP. It was Salesforce and Workday and the world changed. When mobile came along, it was no longer Intel and Microsoft supplying the components. It was Qualcomm and it was Apple and ARM. And so now we've got artificial intelligence and you've got Nvidia. And now artificial intelligence is not just going to be the basis of new products that are all artificial intelligence but it's going to be present and change every industry, the way the internet changed every industry.

54:12And so what we have to keep doing is to say, what's changing? If we can focus on the five or six things that are changing in technology products, in technology delivery, in business model, and go in the market, and be the first firm that advises on an important deal in that sector, that will make me happy. Will we add new areas? I don't know, will we add biotech? Well, George Bucharest says maybe with the next CEO wide biotech. Will we add financial services? I mean, we do fintech and payments and things like that. But I don't know if we continue to focus on what's changing to help our clients see around corners, see who the new leaders are going to be and state to where the puck is going to be, then I think we're going to do just fine.

54:55Frank, I had so many great things. I imagine Eric. I mentioned Bill Frank, Peter on your team, Jonathan. This has been such a joy to do. I love this. So thank you so much for joining me today. You're welcome. It's my pleasure and thank you. It was a fun experience for me and looking forward to seeing how it turns out. I mean, what a show that was with Frank. I'm a historian, but hearing the pricing of that Amazon IPO just an epic. I also didn't know the origin story of the Qualtrics SAP acquisition. So that was awesome to hear. If you want to see more of the show, you can check it out on YouTube by searching for to zero VC, that's to zero VC on YouTube.

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