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

1. 0:00 – 0:56

   Intro

   1. HSHarry Stebbings0:00

      You're the OG of M&A. (laughs) Has regulation killed M&A?

   2. FQFrank Quattrone0:04

      I don't think it's killed it. It's more of a granular filter. What you need are great companies to come public, and you need them to be willing to come public at reasonable prices. 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. When interest rates are stabilizing, I think we're gonna be on a cusp of M&A activity increasing.

   3. HSHarry Stebbings0:28

      Has the way in which you do deals changed?

   4. FQFrank Quattrone0:30

      You know, I really don't think so. But the hardest part was-

   5. HSHarry Stebbings0:36

      Frank, I am so excited for this. When I was thinking of this topic, there was no one that I would rather have do this. And there's so many mutual friends that I've heard so many good things about. So thank you so much for joining me today.

   6. FQFrank Quattrone0:46

      It's a great pleasure. I've heard wonderful things about your podcast, and I'm really looking forward to our conversation, Harry.

   7. HSHarry Stebbings0:51

      Well, I pay a lot of money for such good reviews, but I do want to start way back.

   8. FQFrank Quattrone0:55

      (laughs)

2. 0:56 – 10:37

   Meeting Steve Jobs

   1. FQFrank Quattrone0:56

   2. HSHarry Stebbings0:56

      Because I heard that meeting Steve Jobs at a Stanford investment class was the inspiration for your career in investment banking. Can you just take me to that and what that was?

   3. FQFrank Quattrone1:07

      I'll go back just a little bit in time before that, but, um, yeah, I was, uh, I- I'm from a blue-collar neighborhood of Philadelphia, South Philly. My dad worked in a clothing factory, and I was very fortunate to get a scholarship to attend the University of Pennsylvania's Wharton School. And after Wharton, I joined a privately held company that I'd never heard of before called Morgan Stanley in New York. They had a two-year program for people like me who wanted to work for two years, and then they kicked us out, and you had to get an MBA if you, um, if you wanted to continue with the firm. So, uh, when I was in New York, I mean, I- I enjoyed the work, but I didn't really find any passion. So I get to Stanford, and, uh, luckily I, um, got a job as a teaching assistant to Jack McDonald, who is literally the most revered, um, professor there. People would basically use up all of their points to try to get into his class. So I took his, uh... Well, the first thing was, he said, "Frank, um, he- welcome to Stanford." This is 1979. Um, "Your first job is, I want you to go down to this little privately held computer company in Cupertino called Apple. You've probably never heard of it. Uh, they make personal computers." I hadn't heard of what those were. Uh, and he said, "I- I've just bought an Apple II. Could you go down to, uh, to Apple, pick it up, bring it back here to Stanford, and I want you to transport the software program that does investment analysis that's currently working on the minicomputer in our labs to work on this new personal computer?" I said, "Okay." I had done a little bit of computer programming work at Stampf- at, uh, Wharton. And, um, so I- I went down there, and I saw this group of young people. I didn't see any offices. I saw a lot of jeans and beards and, you know, uh, it didn't look like a traditional company, but you could feel the energy. And I was like... I grabbed the computer. I brought it back. When I opened up the box, it had a tiny manila, or a- a very large manila-colored, uh, keyboard in which the single circuit board of the computer's intelligence was embedded. And it had a tiny little terminal, and when you turned it on, it was a green screen with a C prompt, uh, just like a minicomputer, uh, or a mainframe. And so... And then, it had a user's manual. That's it. It had three pieces, the keyboard, the terminal, and the user manual. There were no, um, applications available for it yet, although some were on the horizon. So if you wanted this hunk of iron to do something useful, you actually had to program it. So I had to learn, uh, micro- uh, BASIC for the microcomputer. Um, and I did the port, and it turned out successfully, and I figured, "Ah, it's just a small minicomputer, no big deal." So roll the clock forward a year later, I'm in the same professor's class, Investments, uh, with Jack McDonald, and right around that time, Apple had filed for its initial public offering, but it hadn't yet priced it. And so Jack gave us the job, our classroom, of pricing Apple's IPO before the underwriters did. And as an added inducement, he brought in the 25-year-old Steve Jobs into our classroom. I was 25. I thought I was kind of a hotshot, you know, after all, Wharton and- uh, undergrad and Morgan Stanley, you know, two years on Wall Street, and now I'm about to get my Stanford MBA. And then I meet another 25-year-old guy who really has a tiger by the tail. And, uh, he tells us the story of how he and his partner Wozniak had come up with the idea for a single board computer that could be on everybody's desktop and everybody's- in everybody's home, and how they had no idea how to do a business around it. But they tried to take it to Hewlett-Packard, to Digital Equipment, to Tektronics. No one was interested. So he told us that day he finally had to sell his Volkswagen van for $800 for working capital to get Apple Computer started. And, um, then the really interesting part happened. He said, "Personal computers are not just going to revolutionize the computing industry, but how we communicate, how we shop, how we entertain ourselves, and how we live." And I said, "Wow, I don't know what that guy is smoking, but I really want some of it." (laughs) And the, uh, the even more interesting part is that Morgan Stanley, the blue-chip firm that I had worked on, on- worked at at Wall Street, um, who was the banker to AT&T and General Motors and General Electric, uh, they had never really done a high-tech IPO before, but they were the lead manager of Apple's IPO. They had also just opened up a San Francisco office. And, you know, one of the great things my dear old dad, uh, God rest his soul, told me, uh, because he had failed to follow this advice, he said, "Son, if you ever get a chance to get in on the ground floor of something new, uh, you should really jump at it." And so, uh, the Morgan Stanley people were trying to recruit me back to New York.... to work in the M&A department, ironically, since that's, we'll, all we do at Catalyst. But I didn't really want to do that. And I had had my eyes opened and, uh, the scales fell out of my eyes, and I had seen the future, and it was Silicon Valley and, and Apple and companies like that, and venture capital and all the things that were surrounding this risk-taking, uh, phenomenon. And I told them, "No, no, no, I, I thank you. I'd love to rejoin you, but I, what I really want to do is go into your new San Francisco office," which I believe had zero revenues that year, "and work with these cool companies like Apple, taking them public." I think that's the future. That... I really identify with that, like, giving birth instead of going end of life with mergers. You know, that's kind of...

   4. HSHarry Stebbings6:51

      (laughs)

   5. FQFrank Quattrone6:53

      I was, uh, (laughs) a little philosophical back then. And so, um, so they said, essentially, "Frank, that's the stupidest fucking idea I've ever heard a human being utter." And, (laughs) -

   6. HSHarry Stebbings7:04

      (laughs)

   7. FQFrank Quattrone7:04

      ... and, uh, th- that would be essentially career suicide for you. You'd be 3,000 miles away from headquarters. You'd be out of sight, out of buy, doing tiny little deals for tiny little companies that nobody here cares about." And I said, "Yeah, but that's really what I want to do." (laughs) And they said, "Well, you know, if you really want to do that, um, I guess we could put you out there for a year or two, see if it works, and, uh, you're not gonna really... We're not gonna be able to pay you as much as the people who work in New York, and you might not get promoted as fast. Uh, but if that's really what you want to do, I guess we'll, we'll do that for you." And, um, so I became the first full-time employee of the tech practice in Morgan Stanley's San Francisco office, because it was really run out of New York, like everything else there at the time. But over time, um, over the next 10 years, I, um, uh, started to develop some good relationships with the firm, and ultimately, I was put in charge of the technology practice, and we took it together with a few others from, um, the smallest industry group at the firm, obviously, it was a startup, right? Um, to the largest industry group at the firm in, um, in 15 years. And so, yeah, by 1995, uh, the tech group was adding 20 to 40 new clients to Morgan Stanley every year through initial public offerings and doing the second offering for a company that had been taken public by, like, Hamrick & Quist or Roberts & Stevens, like Adobe. We did Ado- Adobe's second deal. We did AOL's second deal. Uh, and then through other products like convertible financings and, and M&A. And our pitch to, uh, tech companies back then was, "We know just as much, um, about the industry as these little small boutiques, but we can do a lot more for you than take you public." It's, it's a boutique within a full-service firm. And that kind of, um, uh, became the nucleus of our operation. And we were welcomed into the industry by venture capitalists because, you know... And back in 1980, most of the IPOs were very small. They were for, they were five, 10, $15 million offerings for companies that had, you know, less than 100 million, uh, of market cap. And that, that really didn't get the attention of Wall Street. It, it was companies like Hamrick & Quist, Roberts & Stephens, Alex Brown, Montgomery Securities, uh, the so-called Four Horsemen, and another, another firm that you've probably never heard of called Eleff Rothschild Unterebert Toebin, which is a real mouthful. Uh, but those were the firms that did most of, like, they took Intel public, and Tandem, and all the great companies that, you know, came public in the '70s and the early '80s. And the venture guys really wanted a big firm like Morgan Stanley, who was known as the banker of the triple-A-rated legitimate, you know, uh, star, um, you know large corporations, to put their, you know, halo of blessing on this new upstart industry called technology. And so, we chose, at the time, and this was a strategy of the head of, uh, emerging growth research at Morgan Stanley, to not be the volume leader. We didn't want to take 100 companies public when you could do so. We wanted to take the top 10% of the graduating class public and be known as the firm who took, um, the highest quality firms public. And, um, and so, um, uh, that's what we did. And pretty soon, there was a demand pull for our services, and everybody wanted Morgan Stanley to take them public. And the job got a lot

3. 10:37 – 17:48

   Dot-com Bubble & Technology Pervasiveness

   1. FQFrank Quattrone10:37

      easier.

   2. HSHarry Stebbings10:37

      When you look at where we are now... I'm too fascinated. Did it take longer than you thought it would for technology to be as pervasive as it is? Did it take shorter than you thought it would? Is it as expected?

   3. FQFrank Quattrone10:48

      It took longer. I was like the weatherman predicting rain for the first 5 or 10 years, but then the rain really started to happen then. Uh, um, so my first year back at Morgan Stanley, but in San Francisco, was 1981. And back then, um, the Dow was at 700, interest rates were at 16%, and, um, there were very, very few technology companies with more than a few hundred million in market cap.

   4. HSHarry Stebbings11:11

      Frank, can I ask you? I was four or five in the dot-com bubble. Um-

   5. FQFrank Quattrone11:16

      (laughs)

   6. HSHarry Stebbings11:16

      ... sorry, uh, sorry, I didn't mean to age you. But, um, what was it like? Because I read, and I'm a historian and student of this business, but what did it actually feel like being in it and being so in it like you were?

   7. FQFrank Quattrone11:28

      Well, you know, it's interesting because a lot of investors kind of missed out on PCs and PC software. They thought Microsoft was too expensive because it was at 25 times earnings. (laughs) And, um, uh, a bunch of them had bought Apple, but, you know, they, they really weren't too sure about this PC industry because the big computer companies were calling it toys. And, uh, everybody figured IBM would als- ultimately win this game. These startups didn't have a chance. And they all really got burned by not being part of Microsoft. Literally, all the way up to $10 billion, everybody thought it was way too expensive. And so, when Netscape came along, they thought this was the next platform, the internet was the next platform, and no one wanted to miss it. It was the most serious case of FOMO that you have ever seen in your life. And, um, and there were a couple of phases to this. You know, Netscape, Netscape came public in 1995.... and it was literally the most popular IPO at Morgan Stanley since Apple in 1980. And when we took Netscape public, the Morgan Stanley, uh, telecom system almost got broken. They had to add a new PBX to handle all the incoming calls of all the people (laughs) that wanted to buy Netscape. And it was at the point where, you know, if you got in a taxi in New York, uh, the, the taxi driver was asking, you know, "How can I get a hold of Nets- Netscape?" And they're all starting to talk about the internet. But then the internet went through kind of a swoon, and it became out of favor. By that time, I had moved from Morgan Stanley to Deutsche Bank, and one of the very first companies that kinda came out of that, it, it was a tough time for internet stocks in, uh, in '97, but, you know, at, at Deutsche Bank, we were fortunate enough to lead Amazon's IPO, and, you know, there were a lot of already kind of sick bodies, maybe not too many dead bodies in the internet, but, but Bezos kind of brought it back, and, um, 1998 was when it really started taking off, when some companies that you'd never heard of, with very little in the way of revenues, maybe sometimes no revenues, um, you know, were testing the waters. And the demand for these offerings, no matter, almost no matter what they did, was so insatiable that they would, they'd pop on the first day 100%, 200%, 500%. Now before that time, if a, if you had, a successful IPO is defined as, as one that didn't go down, might have gone up maybe 10, 15, 20%, but the underwriter was viewed as irresponsible if they left 30 or 40 or 50% on the table. During the internet boom, if you didn't go up 100% or more, you were viewed as an unsuccessful company, and people started to dump the stock. And it was a crazy, crazy time. Um, and, uh, and, uh, by the year 1999 and 2000 at, um, Deutsche Bank, and then later at Credit Suisse, we had 16 separate groups following different sectors of the internet. I never had more than 28 people in a tech group at Morgan Stanley. At, um, at Deutsche Bank, we were only there for two years. We grew that to 170 people. Credit Suisse hired all of those 170 people, and we grew it to 500 people, and literally, we were pairing bankers and analysts together to, to develop, you know, more nichey, and nichey, and nichey sectors. And interesting, you know, the valuations we were talking about, right? Um, the, the normal valuation for a technology company was, like, maybe 10 to 20 times trailing earnings, and then it got to 30 to 40 times this year's earnings, and then maybe 50 to 60 times two-year-out earnings, and all of a sudden, there weren't any earnings, and there were revenues, but there was not profit 'cause people were stepping on the gas and trying to grow. And then it kind of leapt to ten times revenues, and then concept companies started to come out. They didn't have any revenues, so, you know, how can we value those? Well, let's do valuation per eyeball or, you know, per audience or, you know, the number of users, and it became, I don't know, like, 100 times the number of eyeballs, and, uh, and then even be- before they had much of an audience, well, how about, uh, a million times the number of engineers they have?

   8. HSHarry Stebbings15:46

      Do, do you know this is crazy when it's happening?

   9. FQFrank Quattrone15:49

      Of course. Well, you, you s- you s- it, it, it kind of oozes. It doesn't just jump, right? So it's like a spectrum. It gets to the point where you say, "This just isn't sustainable." Like, even more recently when cloud software companies were trading at 30, 40 times revenues, some of the deals we did were at 30 or 40 times revenues, and you, like, you know this is not going to be sustainable, but during the moment, w- what's causing it to happen? Well, interest rates are at zero for 14 years, which puts a premium on growth because when you discount five-year-out revenues and earnings at zero or, like, 3% or something like that, your five-year revenues is worth almost the same as today's, so put a normal multiple on five-year-out revenues or ten-year-out revenues because there, there's no cost of capital. And you know at that point that, you know, this is going to end badly, and, um, you just never know what's, what's gonna make it end, you know? Normally, it involves leverage or being over-leveraged.

   10. HSHarry Stebbings16:50

       Did you feel the same way in COVID? We've spoken a lot about zero interest rate environments. Did you feel the same in COVID?

   11. FQFrank Quattrone16:56

       All of a sudden, companies that help you do things from home became the new platform. Zoom has always been a great company, right? But all of a sudden, Zoom's valuation seems like it has no end, and it was insane because you know, like, ultimately, it's gonna come back to the norm. But, um, the best year we've ever had in any of my businesses in M&A was 2021, where, by the way, not a single one of us saw any of our colleagues face-to-face or a single client face-to-face, was our single best year in history, and the valuations were, um, were, were very, very high. But there was a new type of buyer who had even higher, uh, valuations, and so you saw a lot of stock-for-stock deals, which, by the way, we hadn't really seen since '99 and 2000.

4. 17:48 – 19:26

   Has Regulation Killed M&A?

   1. FQFrank Quattrone17:48

   2. HSHarry Stebbings17:48

      My, my team and my family are very bored of me hearing this diatribe that I have, but I'm terribly worried about the lack of liquidity right now, and I think the M&A environment is dead. Uh, regulations have prevented any M&A from GIPHY to Plaid to, to Figma and everything in between. I, y- you're the OG of M&A. Am I right?

   3. FQFrank Quattrone18:10

      Yeah. (laughs)

   4. HSHarry Stebbings18:10

      And has regulation killed M&A?

   5. FQFrank Quattrone18:13

      Well, I don't think it's killed it, but, you know, last year and the year before were, uh, certainly not as good as 2021. (laughs) Um, it's not necessarily regulation that's killing it. Uh, the worst M&A years we've had, ironically, are when there's been a market crash, and you'd think that that would be the time that buyers really step up and go on a bargain-basement hunting expedition.... but it's, it's similarly a time when sellers s- still think that they're worth what they were worth last year, and it's hard for them to imagine that they're not worth 20 times revenues, they're really worth eight. And it takes a while for that to sink in, um, and so it's really kind of sellers not being willing to come to grips with the new reality. And, uh, during steep market drops, buyers, um, uh, have... They're shell-shocked as well, and it, it turns out that buyers really are their most bold and imaginative during times when their own visibility and predictability is at their best. And so I, I think back to some of the best times that you could buy companies were right after the great credit crisis. I think companies like Cisco

5. 19:26 – 25:59

   Impact of Rising Interest Rates on M&A

   1. FQFrank Quattrone19:26

      and IBM and the ones that all had $200 billion of cash, they could have scooped up every great emerging growth company in the world at that time. But A, those companies weren't really anxious to sell at the, the lower prices, and B, the, the big buyers just were like deers in the headlight, and, and they just didn't pull the trigger because they were really worried about their own businesses and visibility. And so whether you're a momentum investor or a corporate buyer, like sometimes those are the best times to buy, but there's... Yo- you're kind of frozen because you're worried about your own, uh, outlook and, and visibility.

   2. HSHarry Stebbings20:02

      But as a venture investor today, you know, we need the spigot to open on the other end. We put dollars in and we need them-

   3. FQFrank Quattrone20:09

      Yeah.

   4. HSHarry Stebbings20:09

      ... to come out. It's quite simple. And I'm sitting here going, "I don't know how that coming out is gonna work." What would you say to my worried mind?

   5. FQFrank Quattrone20:20

      Okay. Well, what are the things that caused it to freeze? I don't think it's so much regulation. We've had tough regulation for a long time. We had the Obama administration, they were tough. And then Trump comes along, you'd think that a Republican would be a little softer on regulation, but honestly, he was not a traditional conservative Republican free market. He was a populist, and he hated the big tech companies because they were so critical of him, and they almost steered the election to his competitor. So he clamped down even harder on big tech because he hated them personally. And now we've got another, uh, uh, Democrat re- reg- uh, regulatory regime, and some of the, um, you know, leaders of that are taking more, um, uh, you know, imaginative approaches. But, you know, a company like Microsoft, it took a long time. It took 18 to 24 months, but they got Activision done. And so we're not having trouble getting 80% or 90% of our deals done. It's really only 10%. But a big factor in M&A in tech, uh, over the years has been sponsor deals. And sponsors benefit from the fact we had zero interest rates, which meant high yield bonds were very cheap to issue and plentiful because investors were looking for a way to get something other than zero from their bank accounts. And high yield bonds were like, you know, they inched out on the risk-reward spectrum to buy high yield bonds at 5% or 6%. I think everybody, uh, knew that interest rates were going to go up, but no one figured that they were gonna go to 5% from zero. And when that happens, all of a sudden corporate buyers have a cost of capital that's not 5%, it's 10% or 11%. And all of a sudden, um, uh, sp- uh, financial sponsors are borrowing at 11% or 12% instead of 5%. And so that drives down the prices, and it, it narrows the base of investors, uh, and, and the availability of funds because all of a sudden high yield is more risky and, and, and, and people, you know, are more reluctant to put their money in because they, they don't know where the rise in interest rate's gonna stop. And if you buy fixed income while interest rates are rising, you could really get burned. So, um, you know, i- if you go back to 1981 when interest rates were 16%, you can draw a line almost straight down to zero from there over the next 30, 40 years. And then we had zero interest rates for almost 14 years from the great, uh, uh, uh, credit crash to 19... to 2021. And so all of a sudden when interest rates are rising, all of those trends start unwinding. Um, a larger cost of capital, higher interest rates, uh, lower valuations, and all of a sudden people freeze. So I, I just think it's a matter of time. And IPOs historically have... The windows really are not shut the way they were in the '80s and early '90s. It's more like, it's more of a granular filter, and what you need are great companies to come public, and you need them to be willing to come public at reasonable prices.

   6. HSHarry Stebbings23:35

      Why would they go public with this new market of late-stage capital that is so big now and sovereigns entering pre-IPO like they've never done before? If you are a big prestigious company, why would you go public, face the scrutiny? I agree with you, we need them to, but why would you? It's a bit of an idealistic world, no?

   7. FQFrank Quattrone23:57

      Yeah. You're right. You're right. Um, the trend since the end of the credit crisis, it was that... even since the end actually of the internet bubble is that companies waited a lot longer to go public and investors demanded that they wait longer to go public. But you remember during the time of Facebook and LinkedIn, these companies would be waiting until, um, there were several billion dollars of revenue before they'd go public. Some of the IPOs over the last few months that we've seen are companies with like two billion of revenue or more. And so yes, they wanted to wait longer, but at some point employees need liquidity. Yes, you can get it through privately held deals, but... Um, and, and also they need a currency for acquisitions.... that's a lot of times what, what really, uh, drives the company to ultimately face the test and go public. And also, some of th- some of the times, they, their, the valuations or their options, they just have to get to the point where they, they offer investors the public ro- for, for liquidity. So, yes, they can wait longer than they did in the past, but at some point, they need a public currency if they're gonna be serious about, uh, acquisitions. They need access to public debt markets. This will take time. What, what needs to happen is as long as there are hundreds of ways for public investors to play a trend, a- and valuations are reasonable, they'd rather buy public companies. It's easier to get in and out. There's really no risk of them, you know, trading down other than, uh, earnings or revenue surprises. So those companies have to kinda creep up in valuation, and then the next generation has to be willing to go public at a more reasonable valuation.

   8. HSHarry Stebbings25:35

      Can I ask you, do you agree with the sentiment that companies are bought and not sold?

   9. FQFrank Quattrone25:40

      For the most part, it's much, much easier, um, to advise a company where there's buying interest on the table. Uh, but sometimes we actually have to create the buying interest. Um, you know, I'll give you an example. Uh, you know, Ryan Smith, Qualtrics,

6. 25:59 – 33:19

   Role of Investment Bankers in M&A

   1. FQFrank Quattrone25:59

      right? Um, great company in Utah. It's not part of the Silicon Valley fabric. Yes, they have a few Silicon Valley VCs, but not a whole lot of people know who they are. And so what we tell our companies who are in that situation is, "You know, you spend so much time and effort getting ready for the IPO, right? You hire a CFO. You, uh, get a great auditing firm. You start building a board with people who have public board experience. You start practicing, you know, d- getting quarterly revenues to meet and beat expectations. But only 10% of companies go public." Like, back in the '80s and '90s, it was 50%. But since 2000, 50%... no, 90% of companies get liquidity through mergers. Why do- why don't private companies spend the same amount of time creating that option and perfecting it? Even if you never sell, why don't you go through the same hygiene? And so that hygiene is, you know, working with an advisor who can help you understand the ecosystem of who the potential buyers are. And it's not always obvious because strategies are al- always shifting. So, knowing who the buyers are and building trust with the people who are gonna make the decisions outside the cont- uh, the, um, uh, context of a transaction. So, meet with the Googles and Amazons and, uh, Microsofts and ServiceNows and whoever, Oracles and SAPs, and let's, let's get them to know who you are, because they probably think that you're a survey software company. But no, you're an experience management company. And when Ryan came out with that positioning of experience management being, like, the next great cloud, potentially, that was a game changer. And you have to educate these buyers what experience management is. And so we introduced him to a whole bunch of different, uh, serial buyers of cloud software companies. And, uh, it was, it was interesting who sort of bet on it and who didn't. And then all of a sudden, uh, you know, Salesforce has been just killing it in, in cloud, and Oracle and SAP has been trying to catch up with them. And then Bill McDermott, uh, makes this announcement at Sapphire. "Experience management is the next cloud. It's gonna replace CRM, and we are gonna lead in experience management." So, I had tried to get Bill to bite on Qualtrics for a couple of times, but that announcement was too much for me to bear. So, I called him, and, you know, we've become really good friends over the years. Uh, and I said, "Bill, you've just taken the biggest naked short in the history of software by announcing that you're gonna win experience management, and you have no way of fulfilling that. And so let me try one more time to explain to you why Qualtrics is the way that you could best achieve that objective." And, um, and then that, that's when it started to click. But Qualtrics had already by that time, um, started its plans for the IPO. It got to the point where it was really very, very close to the pricing of the IPO. And, um, we had our CEO conference in Pebble Beach. It's called our Catalyst Pebble Beach Retreat. And it was, it, it was in October, and Qualtrics was just about to start its road show. And we normally invite six speakers, three on, uh, Friday morning, three on Saturday morning. So, on Friday morning, I had arranged for Ryan to be one of our speakers, and for Bill, who had, um, uh, r- really wasn't well-known in Silicon Valley, uh, even though he was the CEO of SAP, to be the s- the speaker. The- they were right next to each other. And I think first it was Bill. And, and he's so energetic and visionary, and, and he tells such a great story that I'm looking, and I'm interviewing him, right? Like you're interviewing me. And meanwhile, I got... 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 his eyes start to light up because he thought, "SAP, big company, Germany, eh, why should I be interested in that?" And the way he saw Bill bring SAP to life and, um, a- and, and, and show off his, his culture and his personality, I saw Ryan, Ryan leaning in. And then the very next, uh, speaker was Ryan. And Ryan's also, of course, brilliant, and he can tell a great story too. And the way he started to explain experience management and how it was going to just basically change how, uh, any corporation...... um, gather sentiment about its employees and customers and how 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 now it's kind of out of the corner of my eye, I 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, I couldn't find Bill or Ryan, and s- suddenly I, I get a text from Ryan, he says, "We've just gone to the coffee shop, uh, a few yards away." I said, "Well, do you want me to come down there?" And, um, and, uh, he said, "Yeah, why don't you come down?" So I see Bill and Ryan, and they're at this, uh, 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. (laughs) And so, um, there was still a gap in what they were looking for, and I, I basically went up to them and I said, "You know, Bill, um, 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, um, and, and tell him what you need from him in order to, you know, bring you guys together and get across the finishing line?" And I 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 them, and what you need from Bill? And now I'm gonna go away for an hour, and then I'm gonna come back, and you guys better have this deal finalized." So I come back (laughs) and they're, 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. And so there it was. But, um, but that was an example of having to try to develop demand for a company that, that didn't have it, because too few people knew what they were all about and why they were strategic. And, um, uh, 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, but sometimes the fun ones are the ones where you create from whole cloth.

7. 33:19 – 36:01

   Competitive Deals & Driving the Highest Price

   1. FQFrank Quattrone33:19

   2. HSHarry Stebbings33:19

      Which deal where you've had to create, that 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 ever worked on, and how did you drive the highest price?

   3. FQFrank Quattrone33:33

      Oh, okay. Yeah, all right. Well, you know, all these details have become public, and so, um, with LinkedIn, we, um, 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, like 150, 151, 162, 163. It was very, very close. And Microsoft of cau- 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, uh, comes up with the best price on the next round, we're gonna go exclusive with towards definitive agreement." And so again, very, very close, but the board decided to go with Microsoft. We won't tell everybody everything that they want to hear as a buyer, but we won't, um, we won't, um, be disingenuous with them, right? So when we say best and final, it's best and final. So some people think that investment bankers say that, but yeah, they're really willing to go another round. So in that case, the board chose Microsoft, it was best and final, and they went down to the definitive a- agreement. A lot of... so they went into like a 30-day exclusivity to try to get to definitive agreement, and during that period, Salesforce lobbed in several offers that were higher, and, um, that meant that, uh, towards the end of that period we had to inform Microsoft, "Hey, your deal is no longer the best deal. If you want to end up with this, um, you're gonna have to improve your offer." And so they got to the point where they, 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, due diligence, um, we had a definitive a- agreement that the board had approved, and there was a currency, all cash, that Microsoft, you know, it was greater certainty. So, um, at the end of the day, um, uh, LinkedIn got an outstanding deal, uh, and they got, they ended up going with the party that they wanted.

8. 36:01 – 37:47

   Common Reasons for Deal Failures

   1. FQFrank Quattrone36:01

   2. HSHarry Stebbings36:01

      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?

   3. FQFrank Quattrone36:10

      Honestly, the answer is probably a lot higher than people think, but 90% of deals probably die once they get started. Yeah, it's hard to get a deal done. Um, sometimes things look good on paper-

   4. HSHarry Stebbings36:22

      What are the most common reasons why they die?

   5. FQFrank Quattrone36:25

      Um, a lot of times it's really, um, valuation. Um, sellers have a very, very high view of themselves and are very optimistic about the future, and buyers are worried about precedent because if they, if they, you know, pay 50 times revenues for a company, all of a sudden that will become the floor instead of the ceiling. And so, um, but companies will say, "But if I wait two years, I can go public at, you know, a lot more than 50 times the current revenues." And so mostly it's valuation, but sometimes it's cultural fit. Two companies get to the point where.... they think it's good on paper and strategically it fits like a glove, but they just can't stand each other. And one that I have in mind, um, is where, um, the deal was literally on the goal line and the CEO asked the seller, uh, "How long do you think you're going to have to stick around, um, 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's gonna happen." (laughs) Um, so, and that would've been maybe one of the largest deals in the history of the industry. But it's, it's really mostly valuation and cultural fit, uh, that, that, that, uh, or present

9. 37:47 – 41:17

   Challenges in the M&A Process

   1. FQFrank Quattrone37:47

      the barriers.

   2. HSHarry Stebbings37:48

      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." You know, it wasn't Figma and Adobe, but, you know, the Adobe-Figma deal ended up being a $30 billion deal for Figma by the time it would have converted.

   3. FQFrank Quattrone38:11

      Yeah.

   4. HSHarry Stebbings38:11

      It's a very different number than $18 billion. How does the time-

   5. FQFrank Quattrone38:15

      And some sellers, uh, some sellers also have their, the, the opposite of that, where they agree to a price when the buyer's stock is at, uh, an all-time high, and then there's a valuation correction and all of a sudden it's worth maybe 40% of what, what it was worth at the time of signing. And then it creates some very, very tough dynamics. 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. Now it's 12 months, and then it's 18 months, and now sometimes, you know, it's 24 months, you know, to predict what's going to happen. And if you're a seller thinking, "Well, I'm really gonna be bound by some covenants for a really long period of time," and i- if you think it's gonna take two years to get a deal closed, do you really ... I mean, what are you willing to give up about the stewardship of your company for almost two years that, you know, if the deal doesn't happen, where are you gonna be? Um, you know, there was a deal early in, in, uh, the career of George and myself. We almost had Intuit sold to Microsoft. It would've been an, a great deal for both sides. Um, I- Intuit, with their checkbook software, um, had beaten Microsoft in a category for almost the first time, and so ... And, and very few people had heard of Intuit at the time. And Microsoft kind of, they admitted defeat in this category and they were, they had to sell off their own product in order for the deal to happen. And that deal was under intense regulatory scrutiny. That was right around the time that Microsoft was being investigated for broader anti-trust issues. And so they reached the conclusion that the deal wasn't gonna happen, and you'd think, "Oh, poor Intuit, they've just been dragged through the, the ringer here and what's gonna 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, uh, a much more challenging one, and to have to think through what, what constraints you're willing to put on your business to be willing to, to endure that kind of, uh, regulatory period is, is very, very challenging, yeah. And, and the buyer, you know, most of the time the buyer's paying cash, and then the seller also has to realize, "Well, okay, if it's gonna be 18 months and I'm accepting a fixed price, in 18 or 24 months is my own stock gonna be much higher than that? Is it gonna be much lower than that? Where are valuation multiples gonna go?" Um, you know, a lot of boards are gonna s- are saying like, "Look, you know, if, if valuations are 50 times, uh, EBITDA, um, you know, I want a little cash in that deal, because if we're gonna be in regulatory limbo for 18 to 24 months, you know, that, that downside protection can really help us in that environment."

10. 41:17 – 44:00

    Buyer Sentiment in the Current Market

    1. FQFrank Quattrone41:17

    2. HSHarry Stebbings41:17

       Frank, how do you feel buying boards feel today? Do they feel, "Hey, there's a great amount of assets that we can buy cheaply," or do they feel, "Oof, markets are bad, cash is tight, let's be conservative and not add"?

    3. FQFrank Quattrone41:32

       If you compare this market to 2021, there are a lot more bargains. I mean, uh, a lot of the indices have come back to close to their all-time highs. But it's been concentrated in, now it's the Magnificent Seven because NVIDIA's part of that, and Tesla and, um, a lot of the, a lot of the comeback has been in those stocks. But if you look at the average cloud, um, software play, which is where a lot of the activity has happened in M&A, we're kind of back to that six to eight times revenue area that it's traded at for, for most of its existence. And so there are relative bargains, but the financing environment's harder, the, um, uh, regulatory environment is harder. And, um, strategics are now more focused on buying private companies. A lot of the activity in buying public companies are, um, 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 have been bought by private equity firms. And, um, I think with strategics they, they have to recognize that sometimes it's better to buy a private company before it gets public and has a, a big, uh, aftermarket premium. Uh, even 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...... kind of a- a phase where things are coming back in M&A. Uh, 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. Um, I think, you know, the- the hardest part is when we're on this rise in interest rates from 0% to 5%. No one knows when it's gonna 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, I think we're- we're gonna be on a cusp, um, of M&A activity

11. 44:00 – 45:44

    Future of M&A in a High-Rate Environment

    1. FQFrank Quattrone44:00

       increasing.

    2. HSHarry Stebbings44:01

       So I think actually rates 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 -ewi still stay frozen or does sentiment just become familiar with the new environment and progress as normal?

    3. FQFrank Quattrone44:18

       Yes. By the way, I agree with you. I think there's a lot of optimistic people that believe that rate cuts are gonna happen much earlier. And I think, you know, the central banks were fooled, especially the US Fed, you know, when they came out with this temporary inflation business. And, you know, it was shame on them, and they're not gonna let something like that happen again. And by the way, 5%, like, we had 5%, uh, treasuries, you know, uh, in the, uh... right before the credit crisis. We had 7% in 1999. Uh, e- these are not unusually high rates for someone who started his career when treasuries were 16%. And so 5%'s pretty still, you know, I think, attractive. But I think you hit the nail on the head when you said what you really need is a period of stability when either valuations are coming down rapidly, going up rapidly, when interest rates are, uh, going up rapidly and- and valuations are coming down because the markets are just, you know, wracked with this, uh, new environment where there's actually a cost to capital. That's when things freeze up. We'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 out there. And, um, it... You know, no one really knows who the candidates are gonna be, even though they appear almost certain to be Trump and Biden, but, uh, that could create a little bit of a crazy time later in this year if things get volatile.

12. 45:44 – 46:56

    Influence of Trump on M&A

    1. FQFrank Quattrone45:45

       Um-

    2. HSHarry Stebbings45:45

       Frank, if Trump- if Trump wins, how does that impact M&A environments?

    3. FQFrank Quattrone45:49

       Honestly, I don't think it's going to impact it much because g- as we talked about earlier, uh, Trump is not a classic, um, free markets Republican. He's a populist. He has personal vendettas. Uh, he doesn't like big tech, uh, because he views them as all, uh, you know, run by a l- a bunch of liberal people who hate Trump. So, I don't think we're gonna see much of a difference in the antitrust environment. If some of his economic policies result in some of the economic growth and, uh, stock market conditions that we saw in the first few years before COVID. I mean, you think about it, Trump had... Trump's policies had the economy in a pretty good place, and it was only really a pandemic that could have cost him probably to lose, uh, the second election. And, um, uh, so if he comes back, I think it might be viewed positively for, uh, economic conditions, but I don't think antitrust will change very

13. 46:56 – 48:39

    Changes in Deal-Making Strategies

    1. FQFrank Quattrone46:56

       much if at all.

    2. HSHarry Stebbings46:56

       Frank, have you changed how you do deals over the years? Before we move into a quick fire, people change enormously over time. Has the way in which you do deals changed and if so, how?

    3. FQFrank Quattrone47:09

       I really don't think so. I mean, George and I learned together at the very beginning of the M&A market for tech. Um, you know, there really wasn't much of an M&A market for tech in the- in the '80s and '90s, uh, because there was so much proprietary technology. There were few companies, there were few buyers that could afford acquisitions. The deal sizes were small. But the hardest part was, like, if you had a w- a market where the technology of IBM and Digital Equipment and, uh, Data General and Apollo and Sun, they were all, like, incompatible technologies and deals were hard to do because you couldn't integrate, uh, acquisition candidates. But- but when things started to standardize, we learned how to do deals back then, and we're doing them largely the same way they were in the '90s and early 2000s. Um, but the- there are way more companies, the valuations are much larger, uh, the number of, uh, buyers and sellers for each category are much broader. So in many respects, it's- it's a much easier environment for us because dea- deals were rare as a hen's tooth back then, and again, most companies went public and didn't do deals back then. And now 90% of companies, um, achieve their liquidity through M&A. So, um, I- I think it's an easier environment and, uh, there's not much different about how we are

14. 48:39 – 50:21

    Selling to Private Equity vs. Other Strategics

    1. FQFrank Quattrone48:39

       doing deals.

    2. HSHarry Stebbings48:39

       Final one, Frank, d'you... Is it easier to sell to PE or to other strategics?

    3. FQFrank Quattrone48:45

       It really depends on the situation. I mean, private equity buyers are- 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 do turnarounds. Then they l- started looking at moderate growth, and I think that the- 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 SG&A, and maybe lose a point or two of growth but convert margins from 10% to 40% or 50%, we'll create a much more valuable company. You know, and, and it was rare that they would pay 10 times EBITDA for a company. It was more like five or six times EBITDA. And now they're getting much more imaginative about the prices that they're willing to pay. But they won't pay, um, you know, 20 times revenue, or 30 times revenue, or 40 times revenue like a strategic will. And a lot of times if, if there is a, um, 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. And it's, it's more rare but, but, um, not uncommon for there to be multiple buyers.

15. 50:21 – 1:08:16

    Quick-Fire Round

    1. FQFrank Quattrone50:21

    2. HSHarry Stebbings50:21

       I'd love to move into a quick fire where I pepper you with questions-

    3. FQFrank Quattrone50:24

       (laughs)

    4. HSHarry Stebbings50:24

       ... and then we'll roll with that. And sa- 60 seconds per answer. Does that sound okay?

    5. FQFrank Quattrone50:30

       I'll do my best. (laughs)

    6. HSHarry Stebbings50:32

       Okay. 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, $200 million in their account? Is that how it works?

    7. FQFrank Quattrone50:45

       Um, mo- most all cash deals have a single closing and, uh, all the money gets transferred on that day. Now, um, there, there's also other ways that, uh, founders, uh, can benefit. They often get, uh, retention, they get new stock options, and the like. Uh, sometimes, you know, there's a mix of stock in the deal, and, uh, and founders get stock that may be locked up for a while. Um, uh, so but most cash deals, yes, the money crosses the wire at the very beginning.

    8. HSHarry Stebbings51:18

       Frank, hardest time in Catalyst Journey, the moment you thought, "Oh my god, the world is caving in."

    9. FQFrank Quattrone51:25

       Being involved in the credit crisis. Yeah, I mean, we s- we started our, our firm in March of 2008, and it was two days after Bear Stearns was sold in a forced sale for $2 a share to JP Morgan. And Bear Stearns had been trading at 150 bucks a share a year earlier. And then Lehman went bankrupt six months into our, uh, uh, launch, and deals just basically dried up. And then Morgan Stanley and Goldman Sachs came this close, like I'm holding my inch, my finger an inch apart, from going bankrupt. And Paulson had to save Goldman because that's where he was from and he couldn't save, uh, Goldman without saving Morgan. But deals really dried up during that time. Um, the, the beginning days of Catalyst, we found it a little bit hard to attract, uh, bankers from, uh, the, the big public bulge bracket firms. But I remember one of my former colleagues from Credit Suisse who had run, uh, a sector for us had gone to Lehman, and he was running all their technology practice. So when I started at Catalyst, I asked him to come back and be one of our first, uh, partners. He said, "Oh, that would be really exciting, get the old gang back together. It'd be really fun to work with you again, Frank. Uh, let me just check in with my wife." And this is, must have been, like, April of 2008. And at that point, he had all his net worth tied up in Lehman stock. And he came back to me, he said, "I'm sorry, so sorry, Frank. You know, we got kids, we got tuition bills. My 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've been a pretty good deal for him to do that at the time. And just three, four months later, um, Lehman went bankrupt and he lost all his net worth. So that was a, that was a, a, 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, um, until our very first deal closed, like, literally on December 25th and we, we got our first fee so we were, we were able to make payroll. (laughs)

    10. HSHarry Stebbings53:37

        Frank, what makes Bill Gurley such a good investor in your mind?

    11. FQFrank Quattrone53:41

        Oh, he is brilliant. He's hard-headed, hard-nosed. Um, he's visionary. I mean, I loved, um, 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 and 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, like, the closest thing to a visionary that I had seen in a, um, in a, uh, in a research analyst. And when he left Morgan Stanley, and I thought for sure Mary Meeker, who I had recruited to Morgan Stanley as our PC software and hardware analyst, and ultimately became our internet analyst when we did deals for AOL and Netscape, I thought for sure she was gonna follow us in, she didn't. I had to recruit an internet analyst. I asked, uh, Roger McNamee, who is a very, very smart investor, "Who's the best internet analyst?" And he said, "Oh, Bill Gurley. You gotta go after Bill Gurley." So we cam- he came to Deutsche Bank. The two of us worked together on the Amazon IPO. And he had written an, uh, a report, uh, called, um, where he referred to some internet companies as wave riders. Uh, 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, uh, 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. It 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, uh, saw that Bill was brilliant, influential, and could be, uh, 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, um, a venture capitalist. Um, and he got- he got along really well with entrepreneurs and even the tough ones who, uh, were hard-headed and stubborn 'cause he can be that way as well. I knew he'd be a successful venture capitalist, but, uh, um, he- he just really, uh, overachieved anyone's expectations and really knocked the cover off the ball, so. But I think my- one of my favorite moments with Bill is when we had to price the Amazon IPO, um, it- it was again during, uh, 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 at Barnes & Noble, sued him for false advertising because the Amazon slogan at the time, you may remember, was, uh, Earth's largest bookstore. And Barnes & Noble had no sense of humor about that and so they sued him. And so it was like this, ah, the big bookstore's suing Amazon and it created a little bit of, uh, of, uh, conflict, but Jeff is so charming and he had investors eating out of their hands. He's one of these guys that combines brilliance with humility and charm. And when he laughs, 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 sh- three million shares of Amazon at 12 to 14, and 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 a share." And so he said, "Great, let's keep going." So we did Boston, we bid- 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 gonna 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, guys. Here's how we're gonna allocate the shares." "Great job." "Okay, we agree." Done. Right? Hmm. So we had just delivered him this good news and he says, "16, huh? Well, what about 17?" And- and we say, "Well, Jeff, you know, 17 would be a little risky and that might be priced too high, and your initial investors might not like it too much. You're gonna have to come back to the markets and raise some more money. You wanna leave a good tast- taste in their mouths. You really have to focus on, you know, how the stock's gonna trade." And he said, "Frank, would you guarantee me that if we priced it at 17, it would be a colossal failure?" And (laughs) I'd never heard that question before. And, "Jeff, no, you know, we don't- we're not in the business of guaranteeing colossal failures. Um, 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- of the pricing negotiation, and even John Doerr who was Jeff's lead venture capitalist is always arguing for more, for the entrepreneur, was trying to put the brakes on him, right? And so he- he asked me the same question, he says, "Je- Frank, 18, can you guarantee it's going to be a colossal failure at 18?" I said, "Jeff, I, no, 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 I- I just, you know, if I were you, I wouldn't go there, uh, 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 three 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." He says, "I don't care what the stock does in the first, you know, 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 it at 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- then it was off to the races. But by the way, that 18 after all of the stock splits since then is seven and a half cents versus the $170 where Amazon is trading today, so 2200 times the IPO price. And Bill, by the way, as our analyst was not too pleased that we priced it at 18 versus 16. (laughs) And shortly thereafter, he left to become a venture capitalist. Now, uh, I don't think it was causation, (laughs) but I always ask Bill, "Hey Bill, what do you think about Amazon? Do- do you think we should've priced it at 18 after all?" So we- we have a lot of chuckles about that. (laughs)

    12. HSHarry Stebbings1:01:03

        A 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, if you- fuck M&A markets. Let's just plot out Catalyst. Where do you want Catalyst to be in 10 years time?

    13. FQFrank Quattrone1:01:19

        You know, we're real... I'm happy with where Catalyst is right now, uh, and for us, I...... we 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 five or 10 years ago, you're gonna fall behind. Our first lesson in that was cloud and mobile, where we didn't do some of the first, uh, cloud software M&A deals, but we did the next three that were the most important. And all of a sudden now, we're, we're the banker of choice in cloud. Same way with mobile, uh, when we did Motorola Mobility. And so, and now, it's like you have to recognize which trends are fake trends and which fen- trends are real trends, because a small firm like Catalyst, you know, we have less than 100 people. I don't think we're ever gonna be a lot larger than that. And so, you have to organize the world in a way that makes sense. And so now, (clears throat) we're grappling with artificial intelligence. Now, some people might think, "Artificial intelligence, it's really new." Artificial intelligence was coined as a phrase the year I was born, 1955. And there was some work done before that, eight, 10 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, and that was what opened up my eyes. And, and, you know, a lot of, 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 the leader and sometimes it never gets there. But when I saw ChatGPT, to me, it was the same reaction I had when I saw Google Search versus, you know, the initial search engines, and the same I ha- reaction I had when I first saw VisiCalc, the electronic spreadsheet, when I had to do manual calculations before that. And all of a 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 ChatGPT, you can ask an English questions and pay a subscription for that, what's gonna 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. When 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, you know, 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 gonna 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. Um, and 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, in going to market, and be the first that, 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 Boutrous says maybe with the next CEO, we'll add biotech. Uh, will we add, uh, financial services? I mean, we do fintech and payments and things like that, but I don't know. I think we do really well. Technology's such a big industry now, that if we continue to focus on what's changing to help our clients see around corners, see who the new leaders are gonna be and skate to where the puck is gonna be, then I think we're gonna do just fine. C- can I tell you one more story?

    14. HSHarry Stebbings1:05:28

        Yeah, of course.

    15. FQFrank Quattrone1:05:28

        Do you have time?

    16. HSHarry Stebbings1:05:30

        Yeah.

    17. FQFrank Quattrone1:05:30

        So along those lines, so, um, and speaking of Jonathan, right? Jonathan sends me this, um, text, uh, about a year ago, maybe a little bit more, and he says, "ChatGPT just got to a million customers or million views in five days. You've gotta check this out." So I, I hadn't heard of ChatGPT, so I start playing around with it. And I see, oh, English language an- questions and answers. It reminded me of Ask Jeeves, which had people behind the curtain coming up with answers. And, but no, this is actual technology generating answers within a microsecond of when you hit send. And the more I played around with it, the more I said, "Wow, this is just amazing. It's gonna change the world." And so every year, I write a letter to Catalyst's employees thanking them for all their efforts, reminding them of, uh, you know, our accomplishments for the year, and then I go on a rant for, um, a, a particular topic, like I went a rant, on a rant against Bitcoin one year. I went on a rant against SPACs one year, right? So, uh, and I try to give some historical perspective. So I was so impressed with ChatGPT, I said, "Well, why don't we try to have ChatGPT write the letter this year?" So I, I enter in, uh, "Write a letter to Catalyst team members congratulating them on, uh, the great year that we've just had, highlighting some of the most important tran- transactions, commenting on conditions in the financial markets, interest rates, stock market, M&A conditions, and giving a bit of a look into the future." And immediately after I hit send, it came out with maybe the best first draft that I could have ever done. Now, it had some problems because it was only smart up until 2021, and it couldn't list the deals that we had done in 2022. It also thought that we were still in an interest rate environment where it was zero interest rates and missed the fact that it was, had gone up to five, and it also thought we were in an all-time high valuation market, and it missed the fact that, you know, we'd seen a 75% drop in multiples of cloud companies. So I had to correct a few things. But it really came up with a great first draft. And then I said, uh, "Could you write this in a tone that's more optimistic and futuristic and maybe in a style that's more like mine?" And it did, and it was amazing.

    18. HSHarry Stebbings1:07:59

        Frank, I had so many great things. I mentioned Eric. I mentioned Bill, Frank, Peter on your team, Jonathan. This has been such a joy to do. Uh, I've loved this. So thank you so much for joining me today.

    19. FQFrank Quattrone1:08:10

        It's my pleasure, and thank you. It was a fun experience for me, and I'm looking forward to seeing how it turns out.

Episode duration: 1:08:16