The Deal Room: Inside the Biggest M&A Deals You Need to Know (Blackstone, Goldman Sachs, Victoria's Secrets, OpenAI)
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Hello and welcome to The Deal Room, where every week we talk specifically about all things corporate finance, from the biggest M&A and PE deals to the strategy that drives business decision making. We aim to bring what you learn in the classroom to life with real world examples and hopefully at the same time have some fun with it. So let's dive in.

Hello and welcome to the show and we're going back to a classic format with Stephen and I, which is five stories in five minutes. So what can you expect? Well, a very expensive love letter. And no, this isn't OnlyFans getting sold potentially for $8 billion. This

This is the $35 billion deal between Charter Communications and its acquisition of Cox Communications. So I'm going to talk about that one. Also, OpenAI acquiring AI device startup from Apple veteran Johnny Ive and a $6.5 billion deal.

We're going to also talk about private equity because Blackstone are out with their latest state of the market. Going to also talk about Goldman Sachs extending its tentacles all over the world, but namely, as are a lot of banks looking to get into the Middle East and streamlining in APAC. And of course, Victoria's Secret, couldn't go an episode without mentioning them. And also Poison Pill. I mean, you couldn't make these headlines up.

sexy lingerie and poison pills so this is what this show is all about and then if we've got time there's also a funny story to finish as well about what could be a gift from your boss that everyone would love to have you'll just have to stay tuned to find out what exactly who that is and what that that gift was so steven how are you and what's this love letter that you've been telling me about

Yeah, thank you so much. And well done for getting an OnlyFans reference in so early. We decided not to cover that. $8 billion. Gosh, yeah, let's leave that one. Let's park that one, as the consultants say. Let's start with this $35 billion love letter. I didn't make up the headline. This was a Bloomberg headline. And I'll go on and talk about why we're referencing this.

this love letter. But just to give you a little bit of background on the transaction, this is one of the biggest, if not the biggest deal of the year, $34.5 billion acquisition by Charter Communications, the large listed broadband cable company.

television company based in the US acquisition of Cox Communications which is a family owned I think fourth or fifth generation communications company started with wireless and radio and now is in a very similar space to Charter and this time

tie up where Cox will end up holding a 23% stake in the combined company this is a classic defensive merger

Remember, these types of companies, they are and have been on the back foot ever since streaming became viable and omnipresent. And the likes of Comcast, which is obviously Charter's biggest rival in the US, take a look at that share price. It doesn't make particularly good viewing. And Charter Communications is not that dissimilar. And just to give you a good representation of how

much these companies are struggling. Chartered Communications is buying Cox for the equivalent of 6.5 times its next year's EBITDA, earnings before interest, tax depreciation and mortization. 6.5 times is not a punchy valuation, right? That is the valuation that you would put on a company that is declining, slowly but declining. So

This is a real story of defensive, let's try and get together. There's expected to be $500 million worth of synergies, strength in numbers, take on Comcast, etc., etc. So it's not an acquisition for massive growth, but it's certainly an acquisition to keep the lights on.

So look, everyone's interested in what's this love letter then? You've not explained yet. So what's this about? The love letter. Yes. So Chris Winfrey, the CEO of Charter Communications, wrote to his counterpart at Cox, a guy called Alex Taylor, the CEO, to basically say, look,

you know, are you interested in combining the two companies? The reason why this is a love letter is that it was sent from CEO to CEO on Valentine's Day. So there you go. And this is, I really like this. So it was sent on the 14th of February and it was a multi-page letter from Chris Winfrey, basically saying, look, you know, I know we flirted a little bit. I know we've chatted for a few years,

But I just sensed that the time is now and there couldn't be a better series of circumstances for us to hook up. Now, you know, it's a good bit of advice for any young person. Taylor from Cox played hard to get. Taylor didn't respond to the letter for a month.

really really quite cool calm and calculated you know when you're desperate to reply to to someone that you quite like just play it cool waited for a month and then as soon as he replied bearing in mind that this company as i said is 127 years old cox and has been in the family for as i said four generations this means a lot to taylor and but once it once taylor responded and they thought there could be a bit of a shape of the deal this thing went super quickly

So remember, Love Letter was sent on February the 14th. Taylor responded mid-March. What are we, kind of edging towards the end of May now? This is just over two months for a $34.5 billion project.

acquisition and i just want to give you a little bit of color this is i really like the reporting on this especially if you're thinking about what a deal looks like as the momentum builds so the advisors so the advisors include lion tree and city on the charter side and alan and co evercore and world's fargo on the cox side they basically set a five-week accelerated due diligence schedule and

Which the cherry on top was that the two CEOs basically said, look, we really want to get an announcement to the markets by 7 a.m. on Monday morning. This is now last Monday. We're going to do everything we can.

to get to hit that deadline, sorry, Friday morning, to hit that deadline of 7am. So to keep, I'm just going to read from the article, to keep everyone on track the night before the deal, lawyers for all of the stakeholders,

fueled in at least one out of office by late night ice cream order, agreed to check in with each other every few hours. They worked through the night and the announcement hit the news wires 10 minutes before that 7 a.m. deadline. So a really nice representation of

actually real collegiality, lawyers from both sides, advisors from both sides, working towards getting some ice cream, getting the pizzas in, and getting this deal across the line in two months. And again, for a company that's been owned for 127 years, that is pretty amazing work. Just final thing, having lived and breathed some of this environment yourself, being on the end of the receiving orders of, Stephen, we've got five weeks.

What's the first thing as a lower ranked analyst that goes through your head? Is it great? I get to get another notch on my belt, get this deal accelerated and I can work on the next one. Or is it first thing?

is oh my goodness like that is so radically fast that's my life gone for five weeks like how what do you think yeah the first thing you do is you clear the diary right you text your text your girlfriend you text your mom and dad and say sorry it's probably not looking great for the next five weeks any nice holiday that you've got probably forget about it and

You probably have that low moment where you're like, oh gosh, here we go. This is going to be brutal. And then as you kind of get stuck in, it's like with any job, right? Almost the starting is the hardest part. But when you're in and you've got a few people around you and you can see that deadline coming up and there's momentum that is being built,

The worst thing is when you're working really, really hard and you just don't think the deal is going to get done. You think there's going to be a roadblock or someone's going to come in and gazump you or it's going to have some kind of regulatory issue. If you know that you're working towards this thing and the CEOs are chatting and the price has been agreed in principle, then it can be quite fun, right? You know that that five weeks, it's a sprint to the finish line, get the ice creams in and then...

you know enjoy the the announcement that comes out on that friday and say actually yeah that was that was that was me would they would they typically give you a couple days off after that i mean how does it work

Yeah, you would, for a sprint of that nature, you would definitely get, you know, certainly you wouldn't get staffed on anything new for a while. So you might come into the office, but it would be like, you know, dotting I's and crossing T's and, you know, catching up on the things that maybe you slipped a little bit on the previous five weeks. Maybe a good opportunity to do that kind of mandatory training, you know, office health and safety kind of stuff. Okay, cool.

Cool. Well, let's move on. Let's talk a little bit about OpenAI. It feels like we've gone at least two months without mentioning them. So unsurprisingly, they're back in the news again. But for what reason?

Yeah, this is a really interesting one. I'm absolutely fascinated by this. So the headline is OpenAI Acquires AI Device Startup from Apple Veteran Johnny Ive in a $6.5 billion deal. I put a little photo of them in my notes. If you scroll down and you'll be able to see, it does look like an AI generated hug between Johnny Ive and Sam Altman. I think there's been some chat GPT

Going on there. It doesn't look real somehow, but maybe Sam Altman isn't real. Who knows? That's another question. But anyway, so it took me a bunch of time just to figure out what exactly OpenAI is acquiring.

So Johnny Ive, absolute legend, right? You know, the designer, the brains, or the kind of the creative skill in partnership with Steve Jobs behind the iPhone, the iPad, the MacBook, all of the most significant and important pieces of consumer technology that we've seen over the last 20 years. So he retired from Apple a few years ago and set up

a consultancy, but he also set up this company, IO, lowercase. It's a terrible name. So $6.5 billion acquisition. We don't know what IO has done. We don't know what they've created. We don't know really what they've been working on.

But Sam Altman and OpenAI felt compelled to buy this company for $6.5 billion. Now, just to give you a little bit of stats, because this, in my reckoning, without knowing all of the details, this is one of the most expensive acquihires ever.

I think I've ever seen in my life. Right. So an acquisition in order to hire, you know, some legends within that company, basically what Sam Altman saying, he's like, I, I'm willing to pay 6.5 billion for Johnny Ive and the 55 engineers that he's assembled that works out at $118 million per hire. So you might be thinking, well,

One might be thinking this is totally bonkers, ludicrous paying this much money. But again,

You know, if Johnny Ive can contribute to a piece of hardware that OpenAI uses that becomes as legendary and as important as the iPhone, then $6.5 billion is a drop in the water. And, you know, when we're looking back and OpenAI is the first $10 trillion company, we think that that's an absolutely genius move. If Johnny Ive still has it, as it were.

Yeah, well, I'm just wondering, like, what does this say about what we thought we knew about open AI strategy? Because talking hardware there, that seems a world away from what people were thinking, right? Yeah, this has always been the criticism, especially of Meta, actually. So Meta's always been, there's always been a business model risk at Meta that they don't own

They don't own a piece of hardware to house their software, to house their apps, to house their social media. They rely on the iPhone. They rely on Android and Google devices and Samsung, etc. And they've tried and tried and tried with Oculus and with meta Ray-Bans and with the Facebook phone way back in 2015. But it's always seemed to be a bit of a structural weakness in their business model. Apple, obviously, you know, it's got the hardware.

and the software google it's got the hardware with their google chromebook and with their google phones and things like that and they've got the software that seemed to be a kind of vertical stack and very defensive so what you know this this to me is just right out of the apple playbook you need to in order to be a trillion dollar company in this space you need to own that software layer

the kind of data layer and the hardware layer. And I have no idea what this thing is going to be. Uh, a few, you know, rumors have come out that it's going to be screenless and unobtrusive. Um, whatever that means is it, it's not probably going to be a wearable or a smartphone. I think people, uh, you know, Sam Altman and Johnny, I believe that that that's done, you know, that, that thing is only going to incrementally improve. So,

So I don't know. Look, if anyone wants to put a comment in the YouTube or on Spotify, what is this thing that is going to be created that leverages the power of open AI and chat GPT, but it's not a watch and it's not a smartphone and it might not even have a screen.

What is it going to be? Is it going to be an implant? Am I going to get this stuck in my head? I was thinking exactly that as you were talking. But it's interesting how with a lot of big tech, like when Apple had the AI big announcement probably 10 months ago, something like that, and it's really not come to fruition. And it's kind of like the cars with Google. They tend to talk about these infantile techs that are a world away, but really big it up.

Whereas this is the complete opposite. It's like zero transparency. So the tactic is like, I quite enjoy the difference in tactic here. It's kind of like, let it be abstract and obscure and undefined. And therefore, can you actually make that really valuable in terms of how the outside perception of it will be?

Well, obviously OpenAI is not a listed company. I would be very interested to see if it were a listed company, how much the share price would have risen when the name Johnny Ive is associated with that company. Because what we do know is that Apple shares dropped 2.3% on the announcement of this deal. It's not that Johnny Ive currently works at Apple. It's just an adjacency and a kind of a potential reflection on

The back seat that Apple has taken...

in this AI revolution, I think there was a thought that at least Apple could be the hardware that people access AI through, even if it doesn't have the great AI level and is having to, you know, having to rely on open AI and chat GPT. But this really reduces dependence. If it is the product that people hope it will be, this might really reduce dependence on

on Apple and on its smartphone and things like that. So let's watch this space. I think it's going to be really, really interesting. But look, $118 million per person. That's probably the world's most expensive Aquahire.

Okay, well, look, this next segment is probably going to be incredibly useful for a lot of students who are thinking about applications pending and things of that nature. So the state of the market through the eyes of Blackstone. Yeah, well, look, I tell you what, this is actually, I tell you what, this is a bit of a non-story, but I wanted to raise it anyway. The actual story that I was going for, I was just looking at Blackstone share price, again, big private equity firm, and it has dropped eight days in a row. And it's

This is, this is, this is what I wanted to raise to the attention of the audience. So year to date, I'm just going to give you a little bit of a summary. Year to date, Blackstone's down 21%. Year to date, KKR's down 21%. Year to date, Carlisle's down 14%. Year to date, Apollo's down 21%. You know, you might, you might well be thinking they do a very, very similar thing, these four companies. And BE is obviously in massive trouble.

And it's definitely worth knowing a little bit about this, even if you're not applying PE roles. But it's a very, very significant part of the M&A and the deal-making market. So just to reference, Kuwait's managing director of their $1 trillion sovereign wealth fund, Sheikh Saud, said last week that the clock is ticking for private equity. He is really, really worried about this notion of continuation vehicles.

I call it the kind of pass the parcel. You have a fund that holds and owns a company that can't exit it to a strategic or through an IPO at an appropriate valuation. So the organization that owns the fund, the Carlisle or the KKR, they start a new fund where that fund buys the company off the old fund, returning capital to the limited partners of the old fund, but still basically keeping the assets from the

actually exiting the ecosystem of that firm. So super, super bearish on private equity. And the biggest issue, the biggest issue, if you read any report in private equity at the moment, is this, to use a trading term, the bid-ask spread.

So the way that funds, private equity funds, report their performance to their limited partners is that they value the holdings of the companies that they own. And they are incentivized to keep the valuations low.

at a certain, not necessarily inflated, but very optimistic level to show returns, even though they're paper returns and show, hey, this fund, you know, 2020 vintage has had 15% IRR or returns or whatever it might be year on year. But then when it actually comes to exiting, they want, you know, 15 times EBITDA for this company and the market's only willing to pay 12 times EBITDA.

that's when you get that bid-ask spread that is causing all of these problems. So it's a structural problem within private equity.

And what it's led to, this is another really, really interesting part because we teach a lot of leverage buyouts and we talk a lot about the role of leverage in private equity. And the way that we've previously taught it is, you know, back in the day, if KKR was to do a buyout, it would stuff 70 or 60 or possibly even 80% debt and put a little bit of their own funds equity into the deal. This is a way of juicing the equity up.

upside in a private equity transaction. But really, really interesting. The latest really big deals have come with very, very little debt and a heck of a lot of equity. So just to give you a couple of examples of recent transactions. And again, if you're speaking in an interview environment, this is the level that you need to get to. So KKR's acquisition of Biotage, a Swedish drug discovery company, 80% equity, 20% debt.

Sinvan acquired Nutrisend with only a third expected to be debt. In fact, KKR publications said that overall in PE, the percentage of debt in capital structures over the last five years has fallen from 60% to 35%. So less debt's being used by companies and more equity.

Super interesting. And those interest rates, just looking at the UK, for example, last week you had a 50-month high in UK CPI. Retail sales is absolutely blowing out of the water in a positive sense. Consumer sentiment seemingly as well in a GFK reading is still holding up and pretty solid. And interest rate cut expectations have reduced to just one now in the UK from multiple. So

Not helping this situation, right? Not helping this. Well, yeah, it's super interesting. It's definitely one of the reasons why these private equity buyout funds have switched more to equity relative to debt. So, yeah, the reasons are pricey debt. You know, it's more expensive than it was a few years ago and it isn't going down. Cost of debt, cost of borrowing, it's not going down as quickly as maybe people thought.

The flip side of that is there's just so much dry powder, i.e. equity ready to invest, that needs to find a place, right? It needs to be deployed. So whereas previously the scarce asset or the scarce resource was equity within a fund,

Now the scarce resource is low-priced debt and equity is abundant. And I guess maybe just to round this off, to give a third reason, if you are quite uncertain about the future of the market,

whether you're worried about tariffs, volatility, recession, whatever it might be, the last thing you want to do is be pumping a load of debt into a capital structure. It makes the company extremely fragile and extremely susceptible to a downturn in trading. So maybe you just want to hold that extra buffer. Maybe you would put 50% debt into this company and you

your interest charge would be quite high. Instead, you're only going to put 35, giving that little interest payment or interest service buffer so that you can sleep a little bit better at night. All right. Well, let's move on to Goldman Sachs. I'm interested to know, why are they looking to scale in the Middle East? Yeah. So again, this is a story we've covered a couple of times, but it's just, again, another reiteration of how

the Middle East is becoming the place where instead of you're just growing at 2%, 3%, 4% as a bank or your investment banking business, which is basically in line with economic growth, maybe plus or minus a little bit, the Middle East is seen to be a

market awash with investable cash but without the maturity of an ecosystem or a banking and advisory ecosystem that is hard to penetrate so it's almost that kind of perfect storm add that to the fact that if you remember our main man mr trump doing his tour of the

Over $2 trillion of firepower to be put to work in the U.S. from Middle East investors. I don't know if that's a viable number. But if there are these pledges and the bridge is being built, the investment bridge is being built between the Middle East and the U.S., Middle Eastern money going into U.S. investments,

US money going into Middle East IPOs and things like that, then it makes total sense to have a big enough presence to manage this growth in the Middle East as well as in New York. Again, it's staggering this amount of money that's swilling around in the Middle East. $4 trillion in assets are held by the sixth largest sovereign wealth funds in that region.

So it's the place to be. Goldman Sachs are doubling down in terms of headcounts and opening more regional offices outside of Abu Dhabi. UBS is planning to open a new office in Abu Dhabi. JP Morgan's adding more than 100 staffers to its business across the Middle East. I wouldn't necessarily say it's the new gold rush, but it's certainly the area where growth is happening.

How do you play this if you're Goldman Sachs or any of these banks in terms of who you send? So there's a lot of potential on the table here for fees, but how does it work in terms of who you'd want going to that region and the appetite of that person to be in that region and not in New York or London? It's a very good question. You would get the best people that you possibly can

to go over with the highest credibility and status. I think there's a very important status element here. You don't just send a bunch of junior bankers. It just doesn't work like that in this region. You would pay them incredibly well. You would leverage the fact that you'd probably be based in a zero tax environment and you would say five years, make hay,

Off we go. You know, the pay packet, the incentives are going to be extremely strong. Don't pay tax. You know, send your kid to school wherever and give it a go. And you will get, I can guarantee you, you will get enough bankers of a certain level of seniority that will be interested in that proposition. And again, there's money to be made. And for any banker that's enterprising and is a little bit kind of, gosh, all right,

New York, list of companies, they've got their favorite bankers, very, very hard to break into new markets. This is the opportunity, right? Yeah, yeah. Young upstart, this is your time to shine. All right. Well, look, last one.

And we've talked about this before, actually a couple of times, but this is over the case of several months and I'm sure we've got new listeners. So perhaps this last story about Victoria Secret's poison pill could start with the definition of what is a poison pill as a reminder.

Yeah, absolutely. A poison pill is a classic defensive strategy protecting and defending a company and its shareholders against either a hostile takeover or a shareholder adjutant is probably the way that I would put it. Poison pill is

The structure is relatively straightforward. It is a dilutive mechanism that makes it really, really difficult for a potential acquirer who's growing their stake in the business to actually end up acquiring that company. And this is how it works.

So a company that's worried about a shareholder building up a stake and eventually potentially building up a big enough stake that they can launch a hostile takeover, they will enact what's called a shareholder rights plan, also known as a poison pill. Let's say, and this is the case in Victoria's Secret,

As soon as an investor acquires that 15% threshold ownership in a company, it triggers the shareholder rights plan, which effectively gives existing owners of the common stock, excluding the 15% owners, the right to buy more shares at a discount, which dilutes the ownership stake of the adjutant, making it much harder and much more expensive to gain control. So

If everyone wants this shareholder rights plan was enacted, if all of the shareholders took up their discounted share offering, you're effectively turning that 15% stake into a 7.5% stake. You're diluting the ownership of the adjutant. So in this instance, this concerns the lingerie company Victoria's Secret.

Stocks fallen 43% this year. It's struggling with a lot of competition and a relatively expensive physical store base. BBRC International. So this is an Australian entity controlled by the billionaire Brett Blundie.

Great name, Australian businessman. Previously, the owner of Brazen Things, this was his Australian equivalent, has been building up a 13% stake. Now, this is why the poison pill has been enacted. But what's interesting about this story is that I don't know whether the management and the board of...

Victoria's Secret believe that BBRC and Brett Blundy actually want to launch a hostile takeover they just are really really upset and believe that BBRC has violated US laws with regards to purchases of shares you know and I think it says BBRC bought Victoria's Secret shares for nearly three years without the required filings which was in violation of US antitrust laws

So it's more like, look, we don't want this bad actor that I think has probably been breaking the law to go above 15% because we don't want this dude hanging around our company. Surely he's not breaking the law because he can't be spending that level of money to pick up that 13% stake.

at putting at risk that he's breaching the law. Like, surely it's too much money at stake to take that type of risk. Yeah, who knows? Who knows? And I think we'll probably get updates on this story over the next few months. I don't know whether this was a kind of shot across the bowels, or this was a kind of

a proxy story where the actual worry is that there's going to be a hostile takeover maybe this was the the headline excuse given for enacting a shareholder rights plan but the real excuse the real reason is that they don't want a an aggressive acquirer so yeah there's lots of stuff to dig into here i totally agree with you though you know you're buying it was 10.3 million shares 13 of the company you're going to want to do that right um

I don't know, maybe there's going to be a junior that gets fired somewhere. Who knows? Is there any kind of success rate of poison pills? Yeah, so interestingly enough, I think we covered this and maybe we can re-release this episode in a future week. We covered this a number of months ago. Often poison pills are used as a negotiating tactic as opposed to a hard stop.

So we are going to introduce a shareholder rights plan in order to bring the adjutant, the shareholder who's growing their stake, to the table with a more favorable offer. Almost moving something from hostile to friendly because there's no way that this shareholder can do the hostile takeover. So you might as well come to us and be friendly. So it's definitely one of the tools that you can use to bring a party to the table.

Cool. And then just quickly to finish, you mentioned, well, I mentioned at the top of the show about a very expensive gift that was issued by a very famous businessman. Yeah. So I love these little headlines. I think if you read too many of these headlines, they've become quite normalized. So I just wanted to bring this out. So this was a, again, a Bloomberg headline. Google's Sergey Brin gives shares worth $700 million as a gift.

Now, we don't know who he's given that $700 million to. He sold 4.1 million shares, bearing in mind he's got a personal fortune of over $140 billion.

He's been doing this for the last few years. In 2023, he offloaded $600 million worth of shares. He did $100 million last November. And he's obviously got loads of fingers in different pies. But I just love that concept of gifting $700 million. It's a little present, a little pick me up, you know, at the end of a hard week. There you go. I have $700 million.

doesn't happen at Amplify unfortunately well look he can he can pump 700 million into our podcast and then uh yeah you could see see this show go to a new new dimension here come on well you could replace me you can replace me with AI you could you could get um Johnny Ive on it oh what's it called synthesis is it the AI company we could we could get 3d scans of our bodies perfect and then we could just yeah kick back right off into the sunset yeah yeah have the AIs do the work

What are we thinking? Well, maybe we are actually AIs at the moment and we're just fooling everyone. But anyway, who knows? On that note, thank you very much, Stephen. Thanks, everyone, for listening. And we will see you next week. Take care. Cheers, Anne.