The outlook for both tech M&A and tech IPO activity looks pretty good, even if regulatory fears and easy access to private capital are deterrents for some transactions

That was one of the takeaways from a wide-ranging discussion at the Goldman Sachs Technology & Internet Conference involving Gregg Lemkau, the co-head of Goldman's Investment Banking Division, and David Ludwig, the firm's co-head of Equity Capital Markets in the Americas. Here are some of the highlights from the talk.

M&A Activity

"When we're out talking to our clients in this environment, they're really optimistic, across all sectors and all geographies," said Lemkau about the broader corporate M&A landscape. He thinks a wish for clarity on tax reform and cash repatriation caused an M&A lull last spring and summer, but -- citing deals such as CVS (CVS) /Aetna (AET) and Disney (DIS) /Fox (FOXA) , as well as Action Alerts Plus Broadcom's (AVGO) hostile bid for Qualcomm (QCOM) -- added that firms got tired of waiting towards year's end.

And now that tax reform and (at a 15.5% tax rate) cash repatriation have become realities, the stage is set for more dealmaking. Though many firms previously insisted that a lack of access to offshore cash isn't affecting their M&A plans, Lemkau asserts "behavior's changing" as companies are forced to decide what to do with mountains of repatriated cash. "Their view is that it if you don't use it in the next year for M&A, shareholders will demand it back."

He added that the "general mindset" among companies facing this dilemma is to commit to some capital returns while leaving powder dry for M&A (Cisco's (CSCO) recently-announced $25 billion buyback expansion might serve as a case in point). The big question is whether shareholders will be appeased by such moves.

Regulatory Fears

Regarding tech M&A in particular, Lemkau noted that (in spite of some high-profile deals and plenty of chip industry consolidations), tech "has punched below its weight" in terms of dealmaking. And though believing the broader outlook for tech M&A looks good, he thinks concerns about greater regulatory scrutiny will restrain the actions of tech giants. "I think it has less to do with antitrust doctrine...but anytime you do a deal like this, you're opening yourself up to the regulators to look at everything you do," he said.

The EU "would love" to have a chance to more closely probe tech giants, he argued. And in the U.S., the "political arbitrariness" of the regulatory environment is a concern. Lemkau cited the rural broadband requirements placed on the AT&T (T) /DirecTV deal, which had been widely expected to pass without any trouble, as an example. Also: An uptick in nationalist sentiment is seen as a greater risk to cross-border M&A in many locales.

But Lemkau and Ludwig are both optimistic about the potential for M&A among tech firms in the "layer beneath" the giants -- for example, companies with $50 billion to $100 billion market caps. Software was singled out as an area particularly ripe for major deals, as firms try to gain scale and expand their product lines.

IPO Activity

"Broadly, we're really excited about the IPO market right now," said Ludwig. He noted that optimism about macro trends has been fueling a pickup in IPO activity, and that (in contrast with prior periods, where offerings may have skewed towards fields such as Internet services or cloud software/SaaS) there's now an "amazingly diverse" backlog of tech IPO pitches.

With many high-profile tech unicorns (Uber, Airbnb, Pinterest, Palantir, etc.) still in no particular rush to go public, Ludwig unsurprisingly qualified his remarks by stating that "access to private capital at attractive valuations" is letting many firms stay private longer if they want. However, he added that a number of companies are now "beginning to think about going public at some point" (pressure from employees and other shareholders can be a factor here), and predicted that many unicorns and "decacorns" will take the leap in the next 12 to 36 months.

Private Equity

In terms of capital-raising, "it's an amazing market right now for private equity," said Lemkau. With the help of both cash repatriation and how well PE has performed as an asset class, funds in the $12 billion to $18 billion range are being raised, with capital deployed in 2 to 3 years rather than 5.

When asked about what the "right size" is for a potential PE deal, Lemkau suggested something around $25 billion would fit the bill. He noted that access to equity financing, rather than debt financing, is often the limiting factor with regards to deal size, with firms sometimes struggling to raise more than $8 billion to $10 billion of it for a transaction.


Though it's hardly the only tech giant to spawn major competitive fears and acquisition hopes among smaller companies, (AMZN) is in a league of its own in this respect, Lemkau suggested. Among the companies he claims have told him that Amazon should buy them: A SaaS company, a sports content company, a home security company and a bricks-and-mortar retailer. "They could do any of those things. And they could do all of those things," he quipped.

Ludwig says "every one" of Goldman's software IPOs is worried about Amazon Web Services (AWS). Just as all of its Internet IPOs are worried about Google, Facebook, or Amazon.


There's a "massive amount of envy" for SoftBank's giant Vision Fund, says Lemkau. "They get every phone call and every opportunity" for big capital raises, and not just in tech (SoftBank was recently reported to be mulling a giant investment in reinsurance firm Swiss Re). "From a sourcing standpoint, they're getting every transaction of size."

Regarding the steep valuations the Vision Fund has often made big investments at, Ludwig argued that the fund's long-term timeframe (investing "for decades" rather than years) makes such deals more palatable for it than they might be for peers. Lemkau added that it's widely speculated SoftBank chief Masayoshi Son "has created a reverse auction dynamic," in which rivals firms within a market compete to get SoftBank's backing.

AT&T/Time Warner

As the DOJ's lawsuit to block the AT&T/Time Warner (TWX) deal approaches its March 19 trial date, Lemkau reports hearing from the "vast majority" of antitrust counsel that Goldman speaks with that "some kind of settlement" is possible, given the uphill battle the DOJ faces. "Conventional that you're going to have to remake antitrust doctrine" to shoot down the deal, he says.

Like a few others, Lemkau suspects Time Warner's ownership of CNN has something to do with the DOJ's suit. "Had AT&T bought...Fox News, I'm not sure Trump has issues with it."

Activist Investors

Given how successful activist investors have been in winning concessions from the companies they've targeted, Lemkau doesn't expect any letup in activist campaigns. Though admitting a tension can naturally exist between firms taking a long-term investment mindsets and activists who are more focused on the short-term, he argues companies are best-served by getting out in front of the problem, addressing "deficiencies" in areas such as governance, capital structure and cost structure before an activist does it for them.

"The dialogue we have with all of our clients your own activist," Lemkau said. Because when an activist spots one of those deficiencies and demands a change, "you're going to have to do that."

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