The grandees of Silicon Valley often view Mergers and Acquisitions through a different lens than much of the rest of the country. Whether due to new technologies supplanting the old, overhyped valuations crashing to earth, errors in judgement, or lack of business acumen, the tech world is rife with the rise and fall of companies and careers. That boom-and-bust mentality has inculcated in its aspirants a mentality that fast growth and enormous riches are as rapidly built as they are squandered and perhaps built again. At this year’s West Coast M&A/Private Equity Forum, which took place on September 28th in East Palo Alto, those differences were on full display.
A chill has descended on Silicon Valley as typical acquirers such as Google, Microsoft, LinkedIn, Apple and others are hesitant to make acquisitions. One of the main factors is the regulatory pressure from lawmakers in D.C. A representative for one of those typical acquirers, bemoaned the current administration as a “wet blanket” for M&A prospects in the tech sector. The irony of that comment may have been missed by the audience, as many in Silicon Valley have supported the same administration that has brought the regulatory heat.
Environmental, Social and Governance (ESG) objectives, many of which are practically dictated by Washington, have become ever more prevalent in business, and as a result, companies feel cornered and limited. The pursuit of ESG goals might mean diminished earnings, which would raise the ire of shareholders and board members. But if ESG goals are not pursued, that might raise the ire of activists…and some board members. Damned if they do, damned if they don’t. Managers are terrified of being the next Target or Bud Light, and as a result, they are now trying to keep a low profile.
Manufacturing and distribution might not be as ephemerally sexy as technology, and companies with balance sheets with inventory might not trade for sky high multiples, but they tend to avoid the crash and burn nature of technology. Last year, the hot topic of discussion at the East Palo Alto forum was cryptocurrency. This year? Crypto was not mentioned, and the crypto industry did not send a representative. Artificial Intelligence (AI) is all the rage now.
But AI is only as good as the information being poured into it, and to that end, most AI engines utilize data from a few years ago. The information that is manipulated by those engines, and therefore the output that is presented to humans, might not be current. Where AI can be very beneficial is in the reduction (and maybe, elimination) of the informational “black box”– a phenomenon where what is perceived as company-wide common knowledge among employees is instead relegated to a few individuals or silos within the business. AI can be a powerful tool to scrape a company’s servers to find information – thereby eliminating the phenomenon. But “intelligence”? A bot might be able to write a term paper, or a song, or even a book, but that bot cannot be considered “intelligent” until it decides by its own volition to write that paper or song or book. To that end, the bot does not provide answers. Instead, it is a high-tech resource that quickly and efficiently finds information usable for human consumption, analysis, and decision making. AI imparts gussied-up search results packaged to look as if they were produced by a sentient being.
Just as AI replaced last year’s crypto-mania, will some new development next year supplant AI? And if something new grabs our attention in a year, will it be a long-term trend, or just another momentary infatuation.
In the forward for Gone to Pot, a 2020 book about the early days of the legal cannabis industry, I mentioned “the caravan.” This was a term my father used many times to describe the never-ending litany of fast-talking, wild-eyed, know-it-alls who tout “can’t miss” financial structures and get rich quick schemes. Every few years, a new coterie of caravan members arrive and promise to not just disrupt, but to upend business as we know it. In the 1980s, the caravan touted junk bonds; in the 1990s, dotcoms; in the 2000s, collateralized debt obligations; and more recently, crypto and cannabis. Will AI be the next addition to the caravan?
Someone, somewhere will figure out how to make a sustainable business model for crypto, cannabis, and maybe even AI. Will that, and perhaps a more business friendly administration, be enough to kickstart Silicon Valley’s vaunted, though now dormant MA& machine? Time will tell.
William R. (“Bill”) Snow, a FOCUS Managing Director, is an experienced M&A professional with over 30 years of professional experience, including almost two decades as an investment banker. His work includes business sales and capital raises for middle-market companies as well as buy-side services for acquirers seeking middle-market companies. Contact Bill at [email protected].