Smells Like M&A Spirit: Disruption or Advancement? – Shimmy Says EP13

Hey everyone, it's Alan Shimel and welcome to another Shimmy. Says, you know, in my best Apocalypse Now movie voice, let me just say I love the smell of m and a in the morning. I don't know what it is, if it's that April showers have bought May m and a, the economic macro and micro conditions, ai, VCs, PEs, IPOs, stocks, we, you know, we talk about all these things, but we certainly are seeing a rash of m and a activity in the tech sector, right?

We just reported, uh, I, I just today, right? Databricks, uh, bought, uh, neon a a, it's actually a serverless Postgres provider, but you know, they claim this is part of this agent AI thing. Of course, everything, if it doesn't shake and rattle ai, it's not worth anything.

But they paid a billion dollars for Neon. And you know, that's quite a billion bunch of money. That's the third billion dollar acquisition.

Databricks Databricks is made, like in the last year, a Salesforce, which always seems to be acquiring something, is usually in the AI business too. Bought a company today, also paid a hefty sum for it. Um, you know, really, we've been on a roll almost since, I would say, since the Google whiz deal was announced, you know, for 30, whatever it was, 34, 30 $7 billion.

It's a lot of billions getting thrown around. And, and, and the beat keeps going on. We're seeing more and more activities, I think.

We'll, we will continue to see. Now, that's kind of the way of the world in, in tech, right? Small fish come up with great innovations, medium fish, eat the small fish, and take those innovations and, you know, productize them if you will, and market fit them, medium fish, then get eaten up by bigger fish who take those products and build them into their platforms.

It's been going on for as long as I've been in technology, but when you see a lot of m and a activity like this, some people say, oh, it's a good thing. People are making exits, people are making money. It, it's the sign of a healthy ecosystem system.

And sometimes it is. And, and if you are, you know, the founders of Neon and you just sold for a billion dollars, congratulations, it's your lucky day or your lucky life. Um, but it's not always a good thing.

Sometimes it could be a sign of sickness in the ecosystem. And as I sit here now, I'm not quite sure if it's a good or bad that we're seeing all of this m and a and, and like most things in life, it's probably not black or white. It's probably gray.

There's good and bad to it. I think we gotta look at it this way though. First of all, look, for all intents and purposes, the IPO market as a means of liquidity and exit is, is is still basically shut down.

Yeah, we, we've got a hiatus with this China tariff situation. Yes, the market was thrilled to hear it, but it's really, what is it, a 90 day sort of chance to get it right? And I don't know if anyone sitting here is confident that this gets right, other than, you know, the present US administration seems to like to take stuff to the precipice and then pull back, right?

But it, it's very hard to keep running your economy that way, and we'll, we'll see where that goes, but be that as it may, IPO market right now is not really an option for many companies. Databricks is a perfect example, by the way. Look, this is, I think they were valued at 10 billion or some number like that, or maybe they raised 10 billion.

I don't even remember. They raised a lot of money at a very, very high valuation. And you would think they're primed for an IPO, but for what, you know, they've chosen not to and because it's not a good time to do IPO.

So if you don't have an IPO market, what do you do? You want a liquidity event? You could raise more money on secondary markets and sort of recapitalize, recap your company, take some of the old money out, put new money in.

But that's not really the answer. That's not the answer for a liquidity event. That's just, you know, that's trading kind of treading water.

You look to sell your company, you look to, uh, the m and a activity. Now, whether m and a activity is a sign of a healthier, weak market, in my mind comes down to a few things. Number one, what kind of multiples, what kind of valuations are companies getting, right?

If companies are being sold for fire sale money less than they've raised in capital, or much less than you know, their, their valuation at their last round, well, generally that's the sign of something's rotten in Denmark, right? Something's not good. And, and you start seeing these fire sales and, and consolidations as they're called.

And, you know, and it's VCs who really look, when a VC invests in a company, they've got a five to seven year window to get a return on that money for their fund. If they've invested five, seven years ago and that company hasn't had an exit or a liquidity event, you know, the VC has to do something to go try to get that fund, uh, payback done, right? Because that's how they get judged when they raise their next fund.

So this, this is an issue that we, you know, you see. Now, here's the good news though, for the most part, this m and a activity that I'm seeing that we all are seeing, it's at really high valuations, right? I don't know what neon's, uh, revenue was, but it was, it's a very, very small fraction of a billion dollars, I'm pretty sure.

And, and so, you know, we, we call those deals, right? A strategic deal because you really can't judge it by a multiple of revenue or EBITDA or something like that. So, you know, that's a good deal.

But we've seen a lot of good deals. You're not seeing deals get done for under a couple a hundred million, and oftentimes the deals are a billion or two or even more sometimes. So, you know, by the healthy, uh, valuations that these, that these companies getting acquired are receiving, I'd say that's the sign of a healthy ecosystem, right?

But again, there's some caveats. All of these acquisitions are being couched under the veil of AI enablement, a agent AI, generator of ai, right? And, and so the real answer is are they really AI or are they pigs sent to market with some AI lipstick?

I don't know. I mean, time will tell, but you know, I, I got a hard time believing that all these things are truly, truly AI related. Um, the other thing is, you know, it's something my friend Brad Feld taught me a long time ago.

In any new and emerging market, you wanna be the top three. The top three companies that go li that get a liquidity event, get the lion's share of the available capital to that, right? So whether it's an IPO or an m and a, if you are in a particular segment, if you are not one of the top three in there and you are not one of the first three getting acquired or IPO-ing or merging, generally after that, the valuations go down or down, down, down, down.

And, and so I think what we're also seeing is because AI has spawned so many new categories that a lot of these companies getting acquired are actually early in their markets and they're getting acquired, you know, as one of the first three companies in their market. So they're getting some really healthy valuations and again, more power to them, right? I, I learned something, another mentor of mine, a man named Len Faser once told me, if someone's willing to put their hand in their pocket and write you a check, and it's a fair number, take them, take the money.

And unfortunately, I've learned that lesson the hard way in of my life too. So, you know, will, is, is, is the current m and a storm the, the product and fruit of, of AI hype? And is it a healthy thing for our ecosystem?

Or is it a, a bellwether of underlying weakness? And once the, the top three in any category have made their deal, we're gonna see a lot of fire sales. If I knew that I wouldn't be working, I'd be living on some islands somewhere, but it's something that bears watching.

Thanks for joining me this week On Shimmy says, we'll see you next time.