Motley Fool Money - One Deal Begins As Another Ends

Episode Date: December 18, 2023

(00:21) Bill Barker and Deidre Woollard discuss: - The arc of U.S. Steel over time. - Why Adobe might be giving up on acquiring Figma - The changing environment for getting deals done. (17:00) Deidre Woollard talks to angel investor and author Bill Raduchel about how tech has changed over the past six decades. Companies discussed: X, ADBE, CLF, XRX, AAPL, META, GOOG, GOOGL, NVDA Claim your Stock Advisor discount here: www.fool.com/mfmdiscount Host: Deidre Woollard Guests: Bill Barker, Bill Raduchel Producers: Ricky Mulvey, Mary Long Engineers: Kyle Carruthers, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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M&A madness, buckle up. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst Bill. How's your Monday going so far? Monday's going well so far. Thanks for asking. And yours? Busy. Because I mean, one of the reasons I love hosting the show on Mondays is I never know what news I'm going to get. But, you know, the rest of the week, you kind of see earnings, economic indicators. Monday is a wild card. But, you know, I'm going to be. But, you know, but it usually involves some form of mergers and acquisitions. It's kind of like my own version of the celebrity gossip. And we've got a makeup and a breakup today.

I want to start with the big one. This kind of feels bittersweet to me as a student of U.S. history and financial history, but U.S. steel, right? Once the giant of the American economy, you know, it's attached to all the big names like J.P. Morgan, being acquired by a bond deal for $15 billion. We knew that this was coming. U.S. Steel has been entertaining suitors since the middle of the summer.

It's a good deal for shareholders, but I don't know, Bill, it's the end of an era. What do you think? Well, I suppose the era ended quite a while ago, although U.S. Steel is at the heart of a lot of eras, a lot of history, whether you're talking about monopolies and the creation of regulation to, thwart monopolies. You're talking about its role in war efforts, the creation of vast an ounce of wealth, the creation on the other side of sort of the Rust Belt, and so many other parts you can tell the story of America over the last 130, 140 years or so pretty well by looking at different aspects of where this company has been. And I think that where it has gotten

And two is not as interesting as where it's been. But, I mean, this is still a $15 billion deal. This isn't a company that, you know, that is like disappearing or anything. And it's still a valuable company. And one of the things, you know, I try to ask with every deal these days is, is it likely to happen? Is it likely to go through? Because there's so many governmental regulations. What kind of considerations do you think are going to go into this one?

happening or not happening? Well, the size of the deal and the size of the headline is not commensurate with the import of the company in the stock market, for sure. It hasn't been in the S&P 500 for decades. And I was looking up sort of what are the other similarly sized companies in terms of market cap, not in terms of employees or output, but going into this deal, it was about the same size as Etsy. So you've got this picture of U.S. deal as being this gigantic, important entity in terms of employment with 15,000 people, and that's largely unionized a workforce, that's going to be the biggest hurdle, I think, is getting any type of union buy-in. They're going to oppose, they've already announced that they're going to

oppose this deal on various grounds, but I think ultimately on what it's likely to do to jobs in the U.S. So, regulatory backdrop is not terribly favorable here right now for this. The market is discounting a little bit, despite how much the stock has gone up today, about 25, 26 percent. There's still a gap between where the market is pricing the stock and the offer price. I think one of the things that's interesting, too, is that this was so much bigger than the Cleveland Cliff Steel that was supposed to happen. There's definitely some value here, and I think more so for Nippon Steel than it would have been for Cleveland Cliffs.

U.S. Steel, they're going to keep their name and their headquarters in Pittsburgh, but it's obvious that the locus of building has shifted, right? China now dominates the world when it comes to steel, but China is also going through its own building crisis. So we're looking at a fading industry, but not a disappearing one? No, not disappearing. Still important in terms of what you do with steel and construction, buildings, cars. So there's plenty of plenty of work to be done on producing steel domestically, but the economics of it have not worked out for shareholders very well. And if somebody else wants to give this a try, today's share. shareholders where yesterday's shareholders are willing to let them do so, I think.

At the price that they're offering, maybe Nippon sees efficiencies that U.S. Steel has never been able to affect. And if so, then maybe it becomes an attractive economic deal beyond just making Nippon, I think the number three steelmaker in the world in terms of tonnage, if it combines. So I would assume that they see that this is a good allocation of capital, and more than Cleveland Cliffs was able to offer. Cleveland Cliffs is also up on the day. I guess the idea that U.S. steelmakers have a price that is now being reset by this offer. So that's been to the benefit of the shareholders beyond U.S. Steel.

Yeah, good point. And it is a reminder that today's hot industry is tomorrow's, oh, well, that was big once upon a time. It seems like, I mean, you're right, steel was once, I mean, hell, there's Pittsburgh Steelers for a reason. But it's also a highly cyclical industry. And this is not the cycle to be invested. in it, it seems like. No. Well, it was peaked in terms of output 70 years ago. So it's been a long

series of chapters of other competitors going bankrupt and U.S. Steel being able to take over some of those and the largest company in the world once upon a time. And the center of Carnegie story making Andrew Carnegie the wealthiest man in the world, Charles Schwarz The financier and at one time CEO of steel companies. There's a lot of American history there and lives on in the form of the Steelers and a lot of present-day Pittsburgh and what has been created by the steel industry over the decades and centuries. But it's not something that has the kind of economic returns that that's the kind of economic returns that interests that many people.

Well, let's move on and talk about a deal that won't be making it to the finish line. Adobe is calling off their acquisition of Figma. Figma is a sort of design software company. It helps you sort of design and build websites and apps and things like that. This one seems to be a victim of regulators. They had faced friction from both the UK and the EU. Gave up before the Department of Justice rendered their decision, though. And they're going to pay a billion-dollar breakup fee.

So should it be shareholders be happy about this? Apparently. They're happier to the tune of 2% today in the market, a market that's up about half a percent in the S&P. So, yeah, not disappointed. The purchase price at the time, September of last year, I guess, was aggressive. and part of this was being fueled by stock as well as cash.

Adobe stock is up about 100% over that time period and 75% this year. So, shareholders are seemingly happy to not have the stock diluted for the acquisition of an entity that would have made lots of sense in Adobe's portfolio, but Adobe has products that compete with Figma. And I think there was a pretty reasonable argument by the regulators on this merger that this was going to be anti-competitive, that this was something where the consumer would do better with these two companies competing against each other than combining. Well, and I think it's interesting to me because Adobe had their earnings last week. And, you know, they were still saying they were going to wait and they felt optimistic that this was going to go through.

And now, you know, it seems a little sudden to me that they didn't wait all the way to hear from the DOJ. So I'm wondering if there's something, if they took this opportunity because maybe they thought they were overpaying or something like that. I think the possibility that they were overpaying could have a role in it. I'm sure that discussions with the lawyers in the many jurisdictions where they were going to, going to have to get this approved and what the tone was, waiting around in the U.S. for a new administration might be plausible, but in the EU and the U.K., less so. So I think that on balance, they can do this. They can do plenty without Figma.

Figma can do plenty without Adobe and waiting around to fight this, what seems to be long series of battles was not in the interest, apparently, of either party, but it does, as you point out, with the declarations just last week of what their intent and belief was about how this would play out, you know, you got to take that with a grain of salt on the public proclamations about how things are going to work out in situations that are outside of the hands of management. My wild theory and speculation is, you know, hearing last week that Doc you saw, is looking, you know, is potentially exploring a sale.

I'm like, oh, well, maybe Adobe wanted to put the money there. I don't think that's what's going to happen. I think private equity will probably grab that. But that was sort of one thing that I was just sort of wildly speculating on. Since it seems like DocuSign might be being sold somehow, somewhere. Somewhere, maybe. They'd like it, I guess. That sounds like it.

Better than some of the places that their stock has visited over the last couple of years since the peak craziness. So if they can get something that's rewarding to today's shareholders, that's in their interest. But I think that the M&A market is healthier today, given the bull market moves in the last couple months. And that's showing up in the news. Yeah. Yeah, absolutely. And it's the end of the year. I was talking to Jason Moser last Monday and asked him, you know, do you think we're going to see any more M&A for the rest of the year? He thought, he thought maybe. And certainly since I talked to him, I think we've seen a couple of other biotech deals. But one of the things I think about these days is knowing how long every deal

is taking. It's not, it's multiple years at this point. And the risks for it not getting approved are so high. As an investor, what do you think like when you hear of an acquisition these days? Are you putting, are you sort of just waiting and thinking it's not going to go through? How are you thinking about it? I would say that the environment is less favorable today than it's been most of the last couple decades, and that any deal should be discounted to a degree by that. And the bigger the size and the more that tech is involved, that seems to be getting extra scrutiny.

There are only so many levers that the regulators have currently. to regulate tech. They can't get the lawmakers to give them additional power. The lawmakers seem to all agree that there should be far greater regulation, but what that is hasn't moved forward at all, really. But what does exist is the power to stop mergers, and that prevents big tech companies from getting bigger, faster to a degree. So I think that that is a particular area where I would look for, you know, mergers to be getting large amounts of scrutiny and a bias against permitting them.

Well, that's interesting because logically individual investors know, like, okay, just because a deal is announced doesn't mean a deal is done. But the market doesn't seem to know that. We get these wide swoops of enthusiasm and it really, you know, it becomes that voting machine in the, in the short. short term? Well, you've got certainly anybody that was short the stock kind of has to cover, whereas it's likely to in situations such as U.S. Steels. There's an offer for 55 out there. The market shot up to 50 at the open for its share price, despite the fact that it may not

get approved. But it's certainly on, maybe this ends up. being good news for the Cleveland Cliffs merger. I don't know exactly how, but they seem to be seeing their stock price go up. And that's the kind of merger that would get much quicker approval, keeping everything domestic. So yeah, it's always worth keeping in mind that a merger announcement is not the equivalent of a completed merger. But it indicates that there is interest at high.

prices for the assets of these companies. And so that in itself is reason for the stock to move higher. So as an investor, do you think people should, I mean, of course, it's individual, but when all of a sudden a stock that you've had in your portfolio that is kind of languishing along, all of a sudden spikes on a deal or a proposed deal, is that the time to potentially consider an exit? If you like the price, yeah. I think that the prices for the acquired company is almost always, not always, but almost always,

higher than what the market price was. If you've got a valuation that makes sense to you to sell, then not waiting around for it might make sense. Depends on your tax situation. It's a complicated portfolio question, but if you like the price, then that might be waiting around for those last two or three dollars may not be in your interest at times. It's very specific to the deal and the individual holding. Yeah, absolutely.

Well, thanks for spending this M&A Monday with me, Bill. All right. Thanks for having me. The analysts you hear on the show have a whole other day job, providing premium coverage and recommendations for the Motley Fool suite of stock investing services. We are giving our listeners a discount on Motley Fool's flagship service. It's called Stock Advisor. If you're interested in more analysis from our team, two stock recommendations per month,

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Once upon a time, you talk to computers by ringing a bell. I caught up with Angel Investor and author Bill Radichol about the past six decades in tech, messing with the laws of physics and the difference between Apple and Xerox. Well, let's set the table a little bit by discussing what tech kind of was and wasn't when you got started way back in this business, because it is a very different world now. Oh, it's totally different. I mean, the first computer that the college I was at bought had only two ways to talk to it, a bell and a paper tape. And you had a code, very complicated bell sequences, or otherwise, you had to take a paper tape and go over to a flexor writer

and feed the flexor writer the tape, so it would print out what was on the paper tape. So the world's changed in every respect. The first computer I programmed had 10,000 characters of memory. And your, you know, my Apple Watch has 128 gigabytes, you know, gigabytes. I mean, it's 6,4 gigabyte. It's millions of times more power. You know, what we saw in the beginning did very specialized tasks, maybe fine, but they were very limited. And today we're talking about artificial general intelligence on our phone that will be able to do almost all the thinking we do routinely in our lives. I mean, it's just, you know, night and day, universe is away. Oh, yeah, absolutely. And I think one of the things that's interesting about that and in reading

your book is the early days of tech, because nobody knew what was ahead, nobody kind of knew what to pay attention to. And it sounded to me like there were a bunch of missed opportunities, especially around data. If you could go back in time, what would you tell people to focus on? Privacy, security, and mental health. I mean, if there are three things that people missed, I assure you, no one up until the last five years ever talk mental health. Privacy, that's been around a long time.

I mean, my friend, and at that time, my boss, Scott McNeely in 1995 at a press conference on something else, a question was raised about privacy, and he said, there is no privacy, get over it. That was in 1995. So that issue has been around a long time, but we haven't done much. The people who invented the Internet did an incredibly good job, but they thought it was going to be a million people. Now it's nearly $5 billion. The technology was great. It was a brilliant design, but they never thought about the privacy issues or the fact that when they designed the Internet, they designed it to be sessionless.

Now, that's a technical term, but what it means is that you can do things on the Internet without an identity. And so you have anonymity. And this is really the first time, even when you go into a store, you're not anonymous, because somebody is able to see you and recognize you. But, you know, there's the famous New Yorker cartoon, which I think has by far in a way the most request to reprint, which is the one that shows the dog sitting at a console saying, you know, I'm the Internet. No one knows you're a dog. But we didn't think about the flip side of that. We didn't think about how this could be played out. We certainly didn't even think social media, right? I mean, that, you know, no one thought of that. Even today, you know, when you see people talking AI, you know, the consultants or the advisors tend to have a trick question. for the executive claiming they have an AI strategy and ask them, what is their data strategy? And the person says, well, if you don't have a data strategy, you don't have an AI strategy, because AI is fed on data. And if you don't have the data, you can't feed the AI, so you don't have a strategy.

A couple of things that I've learned along the way. One is that it's all laws of physics. If you don't understand what laws of physics you're changing and why that's going to enable a new round of innovation, then you probably don't really have the investment opportunity you thought you might have. And secondly, it's all people. And some people were able to sit there. I mean, Andy Bechtlesheim is badge number one at Sun. And in 1988, he sat down with me, and he explained to me the information environment we would have in our homes then, 88.

So, the one we have today with high-speed Internet and all these things. He did that in 1988. And so there are a handful of founders who are able to look out and see what these laws of physics dictate and which things will in the end win out. And it was very clear even in 1988 that TCPIP, which is the foundation of the Internet, you know, was going to win. It was going to end up being that was going to be the technology that won. And everything else would take a long time to fade away. But that's where we are today. I mean, you have a single high-speed IP connection coming into your house, and that drives everything.

And he could see it. So the change, part of the reason I wrote the book was to make the point that none of this happened without people. And it's easy to look at this stuff and say, well, no, but there were individuals along the way. It took work. It took engineers. It took people working long, hard hours. It took deals between people that didn't want to strike deals. to go make it happen. And, you know, it's been a struggle. I mean, rewarded some people, you know,

beyond their dreams, but it's a very personal thing. I mean, I got to write the book because it comes out of a class I taught at Georgetown, and I was asked to do the class by a friend who was the dean, and he said, my students need to know what the real world is, and there isn't enough real world. So please come in and talk to them about how the world really developed. in terms of the things they're going to be doing and watching and observing. And that's what started me. And so those lectures became the basis for the book and the chapters and it's all better be written.

But that's really where the ideas came from. Well, I want to go back a little bit to some of your history because you have some of great lines in the book that really sort of helped me understand what things were like at a certain time. And one of them was about Xerox. You called Xerox the most professionally managed company in the country at that point. But you also made the point that there's a big gap between professionally managed and best. So looking at that now, would you say that you see companies that are professionally managed right now

and do you see companies that are best managed right now? And are there? The comment that got me into trouble at Xerox, DeGer, was the comment that it was professionally managed but content-free. And that the management process was largely devoid of a discussion around whether this was going to work or where the competitive advantage came from or the core of what happened. But you could take the Xerox technology or techniques and apply it to any industry. But if you didn't have the knowledge of the content, then it didn't matter, right? It was a way to make decisions, but unfortunately, you know, another line is process affects outcomes.

And because you did things in that way, and Xerox always wanted evidence. and so they kept looking for evidence before they would spend money. Well, in technology, you've got to, that means you're always shooting behind the duck, as they say. If you want to shoot to where the puck is going, to mix metaphors, you've got to be willing to act on knowledge. And Xerox wanted evidence. And you can't manage technology on evidence, because by time you've got the evidence is too late. You've got to be able to manage it on knowledge. To manage it on knowledge, you have to understand what it's all.

about. Is that why they missed the opportunity with Park where they had this great technology, but they just didn't see how to use it? Well, it's a fascinating tale of two questions. Xerox management went to Park, saw the demo. It was beautiful. I mean, it was a wonderful system. It's as good as anything you got today in the office. And they did it on much less powerful hardware. It was really an active genius. And the Xerox team said, great, we're going to bet on this. How much does it cost? Now, this again is 1970, late 70s. We really say this question would be mid-80s.

And the Xerox team said it would be about $85,000 a desk, I mean, $50,000 a desk in 1985. So Xerox built a business around it. Steve Jobs came and saw the same technology. And he went back to his man in engineering team and said, give me as much of this as you can for $2,000. So management asked different questions, and they got good answers to both questions. But the Xerox answer obviously never was going to be a mass product, whereas Steve Jobs' answer was the McIntosh. And so it's this professional management. I mean, they had a way of doing things, and, you know, Steve Jobs didn't do it that way at all. I mean, he looked at it, said,

this is the way computers are going to be forever. You can find a video clip of him saying that. And yet, he asked the question, how much of this can you do for $2,000? Zerick would never think of asking that question. Never. They were, you know, managing correctly was more important than getting to the right answer. Well, we started off talking about AI. I kind of want to wrap up there because you've seen all of these different revolutions throughout your career. We're now in the middle of one. I'm sure you're seeing some of the missteps we're making, but also some of the opportunities. So what are you hoping leaders pay most attention to?

Well, I mean, I heard a statistic today that ChatGPT has 180 million registered users in less than six months. Now, if you look at the adoption of a consumer technology, you know, it took, television 20 years. Chad GPT did it in four or five months, right, to get an equivalent level of penetration. So obviously, this is the fastest being adopted technology ever. I don't know how sustained the usage is going to be. It's a new abstraction layer. And if you look at the history of the computer industry, it is a succession of abstraction layers. In the beginning, you wrote software to the the hardware. Then we invented an assembly language to make that easier. Then we invented compilers,

Portran, Cobol, Pascal, C, to make it even easier. Then we invented the desktop environment. We invented operating systems that let you do things. Then we invented the Windows environment, the desktop environment. Back then became the web. And now we're going to the next abstraction layer, which is AI. And every time we're you've changed distraction later, you've changed everything. Because it automatically absorbs all that's gone before. It lets more people utilize the technology. And they get more power quicker, easier, faster. And so you get third party. I mean, the chat GPT apps is a huge deal. I mean, the iPhone would be nothing without the app store. Right. And so chat GPT would be the iPhone.

But now chat GPT with apps is going to be like the iPhone we have today. I mean, first iPhone, when it chipped, did not have apps. And C jobs didn't want it to have a camera. I mean, people forget that. I mean, it's 15 years ago, but he didn't want it to have a camera. And he fought with the engineers on that. And it didn't have apps. But it changed the world.

That becomes the, you know, today that is the abstraction layer that matters. That's how most of the world accesses this technology. And now chat GPT is going to come on top of it and, you know, the other ones, Claude, Anthropic. They're in Meta, Google. There'll be lots of them. I think the risk is way overhyped because there are going to be lots of things, but it suits the main people to get regulated because it keeps out competitors. And so if I am a leader, I love regulation because.

It means my competitors have many more hurdles to overcome that I don't. And that's why they favor it. But I know if you saw the announcement that a company announced last week that they were putting $500 million worth of Nvidia processors on a barge international waters so that no regulation would apply. So, I mean, that's the nature of the world. I mean, you think you can regulate. Well, what can you regulate?

If somebody puts the computers out on a barge, In international waters, how do you regulate that? I mean, that's an old issue. There were pirate radio stations in the 70s in Europe. But AI is a new abstraction layer, and every new abstraction layer has totally disrupted the world. As always, people on the program may have interests in the stocks they talk about. And the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear.

I'm Dieter Wollard. Thanks for listening. We'll see you tomorrow. I'm gonna