The Prof G Pod with Scott Galloway - Prof G Markets: The Demise of Chamath’s SPACs, Citrix’s Debt Deal, and Adobe’s Figma Acquisition

Episode Date: September 26, 2022

This week on Prof G Markets, Scott shares his thoughts on Chamath Palihapitiya’s decision to close two of his SPACs. He then explains why Wall Street Banks are on the hook for $700 million after the leveraged buyout of Citrix, a software company. And in this week’s deep dive, we take a look at why Adobe would pay $20 billion for the design software company Figma in what may be the largest acquisition of a private technology company ever.  Chamath’s SPACS Citrix’s LBO Adobe’s Acquisition Learn more about your ad choices. Visit podcastchoices.com/adchoices

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. This week's number four, Adrift, America in 100 Charts is my fourth book in five years. Why do I write a book every 12 or 13 months? One, I'm desperate for your affirmation. I believe mental stimulation will keep you alive longer. And I am going through a midlife crisis and am incredibly insecure about my role in the world. Welcome to Profiting Markets. Today, we're discussing Chamath's failed SPACs, Citrix's, that's easy, debt deal, and a deep dive on Adobe's Figma acquisition. Here with the news is property media analyst, Ed Elson. Ed, what is the good word? I'm here in LA in an Airbnb and I'm up bright and early getting used to this new time difference.

That's right. That's what's called a new job. You get your ass up at eight. I'm up at four. That's right. What are you quiet quitting? Yeah. Well, we have to make sure you get to your party. Oh, by the way, I am going to a party tonight in black tie, which I hate. They said it's a benefit for Amazon. And I'm like, what the fuck? The last thing I'm going to do is give money to an e-commerce company in Seattle that's worth a trillion dollars. No, no, no, Scott, Scott, calm down. It's a benefit for the Amazon. I'm like, oh, okay, that makes sense. So, anyways, I'm going to a benefit. Supposedly, there's a river somewhere in South America called Amazon. That's how into my own tech world I am. Anyways, enough about me. What's going on in the business world? All right, let's start with our weekly review of market vitals.

The S&P 500 continued its late summer decline, slipping further on the Fed's latest interest rate hike. Higher interest rates buoyed the dollar, which continues to trade at a near two-decade high against the euro. Bitcoin was relatively stable, but Ethereum fell after SEC chair Gary Gensler hinted the coin's new proof-of-stake model will subject it to SEC regulation. And the 10-year yield continued to rise with interest rates. Shifting to the headlines. As expected, the Federal Reserve delivered another 75 basis point interest rate hike last week. But what was less expected is that the following day, central banks around the world also raised interest rates in what analysts are calling Super Thursday. That

includes countries ranging from the UK to Indonesia to South Africa. Here in the US, the Fed's rate increase was the fifth this year, and it likely won't be the last. As hikes continue, US unemployment could rise to 4.4% by the end of 2023. That's a sharp enough increase to renew fears of recession. Germany is spending about $8 billion to nationalize and rescue its largest gas importer, Uniper. The country still faces a winter without natural gas from Russia, which traditionally. The country still faces a winter without natural gas from Russia, which traditionally provided more than half of its supply. And Meta argued in an antitrust hearing that it no longer counts as big tech. The company's lawyers pointed to its stock,

which is down more than 50% year to date, as evidence that it has serious competition and is not, in fact, a monopoly. Do you think that is a fair argument, Scott? The number one reason the stock is down is growth has slowed. The number two reason is that people are starting to recognize that this $10 to $20 billion bet on the metaverse is a giant thud, and that the Oculus will go down in history as one of the greatest tech hardware failures and Mark Zuckerberg's fever dreams of a legless metaverse where he would control your gaming, your education, your business. This thing is a giant mulligan, if you will. But that has nothing to do with whether the company is anti-competitive or not. There are monopolies that are worth a lot less than $300 billion that are broken up. This is still a monopoly in social media. The better argument, I think, would have been we're no longer as dominant. The TikTok is coming in and kind of

cleaning our clock, if you will. That would be a better argument. I still think the company should be forced to spin Instagram, that they control too much data and it's hard to leave those platforms. But the whole we're worth less doesn't make any sense. Does that mean if they go back above $500 billion, we should break them up? So I don't think it's a good argument. Breaking up is hard to do. Don't take your love away from me. Don't you leave my heart in misery.

If you go, then I'll be blue Cause breaking up is hard to do Chamath Palihapitiya, the billionaire tech investor known as the King of SPACs, is shutting down two of his SPACs after failing to find viable target companies. Those two SPACs are collectively worth $1.6 billion, and that money will be returned to investors. Now, just a quick primer on SPACs are collectively worth $1.6 billion, and that money will be returned to investors. Now, just a quick primer on SPACs for our listeners. SPAC is shorthand for Special Purpose Acquisition Company. It's an alternative method of going public in which a shell company lists

shares with the public and then acquires a private company at a later date. This is why SPACs are often referred to as blank check companies. You can purchase shares before you even know what the operating company will be. So back to Chamath. Chamath has raised 10 of these blank check companies, many of them already acquired companies such as Virgin Galactic, SoFi, and Clover Health. But recently, the SPAC market has frozen over. Last year, SPACs raised $163 billion, and this year they've raised $13 billion, or a twelfth of that. Chamath still has two other SPACs open that are actively looking for deals, but the SPAC king's retreat suggests the blank check boom may be over.

So it's not over. It's just taking a slumber, and it may never return to the highs of the popularity it enjoyed during this kind of mania, if you will. SPACs have been around a while. They kind of come and go out of favor. And a bunch of moons lined up here to result in what was unprecedented kind of SPACdom, if you will. never underestimate the market's ability to produce a product when a consumer has cash in hand. It's just, you know, when it starts raining in New York, all of a sudden vendors pop up to sell umbrellas on every corner, which I don't know, I'm like, where do they come from? Anyways, you had a massive number of retail investors who thought, I want in on the growth innovation economy. And you had a lot of investment banks who were kind of had no bandwidth or felt that a lot of these kind of SPAC candidates weren't ready for prime time. And they didn't want to market or sell their shares into their institutional client base. They looked at these pre-revenue companies that were small, burning tons of cash,

that were sort of built on a wing and a prayer and said, no, you're not ready. And so you have this vehicle that says, well, we're going to bypass certain filing and disclosure requirements, just add water, and boom, we have a publicly traded company, and we go acquire another company. And it's kind of a blue line path to getting a company public that may not have kind of cleared or met the criteria of a Goldman or JP Morgan. And what do you know, the companies that failed to get through or clear the hurdles of investment banks ended up not being, on average, very good companies, very sustainable companies. And the king of this vehicle to find companies and sate this consumer demand was Chamath. The uncomfortable question this raises is that when an individual uses a vehicle and every one of his stocks, he was on CNBC what felt like every 24 hours pumping. You need companies like SoFi.

You need companies like Opendoor, like Clover and others. And then soon after, or even the same day, he was selling. Is this starting to feel very much like the ultimate pump and dump? Where SPACs, at the end of the day, have just been vehicles for the transfer of wealth from retail investors to Chamath, Palihipatya, and some other SPAC sponsors. Chamath often evangelized SPACs as a way to democratize access to high-growth companies. It was a favorite line of his on CNBC. There's a massive inequality gap in the United States.

There's trillions of dollars sitting inside of 401ks. They need to be allocated into things that can be fast-growing so that normal, ordinary Americans can generate savings for their future retirement, for their homes, for their ability to pay for college. And the way that you do it is you have to have a simple on-ramp to the public markets. A SPAC represents that. And what it does in creating that on-ramp is also give retail folks a chance to participate. Do you think that's a fair argument? The reality is, over the last 24 months, that access to these companies has been a great way to become not wealthy. And that is almost across the entire ecosystem.

I don't care if you're talking about cryptocurrencies or SPACs. Yeah, it's a great wrap. It's more egalitarian and you have access to what the big boys want. Well, guess what? The big boys, JPMorgan Goldman Sachs don't want anywhere near these sacks. Since January 2021, Virgin Galactic is down 79%. I think Virgin Galactic is going to zero. Opendoor, another one of the small SPACs is down 84%. Talk about a company that's vulnerable. When if the market, the real estate markets continue to be wobbly and start to decline,

Opendoor could get caught with a lot of inventory. That could be very scary, very fast. And Clover Health, it's down 87%. All of these companies have resulted in massive destruction in shareholder value or wealth of retail investors. And the idea that like crypto, it's just some great egalitarian opportunity and you get access to all these great companies. No, you didn't.

You got access to shitty companies that made no sense. Money, it's a hit. Don't get me back. Too good a good bullshit. I'm in a high fidelity. Plus cost traveling sector. Wall Street banks lost $700 million on a debt package they provided for the buyout of Citrix Systems, a cloud computing company. Now in January, two large private equity firms,

Vista and Elliott, struck a deal to acquire Citrix. The deal made headlines because it was one of the largest buyouts in years, $16.5 billion. It was also highly leveraged. $15 billion of that was financed with debt. Vista and Elliott arranged for the banks to provide the loans, and the banks expected to sell that debt in April or May. But at the time, demand was very low, so they delayed to July and again to August. And now here we are in September, and they've cut their losses and sold the debt at a significant discount, hence the $700 million loss. So, Scott, there are a lot of moving parts here, but can you take us through the mechanics of how a deal like this works. So briefly, in a leveraged buyout, the private equity firm finds the company, borrows money from the bank to finance the acquisition, and then offloads the debt obligations to the company.

The bank then sells that debt as bonds in the secondary market. So the PE firm owns the company with very little of their own cash in the deal. They use debt to finance the deal. The PE firm will raise debt or they'll get commitments from an investment bank to offer them 15 or 13 of the $16.5 billion for the acquisition of Citrix based on the cash flows

of Citrix. But they borrow the money based on the notion that when this deal closes, they will have the cash flows and the IP and the underlying assets of the company to secure the debt. Now, I think what happened here is that they come to certain terms, including an interest rate, and then when interest rates skyrocket, their ability to actually go out and place this debt when the deal closes, they have to offer richer terms to investors because interest rates have moved markedly, which means that the commitment they made to finance at a certain interest rate, all of a sudden they have to live up to that commitment, but they have to go offer investors much greater interest rates, which results in a loss. This is the technical term for underwriting. When you're underwriting a deal,

you're actually taking responsibility for providing the financing. And there's some risk, there's some underwriter risk between the time you actually go to the market or make the commitment to do the financing and when you actually have to go out and execute the financing. Yeah, so the banks were initially offering the Citrix bonds with around an eight and a half percent yield, but now they're getting priced with a yield as high as nine and a half percent. You mentioned that this is largely a function of interest rates. Does it say anything about Citrix as a company, or is that irrelevant here? No, this is macro, not micro. This has, I don't think, anything to do with Citrix. Its cash flows haven't changed, I don't believe.

Its competitive position in the marketplace is unchanged. The difference here is that interest rates have gone up. And to finance this type of company, investors demand a higher yield. They demand more in return for giving their money to finance a company like Citrix. And high-yield bond sales volumes are down 80% this year. Citrix is emblematic of the larger dynamic. As one lender put it, Citrix is the canary for investor demand. In other words, investors feel like, I don't need to go into the high-yield market because I can find higher interest rates on safer, less speculative things. Do you think that maybe this is a signal that there's something wrong with the bond market right now? Is the market becoming dysfunctional?

No, I think this is just one of those instances. Investment banks get paid a lot of money to underwrite a deal. And part of that is because they assume some risk. And sometimes that risk pays off. Sometimes the market moves in their favor, and sometimes it moves against them. But this is part of the game. They're called underwriters for a reason. They underwrite the deal. They take on certain risks. And the interest rate movement here is really, to a certain extent, it's unprecedented from a pricing standpoint because people remember what they remember, and that is these bankers, the majority of which are under the age of 40, have never been around in an environment where interest rates can tick up 200 basis points in one or two quarters. We'll be right back after a quick break with a deep dive on Adobe's $20 billion acquisition of Figma. approach? What learnings have shifted their career trajectories? And how do they find their

next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact. Constant Contact's award-winning marketing platform can help your businesses stand out, stay top of mind,

and see big results. Sell more, raise more, and build more genuine relationships with your audience through a suite of digital marketing tools made to fast-track your growth. With Constant Contact, you can get email marketing that helps you create and send the perfect email to every customer and create, promote, and manage your events with ease all in one place. Get all the automation, integration, and reporting tools that get your marketing running seamlessly, all backed by Constant Contact's expert live customer support. Ready, set, grow. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. ConstantContact.ca. We're back with Prof G Markets. The biggest dollar story in tech this month was Adobe's $20 billion acquisition of Figma. Figma's bankers claim that it's the largest acquisition of a private technology company in history.

And whatever its place in history, it's a massive price for a company with less than half a billion dollars in annual revenue. We wanted to know more about this blockbuster deal. So for a deep dive into that subject, here's Prof G Media's editor-in-chief, Jason Stavis. Jason, I guess I've got a pretty simple question to start here. What is Figma? Well, Ed, this week I've learned that there's two kinds of people in the world. There are people who've never heard of Figma, and then there are the people who love Figma. There doesn't seem to be much middle ground. In simple terms, Figma is design software. Its main use is to make it easy for designers to prototype the look and feel of websites and apps.

And crucially, it's built to allow easy collaboration with others. You can think of it as Google Docs, but for user interface design. That sounds pretty niche. It is, but it's also a very large niche. Consider just one of Figma's customers, Microsoft. The company makes dozens of apps, and its website is a sprawling array of pages with varying functionality. All of that has to be designed.

Buttons and text fields assembled, copy and images placed just right, and user experience plotted out for every possible interaction. Microsoft is so dependent on Figma to do that work that an executive there was recently quoted saying that the company's design tools were, quote, like air and water for us.

When your niche is providing air and water to Microsoft, you're onto something. And it's not just Microsoft. We live in a world of user interfaces, or UI. Our podcast players, our banking apps, the front page of our favorite news source. If software is eating the world, UI is the fork and knife. And Figma dominates this space. A survey last year found that 63% of user experience designers used Figma as their primary tool. The second place app had just 12% share. How has Figma achieved such a huge share? To better understand that, I spoke with our colleague, Catherine Dillon. Catherine is the executive producer here at Prof G Media, and she's an associate arts professor at NYU Tisch, where she teaches user experience design.

She explained how Figma's collaborative capabilities and ease of use have propelled it ahead of competitors like Adobe's XD. Figma is just so superior for a couple of reasons. The biggest difference was in Adobe XT, you design in one place and you share in another. So it isn't the fluid experience that it is in Figma. I think the key appeal and what's not getting enough attention about Figma is it's incredibly simple UI, which I'm going to show you. So you're seeing my cursor, I assume. If you look up top, you see this sort of hatch. Figma's investment in collaboration extends to the product itself. It's been able to capitalize on and expand its user base by opening up to community-developed plugins. For users like

Catherine, that's an important part of the product's appeal. I used to tell my students, you know, you need to learn this tool and that tool if you ever want to work in UX. The last couple of years, I've just said, just learn Figma and you'll be fine. You're qualified. Finally, what's enabled Figma's growth isn't just that it has a great product. For most of its users, it's also free. You only need a paying subscription if you're working with a larger team. So free is a great strategy for growth, but not profitability. And I believe it's a great product, but is it a great business? It's a crackerjack business. Even with its generous free membership tier, Figma's revenue growth has been historic. It only started charging customers

in 2017, but it's expected to have over $400 million in annualized revenue by the end of this year. That's faster revenue growth than even Snowflake, which held the largest ever software IPO in 2020 and is today worth nearly $60 billion. And it's on par with Slack, which generated $400 million in revenue the year before it went public, also five years after its launch. Super impressive. But at $20 billion, Adobe is paying over 50 times revenue. That implies a lot of growth yet to come. And even in Adobe's own investor deck promoting the deal, the company put Figma's total addressable market, or TAM, at just $16.5 billion in 2025. Snowflake's S1 claimed it had an $81 billion TAM,

and Slack's TAM has been estimated at $60 billion. So how does it make sense to pay $20 billion for access to just a $16 billion market? Time will tell, but if the acquisition pays off, it'll likely be for two reasons. The first is the potential for Figma to grow beyond its nominal market. Figma's ease of use, its adaptability through community plugins, and its low barriers

to access since it's browser-based and free have allowed it to evolve from a tool for UI design into a general purpose design platform. Users are turning to Figma instead of PowerPoint for presentations. There are popular plugins that turn Figma into a project management tool and that add data visualization capabilities. Figma itself has expanded its offerings with a popular digital whiteboarding capability called FigJam. This is nimble software with the potential to become an operating system for everything visual.

And with the rise of no-code and low-code software design, it could be the front end for the entire app design process. The second justification for the high price is in the eye of the acquirer. Whatever Figma might have been worth on its own, this deal was driven by what it was worth to Adobe. Adobe has been one of software's quiet but phenomenal success stories over the past decade, with a market cap substantially larger than Netflix. Adobe has knit together a bundle of formerly standalone software products into a highly profitable subscription bundle. But in doing so, it's also developed an adversarial relationship with its user base

and a reputation for difficult-to-use, cumbersome software. And it has struggled with the move to cloud-based services. Those challenges are all showing up in the company's core business. The day it announced the Figma deal, Adobe's stock fell over 20%. Now, the media attributed that to a view that Adobe had overpaid for Figma. But the same day, Adobe also announced lower-than-expected revenue guidance. The second quarter in a row, it's had to temper investor expectations. Figma's success and Adobe's failure to effectively compete with it in the UI design market has been an ill omen for Adobe. Adobe is in a difficult place, and the Figma acquisition suggests management realizes that. So where do things go from here?

Well, Figma users are concerned that Adobe is going to absorb Figma into its creative cloud subscription and abandon the characteristics that have made it so popular. There's a long history of that with software acquisitions, obviously. But there's an aspect of the deal that hasn't gotten as much attention as the top-line price. Adobe put up over $2 billion in stock towards employee retention, awards that will vest over four years. That's much more than you typically see. The team that built Figma is going to be around for a while. And so there's a version of the timeline in which Figma absorbs Adobe, serving as the low-cost, easy-to-use portal for Adobe's increasingly powerful but complex professional

apps. As a separate company, Figma represented an existential threat to Adobe. As an acquisition, Figma may represent Adobe's future. Thanks, Jason. Scott, what are your thoughts? Yeah, a couple observations in no specific order. Thanks, Jason. Scott, what are your thoughts? Yeah, a couple observations in no specific order. One, Adobe had to pay $20 billion for Figma twice. They paid $20 billion or have offered $20 billion, hoping that it closes. But when they announced it, their stock was off $20 or $25 billion. So this acquisition actually cost them about $45 billion. Now, having said that, one of the reasons that Adobe trades an incredible multiple is that they think long-term. When they initially moved from

selling one-off pieces of software for $1,200 or $1,300 to $25 a month, the stock got, I think, cut in half. But they saw it as being the right move, and they were right. And I think the stock's up 15 or 20-fold since then. So this strikes me as a management team that doesn't scare easily. The other observation is I think in five to 10 years, just as VCs ask, who is the tech guy or gal on your team? They're going to begin asking, who is the design person? It's no accident that the CEOs of Airbnb and Snap are design graduates. And the person who essentially runs our company, Catherine Dillon, that you referenced, is a creative. And we always invested early and often.

I think if there's one place we overinvested, when I mean overinvested, we always prioritized it, was in design. I think Adobe and design-centered companies are going to do really well over the next decade. Okay, Ed, what's the team focused on for the week ahead? We're watching for revised GDP data on Thursday. Second quarter GDP was already revised to a 0.6% contraction up from the 0.9%

that was originally reported. We've also got earnings from Bed Bath & Beyond and Nike on Thursday. Bed Bath & Beyond is in the middle of closing stores and cutting its headcount. Meanwhile, Nike is dealing with bloated inventories and, of course, inflation. Do you have any predictions here, Scott? I think inflation is going to decline as precipitously as it ascended. When effectively almost every currency globally is off 20% against the dollar, then eventually, because we're such an import economy in the U.S. and 48% of global GDP is trade, you're going to see prices come way down, I believe. I think a lot of the muck is being kind of demucked in the supply chain. In addition, the strength of the dollar means that 88% of those Christmas gifts under your tree from China will be less expensive.

And two, I think the recent gains by the Ukrainian forces pushing back on the Russians in the Ukraine, I think the market is going to perceive an end to the conflict and energy prices will decline. And then coupled with the one-two punch of declining prices because of the strength of the dollar, my prediction is that inflation is going to fall dramatically within the next two to three months. That's all for this episode. Our producers are Claire Miller and Jason Stavers. Special thanks to Catherine Dillon, Ed Elson, and the PropG Media team. If you like what you heard,

please follow, download, and subscribe. By the way, Markets is already outperforming our other PropG podcasts. This is one of the most successful launches in podcast history. PropG is now a top 30 podcast globally. Check our shit out. That's right. That's right. Disc to the co. Disco, champagne and cocaine for everyone. Thank you for all of your support.

Thank you for listening to Prop G Markets from the Vox Media Podcast Network. We will catch you next week. Tell the truth White lies Spread lies What software do you use at work? The answer to that question is probably more complicated than you want it to be. The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise

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