00:00And that brings us to the topic of this week's investment committee,
00:03AI investing, where we take you into the boardroom debates in real time. Today's IC,
00:08it's Wally Chang, head of global technology, M&A at Morgan Stanley, and Tammy Kiley,
00:14senior managing director in technology investment banking at Evercore. Thank you both
00:18so much for joining. I feel like every day there is some new sort of deal, whether it be the
00:22one
00:22Scarlett discussed in chips, or whether it be power to power AI. Tammy, I'd love to start with you
00:28and just get an idea of what the pipeline looks like and what areas around AI are you mostly
00:33seeing some of these deals crop up? Well, first of all, Danny, it's great to be here. So thanks for
00:38having me. It's very busy out there. And I'd say in my 27 years of investment banking,
00:44it's never been more busy and it's never been more fun for starters. And I'd say AI is creating
00:50massive technology shifts. And as which always happens with big technology shifts, there's lots
00:56of CapEx. There is lots of value creation, as we've seen here. There's industry transformation,
01:02and all of this tends to drive strategic activity. And so there is, you know, quite a bit of deal
01:08activity out there, you know, both on the M&A side, which we've been seeing. And I'd say you are
01:13starting to see some of the mega mergers. We obviously saw that in the utility space
01:16with NextEra and Dominion. But I'd say in and around technology, and in particular around
01:21semiconductors, it's been pretty active. But what we've been seeing a lot of is really a lot more
01:26private companies being picked up by larger companies. And it's companies that fill in
01:31key technology holes. If we saw, you know, yesterday, ADI picked up a power company,
01:37we've been seeing a lot of activity in and around the interconnect space, and companies trying to
01:42really position their portfolios for differentiation. And I think we're going to see a lot more of that
01:47continuing. And mind you, they're private companies, they're not necessarily small deals. These are,
01:51these are big deals. But I also think you've got such extraordinary valuation of some of these
01:56bigger companies created, quite frankly, also by really healthy profits, that I wouldn't be
02:02surprised to see some bigger deals also coming down the pipeline. I mean, Wally, what say you bigger
02:06deals, and especially as Tammy was mentioning, more among the private companies? I think the deal
02:11activity is going to span the full spectrum, private and public. If I zoom back one giant step,
02:16we are at the very early innings of AI. And in particular, the very early innings of an AI data
02:23center build out. And it's not just about the chips, the chips get a lot of the attention.
02:28And rightfully so. These things are scientific marvels. They're amazing things. But I think there's a
02:34lot of value that is to be had through all of the infrastructure that supports those chips,
02:41from the networking, to the memory, to the power and the cooling, and even the real estate.
02:47All of those things are critical to delivering the AI, which I think is going to drive a lot of
02:52strategic activity.
02:53Can I ask, and I'd like to know this from both of you, when you're talking to clients, and Wally,
02:57let me start with you, and trying to understand what valuations are fair, what price tags should be.
03:03How do you even begin that? Because the potential for this is so big. You have huge tails on both
03:09sides. How difficult is it to come to a price that makes sense and accounts for the insane future
03:15and the ride that we might be going on?
03:17The short answer is, the short answer is very difficult to do. And you're right. On the one
03:24hand, there is blue sky. There are unicorns and rainbows at the end of this journey that many of
03:31these companies are on. Huge valuation potentials. The one reality factor that needs to be overlaid on
03:38this entire analysis is, what's the execution risk to get there? So it's the balance of those two
03:44things. What am I playing for on my own? And how difficult is it going to get to be to
03:50get there?
03:51All right, Tammy.
03:52You know, I would say, though, in this kind of environment where things are happening and changing
03:57so quickly, if you look at over time, a lot of companies' strategic pivots have been empowered by M&A.
04:04I'll look at one example that I actually worked on years ago was NVIDIA's acquisition of Mellanox.
04:08And that was incredible for NVIDIA's being able to deliver an entire platform. And so I actually do
04:15think M&A is very important. But valuation, as you point out, is tricky. And I do think if you're
04:20a
04:20company looking ahead, a lot of the valuation does depend on what you can do with the technology and
04:25in synergies. And I think that actually does make it very important for companies to look at
04:31what is the real value and opportunity, both in terms of the opportunity to be created,
04:36as well as the opportunity cost of missing out of a potential cycle.
04:39It does feel like deals are starting to take different structures, though. I mean,
04:43just as an example, XAI and Cursor, where you have the company not necessarily buying it outright,
04:47but saying we might buy you later. Is there an element, Tammy, where because these things are
04:52moving so quickly, because you need access to technology so quickly, you're structuring things
04:57a little bit different. And in ways that you're not really waiting to wait,
05:00I don't know, the six months to a year that it would take for a deal to close.
05:03Yeah, that's a great point. And you're certainly spot on with that. The kinds of deal structures
05:09and strategic alignment we're seeing in the industry has changed a lot. I mean,
05:13even as Scarlett was pointing out early on, we're seeing lots of cross investments in companies,
05:17more strategic investments across the board than I've ever seen before, because the need for
05:22strategic alignment in the industry is greater than ever. You know, when you've got, you know,
05:25this year, $800 billion of infrastructure for data center going to the ground by the major capital
05:31expenditures and the major cloud providers, that's a lot of money at stake. And so the need to actually
05:36find ways to deploy capital to align risk doesn't necessarily always mean M&A. So there's a lot of
05:43new ways people are looking to achieve similar outcomes without outright acquisitions.
05:47By the way, some people would look at that and while you say, oh, this is concerning,
05:50it's all circular financing, everyone's becoming more interconnected, and it becomes
05:54a house of cards that might fall. Is that a concern?
05:59Again, I'll take one giant step back.
06:01Please.
06:02What we're seeing is enormous demand for AI. And the enormous demand for AI is putting enormous
06:10demands on the build out of the infrastructure required to deliver the intelligence through AI.
06:16That financing requires creativity. So we are seeing innovative structures with co-investment,
06:25with alternative sources of financing, with governments playing a role. So I think all of
06:31these things are really important for delivering the capital required to deliver ultimately what the
06:39industry is driving towards, which is AI intelligence. AI intelligence deployed to real world situations.
06:48We got to do this for longer next time. This was this was so fascinating. Thank you both so much
06:52for
06:52joining. Really, really enjoyed this. That's Tammy Kiley of Evercore and Wally Chang of Morgan Stanley.
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