Investment Banking & Attempted Murder

Okay, we are back for a brand new week and one of the favoured styles of the Stephen Podcast format is the 5 in 5. And that's what we've got on the docket for today. And just to give you a teaser here, just to front run it, this is not a Netflix trailer and I am in no way associated by or sponsored by Netflix, but the headline reads, Nomura chief apologises after ex-banker charged with trying to murder clients. Dun dun dun dun dun. I don't know where you find these stories, Stephen, and I'm assuming this is genuine headline news flow. So that's the one that's got my interest, but I know there's Nvidia, there's BlackRock, there's Google, there's Vodafone, lots of big names there to tackle for this episode. So yeah, how's it going?

Yeah, really well, thank you. This is a legitimate headline. This was in the FT. You know, I'm not trawling through low-grade news sources here. This is a really good one. We're going to save it to the end to encourage you to keep listening all the way through. I did want to start before we get to our 5 in 5 minutes. I did want to start with giving you a little bit of a shout out to the, to the pod. I saw our Spotify wrapped and your LinkedIn post. And I have to say, I mean, the numbers, the numbers are brilliant. And I was actually looking at my own Spotify wrapped as one tends to do. And I have to say, The Market Maker is third in my podcasts, which I do occasionally listen to my own podcast, but it's mainly just listening to you and Piers. So it's even hit my top 5, even though I create the thing.

Come on, you've top and tailed it here. So who's in the middle then? Who's the second?

I tell you what, let me have a, let me have a think about this. I think I don't want to give away because then I'm just promoting a competitor. You know, it's definitely another business and technology type podcast, but I don't want to give it away. Plus that's where I get my source material from.

So, all right. Good stuff. Well, look, Stephen, throw it back at you. Thank you for all the knowledge shared. And I know I get tons of messages that I, swing your way in, Piers, in lots of students saying thank you. So thank you. But look, let's kick it off and let's talk, uh, Isco, Nvidia first.

Cool. So this was a headline that came out last week, and Nvidia CFO says M&A is possible, uh, to, for, for, for a number of reasons, but just for a use case of their growing cash hoard. This is a classic. What happens when you generate too much cash, and Nvidia is generating a lot of cash. I was just having a look at its cash on its balance sheets over the last couple of years. So it's full year 2023, January 2023, uh, annual reports. It's got $13 billion of cash, which is kind of about the right amount of cash for a company of its size. And then a year later it had $26 billion. $100 billion worth of cash. And at its last Q3 earnings release, there were $38 billion of cash and cash equivalents sitting on Nvidia's balance sheet. And this is despite, this is despite purchasing $29 billion worth of stock. So share repurchases in the last 12 months. So cash is flying out of this business at a rate of knots, as we've discussed. What can you do when you generate loads of cash? Well, you can do share repurchases as Nvidia has rightly done. You can make significant investment back into the business capital expenditure, which Nvidia has done. You can declare significant dividends, which Nvidia hasn't done yet. It's got a very, very small dividend. But you can also say to the market, we are going to go out and do some M&A. So this is super interesting. NVIDIA's an interesting company. Colette Kries, the CFO, has said, look, we're up for doing some M&A, and they're not shy. They've done M&A before. I was just having a look at some of their past transactions. They tend to acquire companies either based in San Francisco or in Israel. Interestingly enough, Israel's got, as many listeners will know, Israel has got a very strong tech ecosystem, especially when it focuses on things like AI infrastructure. So Run AI, Israeli company acquired for $700 million earlier on this year. DeeSci, $300 million Israeli company acquired earlier this year. In fact, their biggest acquisition to date is the 2019 acquisition of Mellanox, which is Israeli company and was bought for $6.9 billion. And this is a really representative example of the type of acquisitions they've done in the past. Now, Mellanox is high-performance InfiniBand and Ethernet networking technology. Don't know what that means, but when I was reading about it, you know, NVIDIA's got the GPUs and they need to match the GPU compute with the infrastructure so that there aren't bottlenecks and barriers to getting that GPU power and compute out there. So this is high-end networking to complement its core unique selling proposition or, or its core product. So looking forward, what are the types of things that Nvidia could buy? Now, it tried to buy Arm. I dunno if you remember that a couple of years ago, got blocked because it is now a $3.5+ trillion company. The eyes of the antitrust regulators are going to be all over them. So even a $6.9 billion acquisition, it's probably going to be quite hard to get through because you're now the biggest company in the world and you own 90+% of the market share for a game-changing technology in GPUs. So are they going to try and buy Arm? No. Are they going to, are they going to make a cheeky bid for Intel? Probably not. Are they going to think about going vertical? So this, we talk about rationale for M&A, verticalization, owning the stack, owning the supply chain for your product. Who's to say they won't go out and buy some energy company or nuclear reactor or other parts of the infrastructure that is necessary for them to own the vertical that they exist within. I wouldn't expect that to include, by the way, the acquisition of a consumer-facing or client-facing AI tool like an Anthropic or, or something like that. I don't think that that would get through, and I don't think it would make sense strategically for Nvidia to do something like that because then it's putting all of its eggs in one basket and there's a lot of other baskets that it generates billions of dollars of revenue from. So it's an interesting one to announce. M&A, and then we all get in a little bit of a frenzy thinking, what are the acquisition targets and what is the strategy that they might be pursuing?

So is it right to summarise then that they're in an M&A strategy, they're slightly handcuffed? Because I think that, I guess the novice might go, well, if they're worth that much, they've got that much cash on hand, they'll just go on a big massive buying spree. Do they also, and how does it tie in how they deploy cash in putting like seed funding into lots of different businesses as well. Is that a parallel strategy with the M&A side?

Yeah, we spoke about this a few weeks ago on the podcast. NVIDIA's been extremely tactical about the companies that it's invested in and the ecosystem that it has created from its core GPU competence. And by the way, the the ability to invest. It is easier from an antitrust perspective to invest in a minority share in 250 startups than it is to buy one established company. So from a tactical perspective, it's just, yeah, it, it will be much easier to keep doing those smaller investments. However, they've got $38 billion on their balance sheets. It takes a lot of very small investments to start chipping into that number. I think from a, again, from a share price perspective, what I would be thinking is there are a lot of reasons to take down the share price at the moment. So if there is a large acquisition announced that is not well received by the market, you will see quite a quick loss of value in that share price. So I don't see anything headline blockbuster, an Anthropic or an Intel or something like that. I think slightly more tactical, slightly more below the radar.

I've got a bit of dry powder. What I'm waiting for is 2025 when Stephen Barnett bites the bullet and goes, you know what, I'm getting into Nvidia even at this value with holding for the 10, 20-year play.

Yeah, I just need a little bit of those Cathie Wood ARK juices to be flowing through my veins. If someone said it's going to be the first $10 trillion company, and Bitcoin's going to hit $5 million, then get me on my share trading app and off I go. But no, that's not going to happen. Uh, unfortunately I'm stubborn and I've, uh, I've made my disappointing bet.

Yeah. What was fascinating there, you talked about sort of two acquisitions there, uh, Mellanox and DECI, and you're like, wow, combined that's like $7.5 billion. So taking us to our next story, another whopper. Which perhaps not, you know, people who are just on Main Street probably never heard of, but BlackRock has been busy again. So what have they been up to?

Yeah, so this is BlackRock's actually third big acquisition this year, and then they're an acquisitive company and they're a risk-taking company. They've made some of their most important strategic moves through acquisition, including what is now the iShares platform, its biggest profit generator. But remember earlier on this we spoke about BlackRock acquiring Global Infrastructure Partners, $170 billion asset under management asset manager. They acquired it for $12.5 billion and it represented a significant push into private markets. So infrastructure, private credit, private equity, et cetera. We know having spoken on the podcast a lot about this before, we know that private markets are where it's at in terms of investor flow, in terms of returns on investment. It is the hot market. Private equity a few years ago, private credit now. So BlackRock is trying to build up its private credit, private equity, private markets alternatives offering to sit alongside its wildly successful passive ETF iShares division, and also its active equity and bond funds as well. So it is really moving very significant in, significantly into this with the announcement of the acquisition of HPS Investment Partners, which is a story that I want to talk about now. It's a $150 billion assets under management, private credit provider or global credit investment manager. And another way to put it, it's a $12 billion all-stock deal, and it is a massive private credit play for BlackRock. Remember private credit? This is investment funds that lend money to private equity firms that are looking to buy businesses through a combination of putting in their own equity and getting outside debt. Private credit's become an absolutely massive growth area as big banks have withdrawn from lending on a leverage basis to riskier buyouts due to regulation. So this huge sway, the private credit has filled the gap and actually BlackRock expects the private debt market will more than double and hit $4.5 trillion by 2030. Put that into perspective, private equity assets under management, the equity side of it is about $15 trillion at the moment. So there's still a lot of room to grow. But what's quite interesting about this story, I quite like the story of HPS. So Scott Katnick is the CEO of HPS and talk about being in the right place at the right time. They set up their private credit arm out of JP Morgan in 2016. And actually bought out the private credit arm out of JP Morgan, set it up as an independent business, and have scaled assets under management in only 8 years to $150 billion. Right? 8 years to get to that scale and be considered alongside Sixth Street and Golub Capital as one of the 3 biggest private credit players in the market. So it's interesting from that perspective, and it's also interesting from a BlackRock perspective because with this acquisition, it becomes one of the biggest alternative asset managers in the world. Remember, we've spoken previously about Blackstone tipping a trillion dollars. We've got Apollo in there. We've got KKR. BlackRock, if you were to extract their alternative asset management division, it's a $600 billion AUM business. Which is about the size of KKR. So now when we are talking about the big beasts of private equity and private credit, you need to talk Apollo, Blackstone, Carlyle, KKR, and BlackRock. So they've really made a move this year.

All of those other names you just mentioned then, what are they thinking? They're seeing all of this happening and they're obviously getting rumbles of these deals behind closed doors, probably well in advance of the market because they know their space and they've got the ear to the ground. How do they react to what they're seeing from BlackRock taking market share?

It's a really interesting one. So HPS had a number of strategic options on the table before it ended up going with BlackRock. One of them was an IPO, and actually it dangled the IPO carrot to JP Morgan and Goldman Sachs as the lead book runners, and they were pursuing the strategy for 2 years and ended up bailing and obviously not paying any fees to JPM and Goldman Sachs. I'm sure they'd be quite frustrated. But another option was a kind of like a merger of equals between HPS and Carlyle to create a big beast, a consolidating beast in that sector. So I reckon quite a lot of these big players, the Blackstones of this world, will be slightly blindsided by this. They will realize, they'll probably think BlackRock, deeper pockets, paid more, they've paid more than any other organization could afford to pay. $12 billion is a lot for $150 billion of assets under management. So I think they'll be feeling a little bit concerned and a little bit blindsided as well.

Okay, well, let's move on to the next story, and it's one that seems to never go away, which is this idea of a Google split. But I know you've mentioned here, EU antitrust chief kind of flexing here is the latest call to arms. So what's the realities of the situation here for Google?

Yeah, so this headline again, which came out last week, Google split still on the table, new EU antitrust chief says. This is, as you mentioned, this is one that's going to rumble on and on and on. And when we are old and grey and, uh, and our hologram is doing this podcast in the future, we'll still probably be talking about it. But this is the new EU antitrust chief, Theresa Ribera. She started her 5-year term this week. It's one of the most important and powerful, uh, influential roles in the world of global antitrust. She has been described by the article that I read in Bloomberg as a Spanish socialist. So, probably, I think we know where that, I think we know where that kind of leans in terms of her inclinations towards big organisations like Google. But she's carrying on the work that her predecessor, predecessor, Margrethe Vestager, who we spoke about probably quite a long time ago on the podcast, probably regarding the, uh, the Activision and Microsoft deal that we, that we spoke about a lot. She wanted to see Google broken up. The US Department of Justice wants to see something happen across Google's advertising platforms to decrease this monopoly power. It does seem like there is significant consensus across Europe and the US for some form of action to be taken, breaking up either through the for sale maybe of the Chrome browser, seen as a key lock for users and for advertisers. You've gotta get a Chrome browser. You've got to use the Google advertising infrastructure, but also dislocating the Google advertising infrastructure. So the slide that I'm looking at in front of me shows how Google basically dominates the supply side, i.e., the tools that help websites offer ad space, and the demand side, the tools that help advertisers place ads across the web. Now, I might just call that a marketplace, right? You know, very sensible piece of architecture, but just the size and the influence of Google ad tech is the thing that is significantly of concern. And it said, Google is active on both sides of the markets with its publisher ad server and with its ad buying tools and holds a dominant position on both ends. It operates the largest ad exchange. This leads to a situation of inherent conflicts of interest for Google. Now, all of this rhetoric, all of this language we've heard before, and the new EU antitrust chief is not going to change anything. The thing is, Google will just appeal, appeal, appeal, appeal, appeal until it is in their interest to accept a deal. And by that time, again, we will be old and grey.

Is some of that as you described then, she's new to her role, she needs to set the stance, how she's going to behave going forward. But is it also a shot across the bow, across the pond, to just let the US know that, yes, we know tariffs are coming, it's going to be negative for Europe, but we're holding firm as far as this side is concerned?

Yeah, it's a, it's a really interesting one. I think, I think you're right. There's definitely, there's a lot of rhetoric and positioning here, and quite often the EU as a bloc certainly feels like it's on the back foot with regards to the dynamism and growth of the US freewheeling tech ecosystem. So it's almost trying to claw back that position, that foothold as a significant decision maker, especially as we see a new candidacy. And a potential move towards more deregulation.

Okay, cool. Well, look, talking of UK antitrust approval, so sticking on the theme, if you like, of regulation, Vodafone and Three's merger getting approval.

This is super, super interesting, and I know it may not sound like the most exciting of the topics that we're covering today, especially as we're going to talk about attempted murder in our last, in our last piece, but from a learning perspective, the contrast between the Google story and the Vodafone story is super interesting. So the headline here is that Vodafone and Three, their £15 billion merger, has finally, after a number of years, won antitrust approval from the UK's Competition and Markets Authority. Now, these are two big players in the mobile telecoms operation— operating system market. And there was a lot of, there was a lot of, there was a lot of analysts thinking this would just never ever go through. But the reason why it went through is really, really instructive. The first and most important reason why the CMA cleared this deal is that as a result of this deal, Vodafone and Three have committed £11 billion to improve the UK's 5G mobile network. So think about the CMA, Competition and Markets Authority. What do they care about? Consumers. That should be the tattoo, you know, on their arm so that every time they're doing anything, they're thinking consumer, consumer, consumer. So if they can say, all right, you know what, Vodafone and Three, you can have your deal, but you're putting £11 billion into giving me 5G in remote corners of the country. That's good for consumers. They've also capped, they've also agreed to cap mobile tariff and data plans for 3 years and offer preset prices to wholesale services. So really, really good example of the negotiation between a really big tie-up and between the concessions that are required for the CMA to feel comfortable. By the way, even after this deal, Vodafone and Three, they will only own, they only, they will only have 32% market share. So it's not as if it's the kind of 40% market share versus the 35% market share and you really are creating a monopoly. It's only 1% more market share than EE, which is the, which is the biggest by market share at the moment. So it's a really, again, a really interesting way to think about the CMA. Doesn't want to block deals just because they want— they love blocking deals. They want to get the very, very best for consumers. And in this environment, it's a really weird market, by the way, the mobile telecoms market, the mobile operators market, because they're effectively utility providers plus service providers. So they are responsible for the infrastructure of 4G and 5G across the country. So they are kind of the core utility provider. And if they stop investing, if they stop committing this £11 billion, we fall behind and behind and behind as a country relative to our peers. So it's a real, again, I love this case study. I think it's really interesting.

Just a final question on this story then. You said it took years to go through. So how does it work? In terms of a dynamic? You've got the regulator, the two companies. Are the banks involved throughout and just roll over advisory services? Or is it the lawyers who are doing all of this work and they make all the money out of this when it's prolonged and elongated as a situation?

I would say the lawyers stand to benefit a lot more than the bankers here. I think the bankers will probably have kind of exploding offers with regards to their their debt packages and their financing packages, et cetera. Although I do think this is more of a merger of equals, share price, all share deal. So maybe less important from that perspective. But again, the advisor just are just waiting and hoping and maybe providing whatever advice they can, the bankers, to help try and get this deal across the line. But it'll be the lawyers, it'll be the lobbyist, it'll be the industry experts that are working with the Competition and Markets Authorities. The bankers will go, all right, you know, £11 billion. Let's see how that works going forward from a financial perspective, from a modelling perspective. But yeah, they'll do less than the lawyers. I'm pretty sure.

Okay. So now is your time to try and explain to me what murder has to do with the Dealroom Amplify Me market maker podcast.

This is brilliant. This was an FT headline. Nomura, biggest bank in Japan, maybe the second biggest bank in Japan, uh, chief apologises after ex-banker charged with trying to murder clients. As you say, I think you're going to get the Netflix rights to this. I might get the podcast rights to this because this is a classic true crime podcast, apart from the fact that we know who did it, uh, and we know what the outcomes are. So maybe it's not that interesting. Anyway, so the story goes, Nomura's CEO Kentaro Okuda, along with another, a number of other executives have taken a voluntary pay cut after one of the bank's former wealth management employees was charged with attempting to murder and rob customers. The story goes that this former wealth management, uh, manager, junior member of staff, uh, who was helping clients with asset allocation and some portfolio management. In Japan and in certain other countries, it's very, it's very common for these junior wealth managers to go to the person's house and to discuss financing and discuss, you know, discuss their policies and advise and all this kind of stuff. So what I'm thinking is that this junior went to a couple of very, very nice looking houses filled with very old people and started snooping around and thinking, all right, well, you know, how can I get a little bit of a little bit of upside from knowing where these people live and knowing what they've got stashed below their pillow. So, the story that kind of came out was that this wealth, this junior wealth manager allegedly drugged an elderly couple and set the house on fire during an attempt to steal millions of yen from that house. So, and Nomura, obviously, like talk about reputational damage. Nomura's like, all right, 'From now on, every time we go and visit a house to do some advisory, we need a senior manager present. We've committed to the strictest, like, no burning down of houses policy internally.' It's absolutely bonkers. And again, this kind of quite interesting Japanese management reaction is, you know, it's kind of penance. 'We are so sorry that this happened under our watch. We are going to take a pay cut to show that we are sorry.' Although it's only a 30% pay cut and it's only for 3 months. But what a bonkers story. I don't, I don't know. Do you reckon in the UK if this happened, a CEO's neck would be on the line?

You know? See, I, yeah, I was about to say, I think, um, there's a big, big cultural difference. I would say if this happened in America, Europe, or the UK, this would be such huge news. The fact that there's already wealth division. And then you've got bankers trying to do bad things to make even more money is how the street would see it. It would just be the best and most pumped story if this happened in the West, developed, you know, Western Europe, I'd say.

Yeah. Would, would, would Jamie Dimon step down if one of his employees, he wouldn't step down, would he? Unless he becomes president.

Yeah. Then he could pardon himself.

Yeah, exactly. Exactly. Well, yeah, so there you go. So that's, that's my last story. A banker trying to murder his clients. It's not bad, is it?

It's pretty good. Pretty good stuff here. We're here on the pod. We're breaking news here, breaking new ground for 2025. Uh, but look, Stephen, thank you as always. And I know we've got a few plans for some final episodes with a bit of a retrospective look from the year and a forward-looking for 2025 still to come. So if you are listening and you do not subscribe and follow the show. Remember to hit that, hit that icon on your podcast platform and the bell as well so you get notified when those episodes drop. But yeah, have a great week ahead. Thanks, Stephen.

Thank you, Ant.