Shutterstock’s Getty Deal, Nvidia’s AI Vision, and Investment Bank Crunch Time

All right, welcome to The Deal Room, and we're recording this on Friday the 10th of Jan because actually this is going out on Monday, Stephen. I know you're going to be in New York. What are you doing out there?

Yeah, I'm really excited. Well, I'll tell you what, firstly, I'm going to be freezing. I just bought myself a new coat because everyone's getting me really wet. They're talking in Fahrenheit and they're saying single-digit Fahrenheit, and that seems really low to me. So yeah, I'm going to be cold.

I did see you in the office in London actually yesterday, and there was a little bit of a Liam Gallagher vibe going on here. I didn't put, I didn't have you down for that, Steve.

What's going on? It's my, it's my hooligan, it's my hooligan jacket. Uh, you know, Piers was in the office, you know, the third element of this podcast. Piers was in the office with his extremely smart, you know, banker's coat. You were there with your football manager's jacket about to give some people some tactics. Uh, and I was just causing mischief with my, with my hooligan coat, but, uh, no, the actual purpose of next week is we are at RBC, uh, which is one of our favourite Canadian banks and one of our favourite clients in general. Um, and we're going to be doing a bunch of M&A stuff, teaching simulations, Monday, Tuesday, Wednesday next week. I might, I think I'm going to see a Knicks, actually, I'm going to go and see the, uh, New York Knicks versus the Detroit Pistons. And this is right in your wheelhouse.

Yeah. The Knicks are back, you know, they are back.

I've heard about that. Yeah. Yeah.

Yeah.

Um, so yeah, look. I'm going to be there with, with my nachos and my big, my big hand. I don't know what they do. I don't know if that's what they do at basketball, but yeah, I'm looking forward to it.

Cool. All right, well, enjoy. And look, this, this episode then, good to catch you because I know you're gonna have a one-week hiatus, but we're gonna bring in a special guest. Our co-founder and CEO Will DeLucy is going to join me for a show, so make sure you stay tuned. But in this forthcoming conversation, we're going to talk about 3 stories you mentioned there. You're going to be doing some M&A work with RBC analysts. Well, we're going to talk about an M&A story, big one in the world of photography and journalism, because a $3.7 billion acquisition of Getty by Shutterstock was announced. And so that's something we're going to dive into. We're also going to talk about the NVIDIA CEO, and the reason why is because he appeared as a keynote speech at the Consumer Electronics Show. In Las Vegas, and we'll talk about his jacket, we'll talk about some of his jokes, we'll talk about his general performance, but also more importantly, this multi-trillion-dollar market for robots that he sees and some of the other technologies tied to the NVIDIA ecosystem. And then there's been a raft of articles about the impending IBD boom, and I have written myself today a piece about Jefferies, who I did see posted some pretty phenomenal numbers, and what can we get out of that given that kind of front run some of the others. So let's start with the big acquisition of last week. Tell me more, Stephen.

Yeah, this is a really, really interesting acquisition for, you know, for anyone that studies corporate finance and anyone that's thinking about corporate finance strategy and what, you know, the reasons behind mergers and whether it's offensive or defensive, this is a great one. So Getty Images and Shutterstock, again, a lot of you would've been well familiar with both of these names. I tend I get to the stage where I've typed in a request for an image and then I see it on Shutterstock and it's got the watermark behind it. And then I realize that I'm not willing to pay for it. So I go and find it on a license-free website. But Getty, again, photography, Shutterstock images, they are, they are getting together in what is going to be a combined 3.7 billion company, including debt. Now the structure of this deal, Getty's by a little bit the kind of the bigger party. They're going to get 55% of the combined company and the CEO of Getty is going to be the CEO of the combined organisation. Just a little bit on deal structure before I get into strategy. It's going to be a $28, uh, so Getty's going to pay Shutterstock shareholders $28.85 per share in cash or roughly 13.75, uh, 67 Getty shares for every Shutterstock share. And the Shutterstock shareholders can choose to take their, uh, take their winnings, take their proceeds in either cash or a combination of cash and shares. And there's some structuring elements to that, a little bit of, uh, tax elements and tax benefits to different ways of doing this. Um, So what is going to end up happening is that this company, and by the way, both boards of directors have unanimously agreed that this is the right thing to be doing. Both companies are struggling. This is the most important thing to say. And why are they struggling? I think it's pretty clear for all of us to see that generative AI and image creation is killing these companies. Absolutely killing these companies. Now Getty, for example, it IPO'd in 2022 through a SPAC, special purpose acquisition company. It's down 73% since it IPO'd. Shutterstock's share price has fallen 50%, right? Just as an aside, often I think to myself, like, you know, Nvidia's gained, you know, 150% in the last 12 months. You've got OpenAI getting valued now at $300 billion. You know, where is all this money coming from? We can't just invent new money. It's gotta come from somewhere. Obviously we have economic growth and we have returns on investment, et cetera. But it, you know, it can't all be explained away by that. So the loot, there's winners and there's losers in this AI revolution. And these two companies are great examples of losers. Companies that investors are pulling money out of ASAP, and they're probably redistributing a decent chunk of that to the AI winners. Really, really interesting.

There's one quite niche, I guess, that someone like Getty will forever hold. I say forever, it's probably the incorrect phrasing, but a good friend of mine works for Getty. He actually won a Young Photographer of the Year award when we were at university. And so then when he was a grad, joined them and he's been there ever since. So he's one of like the main stewards now of the tennis circuit. Uh, and that being then he specializes in sport and actually goes, travels the world taking live photography from these events. But I'm guessing, uh, yeah, maybe robotics one day could get to that point to capture live photography like he does, but Yeah, it's kind of like art. There was that discussion, wasn't there, when generative AI first came out and we were— and when it was mimicking musical compositions as well, wasn't it? With the IBM technology and things like that. Is it as good? Is it not as good?

Yeah, and I think Getty does have that niche and the likelihood of being able to, you know, AI being able to replicate Novak Djokovic winning the Australian, the moment that he wins the Australian Open. That's not going to happen. One thing I was thinking, and this is the extent to my knowledge of the inputs to these large language models or to, sorry, to these generative AI models. I always think about AI like a fire triangle, the fire triangle, fuel, oxygen, the other one, an accelerant. AI is quite similar. You've got the energy, you know, you need energy. So that's why we're always talking about nuclear. You need the large language models. That's kind of like the accelerant. But you also need data, which is like the fuel, right? So, you know, to some extent, Can Getty and Shutterstock with their massive treasure trove of data and images, do a Reddit and say—

I was going to say, you're going to— it sounded like you were going to get all Reddit on me again.

Yeah, I mean, it's always on my mind. It's the first thing I think about when I wake up in the morning. Yeah, I don't know. And maybe that's not a fair comparison, but it was something that, you know, it's just like, can you turn defense into attack in any way with this AI revolution? Because the treasure trove of Getty Images, as you said, licensed images of real things that have happened, pretty remarkable. And I'm sure that many AI models have been surreptitiously trained, you know, ask for forgiveness, not permission on these types of databases, right?

Okay, so we've kind of gone over some of the financial deal mechanics, some of the technology. What are the actual strategic, like the synergies here between these two firms? I would imagine there's quite a lot of parallels between their businesses.

Yeah. Again, this is, this is a classic defensive acquisition. This is an acquisition out of necessity. Now, there are synergies from a cost perspective, as you would expect. There are also synergies from a revenue perspective, you know, again, bundling various different products together and providing more of a complete solution to their, their business clients. But I would focus much more on a bigger entity, two big entities or two medium-sized entities that are struggling can become a big entity that has got a little bit more defensibility, a little bit more in terms of economies of scale. I'm just going to give you a couple of examples. So firstly, if you look at the last three years revenue for Shutterstock and Getty, they're both, well, Tell you what, Getty's is almost entirely flat. $918 million in, in 2021 and $917 million trading 12 months. Shutterstock's not a lot better. So the goal by combining the two together is to just accelerate that through some revenue synergies. The second, and this is something that's really important when just looking below the income statement line, Getty has got $1.3 billion worth of debt on its balance sheet. So, and its EBITDA, earnings before interest, tax, depreciation, amortisation, at end of 2023. So we haven't got the end of 2024 financials yet, but its EBITDA was $200 million. So when I'm a banker or if I'm a credit analyst, one of the key ratios I'm looking at is debt to EBITDA. Its leverage ratio. And $1.3 billion of debt on $200 million of EBITDA, that's a 6.5x leverage ratio. That is highly levered, pretty risky. And in fact, just the interest payments on this debt are enough to send a company that's got $185 million of operating profits to a negative net income. Because the interest payments are so high. Now add Shutterstock to this entity. The debt stays, by the way, you know, they might be refinancing the debt, but it's still, there's still going to be $1.3 billion of Getty debt within this new company. Shutterstock, they have only got $55 million worth of debt, $60 million worth of debt, right? But they generate $200 million of EBITDA. So the combined entity, instead of it just being Getty at a 6.5x leverage ratio, the combined entity is basically doubling its EBITDA with the same amount of debt. So you're halving your leverage ratio and you're suddenly being able to really quite comfortably afford your interest payments. That's not becoming a massive drag on productivity or on distributions. And just look at the markets. Getty, I think, went up about 25% on the news, Shutterstock up about 20%. So this is something that has probably seemed quite obvious to analysts for quite a long time that these two should really get together. Obviously the only issue we've now got, antitrust.

Yeah, I was going to say, you mentioned defensibility and that combining to be a bigger dominant entity kind of rings alarm bells in my head. So is this quite strategic timing-wise given the incoming new administration? And it's good to get that as the first, one of the first pieces on the desk, so to speak, of the new incoming team.

Yeah, this is a great, a great opportunity for us to figure out how the Trump administration and his appointees will approach this type of transaction because Trump's been quite interesting in the way that he's very pro-business and pro-getting the deals done, but he's pretty anti-monopoly and pretty anti the overarching power of the tech behemoths. Now, if I'm looking at this and I'm thinking these two companies have been gutted by, in part, the tech behemoths and their AI innovation, and the combined entity's only going to be $3.7 billion. Am I going to, you know, I think that, well, who knows, but I think this is one that's just like, this is a good deal. It's defensive. It makes sense. These two companies would really struggle if they didn't get together, and therefore I think they will combine.

Cool. Well, let's move on. Let's talk about the showstopper, the main man of 2024, Jensen Huang, the keynote speech of the CES 2025. So So, have you, have you watched this? Have you seen any highlights yet?

No, I haven't. And I tell you what, I've only briefly researched the CES, um, which I've got in my notes. I've got in brackets the most powerful event in the world, but I think I missed out the word tech. I think it's the most powerful tech event in the world. Is it, Stuart?

You could argue, you could argue by being tech, it is the most powerful event in the world, right? It shapes and influences politics, economics.

Yeah, I mean, it probably is, and people were queuing up to get into this keynote speech. But I mean, look, I'm a, you know, I read all the analysis and I read the articles and I try to distill it into this podcast. You actually watch some of this stuff. So when I look at my notes and it says that Jensen Huang has got a sparkly leather jacket, you can back that up. What was it like?

Yeah, so don't think sequins, think more like croc skin. Shiny croc. Like, so you know how, like, I mean, this is gonna sound super first world problem, but if you've ever seen like a croc skin watch strap and you, you inquire as to the expense of that, your mind will be blown. So imagine the full-blown jacket in full croc. But yeah, he's rocking that. Uh, there's this kind of opening sequence that's basically like this full board Hollywood movie, and it's kind of got this mashup, AI mashup voiceover that's kind of, imagine Morgan Freeman meets Stephen Hawking, and they have a child who like narrates an opening sequence. I mean, it's pretty blockbuster. Um, I mean, I haven't, I can't say I watch this every single year. This one I have had a look at some of the highlights. Interestingly, um, I've read a few pieces, commentators talking about his presentation style. And I wanted to ask you actually. It feels like, I mean, some of the jokes he does and the body positioning and phrasing, very similar to other big CEOs. Obviously there's the famous one with the Microsoft and they're kind of hooping and hollering and things like that. Um, do you think a Brit could ever do, be a CEO of a big firm like that?

That is an absolutely brilliant question. I think that if a Brit tried to do the big chest-thumping corporate showstopper of a speech, I think we'd laugh them out of the room, and we would probably disown them as not being very British. And that's all shame on us, right? You know, that's, you know, we are probably now a little bit, I don't think we've ever been particularly loquacious and, and, and yeah, and tub thumping and, and things like that. And it's, and it's absolutely fine. Like, you know, Americans are, well, some Americans are absolutely brilliant at that. We're a little bit more considered, maybe a little bit more conservative. I, for one, don't have a sparkly leather jacket. So yeah.

So I mean, look, he, he definitely, um, is a confident fellow when he's doing this. And an interesting observation was no PowerPoints required for this man. He just talks for an hour and a half with his clicker, with some cool animations that appear behind him. I mean, it's pretty—

He's very— he's a very impressive dude. And, you know, and I think if I was CEO of a $3.4 trillion market capitalization company, I'd probably be quite confident as well. I think that would probably boost my confidence a little bit. But let's get to the story. This is So the headline is that robots are a multi-trillion-dollar opportunity according to Jensen Huang. He says the field of robotics has reached a technological tipping point. And this is the sign of a company that's really, really firing on all cylinders. They, you know, this keynote announced probably 5 or 6 new products. All of which are really, really quite interesting in their own right. And this kind of reminds you of those blockbuster Apple events where it's just like, and one more thing, you know, that was the classic, wasn't it? Um, we've just launched a new iPad or we've just launched this amazing new thing. Just feels like NVIDIA doing that one more thing type, type experience. I think that probably the most interesting is this what they call KOSMOS, which is a range of foundational models trained on millions of hours of videos that can generate photorealistic videos to train humanoid robots, which as I was writing that sentence, I was thinking, I don't think I've ever said that combination of words together before. But the long story short is it is much cheaper than finding real-world video. You know, you can create the environment. This is kind of physical AI. You can create the environment in order to train robots without having to build the environment to train those robots. And it kind of, it decreases the training data is much cheaper and therefore the programs are a lot cheaper. And what's super interesting about this is that NVIDIA is open sourcing all of this. So as a strategy to capture innovation in robotics, in humanoid robotics, it is making its architecture and these models freely available for people to build on top of, right? Yes. At the back end, you know, if there's processing requirements that cost a lot of money, then they'll charge and eventually there'll be a monetization strategy. But what NVIDIA is trying to do with this robotics, humanoid robotics strategy is if I'm NVIDIA or if I'm one of the tech giants and I've just realized that NVIDIA with its GPUs has absolutely done a number on me with regards to large language models and the data of a Google and a Facebook, the data is words. And the monetization is words, pretty much. And therefore, what are Meta and Amazon and Google going to be spending billions of dollars doing? Trying to build the GPUs and the infrastructure to reduce their reliance on NVIDIA because at their heartland, they're a words-based company. So what NVIDIA's trying to do is just like, all right, we're still going to have that market-leading position for the next 5 to 10 years, no question about it. But wait a minute, do any of the big tech players have the physical world as part of their fundamental reason for being? No. So we are going to land grab in physical AI, humanoid robots, the whole architecture and infrastructure and AI behind introducing this physical element. And is Facebook going to try and catch up? Well, it's not part of their core business. You know, their core business is 4 trillion people on social media. So I think it's quite, you know, it's a logical, exciting, interesting move. Do I believe that the market size for humanoid robots is going to be $200 billion by the end of the next decade? Actually, I was going to say no, but maybe it will be. Who knows? What do you think?

Yeah, I feel like you've been caught hook, line, and sinker by the keynote. No, no, definitely makes a lot of sense what you're saying. Makes complete sense. But what I was kind of thinking was, do you think this is a bit of a page from the Elon Musk book of how to deliver one of these keynotes and how to manage investor expectations in a similar way in a company like Elon's where Tesla has gone parabolic at one point and then normalized and so forth. And it felt like NVIDIA were becoming increasingly more defensive over recent earnings quarters. And as the next one rolls over, now we're into the new year. Is this more, let's start to talk about some of these other things and the extreme potential of them, even though they are fairly distant in reality to become anywhere near the size financially of what we were talking about, although the opportunity is so huge, but it's a good pivot to just move investor attention a little bit.

I think, I think you're absolutely right. You know, just to put some numbers on it, the physical AI segment of NVIDIA's business generated $450 million of revenue in the last quarter out of a $35 billion blockbuster earnings release. So it's still a, a really tiny fraction, but really interesting to bring in Tesla as a point of comparison. And one of the other big announcements was this Drive OS system, the partnership with Toyota and Aurora, the driverless truck or lorry company, which is a very exciting thing to think about. What's really interesting here is the different strategies or the different way, ways that NVIDIA and Tesla are going to try and end up in the same place. Now Tesla's built the car, done all the hard work, its gross margins are 20% because it's still deemed to be a car company, but it's valued like a company that's going to be the operating system for all transportation in the future. Whereas Nvidia, they started out as a chip manufacturer or as a, yeah, a chip company, and they are now using their very, very advanced capabilities with their Blackwell chips and things like that to be the partner of choice for physical manufacturers, for physical car companies. So again, if you're thinking from a gross margin perspective, Would you want to be the AI layer or the infrastructure layer that is outsourced to physical car manufacturers, physical robot manufacturers? Absolutely. You don't have to get your hands dirty with complex supply chains, with commodity prices, with things like that. I mean, again, will Nvidia beat Tesla in being the operating system of driverless cars, or at least the architecture behind the operating system, probably.

Cool. Well, look, let's move on. Final topic. And let's talk a little bit investment bank divisions and performance as we start to get some numbers come through, because I know Jefferies came out last week. So perhaps we can start with them. How did they perform? And what is this? What's your feelings for for the ones to come?

Yeah, this is the beginning of the year. We're all quite bullish as an investment bank community. And as we've said before, there's nothing like talking up your own book. I've just got a couple of headlines here, literally from a 3-minute scan of the headlines over the last few days. Barclays Banking: Prepare for wave of dealmaking and IPOs this year. Bankers say Japan's $230 billion M&A boom will get even bigger. M&A banks prepare for breakout year in in 2025. And then finally, as you mentioned, Jefferies' profit triples in a sign that the dealmaking slump is over. So let's, yeah, I mean, look, Jefferies, absolutely, absolutely breakout fantastic quarter. Its net income more than tripled year on year, 73% jump in investment banking fees. Near doubling of advising and advisory revenue. And again, these banks, these boutique, these listed boutiques of which you can count Jefferies as the biggest, but also Evercore, Lazard, Molex, PJT, Perella Weinberg, they are all, their share prices all at their all-time highs. They are flying Evercore's up 62% last 12 months. Lazard up 34%. Jefferies share price has more than doubled in the last 12 months. So the investment community is pricing in, you know, these PE multiples are pretty punchy at the moment, price earnings multiples for these organisations, pretty punchy because they're pricing in the fact that 2025 should be a bumper year. Now, will it happen? That's the question.

Yeah. So, so the question is, you know, with great power comes great responsibility. So share price being so elevated, uh, it feels like, what, so they gotta deliver now? It's baked in. Otherwise everything else is disappointment. This, this smells, uh, it's making me a little bit anxious now after your positive beginning.

Yeah. And, and look, I've got a little bracket in my notes saying don't invest in these companies. That was at the moment because their price earnings are so high. An Evercore 62% last 12 months share price increase suggests that a lot of the future upside, which has some risk, we're not totally sure that investment banking fees will go up in 2025, but that 62% share price rise suggests that it probably will. Yeah. These guys and the big bulge brackets, they need to have a bit of a breakout year. Everyone's expecting that they will. Everyone's expecting the IPO market's going to be back. Everyone's saying that their pipelines are extremely full with big acquisitions and with lots of interesting stuff going on. And just a couple of things just to look behind these numbers. And one of the articles I think that you sent me was about this being a crunch year for investment bankers. And that's partly because they have to justify the share price rise, but partly because these elite boutiques, the likes of Lazard and Evercore and Jefferies, they spent 2022 and to an extent 2023 hiring some of the rainmakers from the big bulge brackets that were having to skinny down and rationalise their IBD headcount. So there's been some big names transferring from the likes of JP Morgan and Goldman Sachs to the likes of Lazard and Jefferies. And one of the most important ratios that we look at when we are analysing service-driven businesses and in particular professional services is the compensation ratio. So that is compensation divided by revenue or salaries divided, salary and bonuses and benefits divided by revenue. And I'm just looking at a chart at the moment. So MOLIS, for example, its compensation ratio is up near 80%. So it's basically saying, look, they have stacked up their roster of rainmakers that are getting paid millions of dollars a year. And the revenue now needs to start coming to get that ratio back down. If a compensation ratio is nearly 80%, and let's say that your other associated costs, maybe 15 or 20%, that doesn't leave a lot of room for profit, right? So that's something that we're looking at when we're analysing these types of companies. And the hope is that these companies that have hired heavily in 2022 and 2023, the rainmakers will start making rain and the revenue will start pouring in as circumstances start to move in dealmakers' favour. And these compensation ratios will go back down and everyone will be happy. But again, it's just an interesting— well, we'll see what happens. Making predictions is a mug's game, isn't it?

Yeah, I think, um, oh no, Stephen, the S&P is going to 7,500. You know this. I was going to say, just to close then, what's interesting when you were explaining that last part was a lot of our listeners obviously are in their early careers, potentially students thinking about investment banking, and there's always a lot of focus on the intensity and the nature and how hard it is in those early years. I can't even comprehend the pressure I know it sounds— it's hard if you can distance yourself from the idea of you getting paid $10 million in a year, which is obviously an incredible amount of money, but you're paid that because you're— you are on the block to deliver. And I know what I was reading was that a lot of these MDs and so forth are on like a 2-year roller or a 3-year, and they've got— they they have, as you said, they have to deliver. And these guys don't live a— these guys and gals don't live a normal lifestyle. Um, and so yeah, that pressure must be immense. And so it's just like, it seems like as a career then, it doesn't— it kind of goes from what, physical? Because I imagine early in your IBD career, it's quite physically challenging, maybe not as intellectually stimulating, perhaps early, early. And then at the end, does it just become this pressure pot where, where are the deals coming from?

Yeah, I mean, you're, you're absolutely right. And I think one thing that you don't have, uh, that you probably need to be one of these, you know, $10 million a year hotshots is kind of unlimited Jensen Huang sparkly leather jacket confidence, right? You need a little, you need a little slice of that, right, in order to be able to get up at 5:00 AM in the morning and go, yeah, I'm gonna hit this. This is gonna be my year. I'm the best in the business. All of these deals are mine and my target's 30 million, but I'm gonna make 70 million. Again, there are plenty of people like that and Godspeed to them, but maybe not you or I, and, or maybe, who knows?

All right. Well, look, we'll look to wrap it up there. Safe travels and time in NYC, and we will see you not next week, week after. So take care. Thanks for listening, everyone.

Thank you, Ant.