Latest / Bloomberg Intelligence / Middle-Market Debt Has Ballooned in Recent Years, Kahn Says

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Middle-Market Debt Has Ballooned in Recent Years, Kahn Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. How
• 0:32
  Speaker 1: do you value a business? How do you value a
• 0:35
  Speaker 1: business for the basis of a non bank lender. Well,
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  Speaker 1: here to help us understand this world is Ronald Kahn.
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  Speaker 1: He is the managing director of Lincoln International and he's
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  Speaker 1: based in Chicago, but he joins us here in our
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  Speaker 1: eleven three oh studios. Ron always a pleasure, Thanks for
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  Speaker 1: being here. You know. Maybe let's just begin with something
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  Speaker 1: called the Lincoln Middle Market Index. Tell us what it is,
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  Speaker 1: and then we'll get into the issue of valuation and
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  Speaker 1: privately held companies. Great, okay, So you know that Lincoln
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  Speaker 1: International is a middle market investment banking firm. In addition
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  Speaker 1: to our M and A and ad advisory capabilities, we
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  Speaker 1: have valuation capabilities as well. And the valuations are basically
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  Speaker 1: for non bank lenders. If you remember two thousand and
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  Speaker 1: eight two thousand nine, the world turned upside down. Banks
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  Speaker 1: got out of middle market lending. Nin banks got involved
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  Speaker 1: UM public BDCs, private d BDCs, private debt funds, and
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  Speaker 1: most of them need valuations. UM. They need it because
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  Speaker 1: if they're public, they wanted UM conform with SEC regulations.
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  Speaker 1: If they're not public, UM, many of the more leverage
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  Speaker 1: and their lenders to the to these lenders also one valuations.
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  Speaker 1: Results of that, we have this a massive amount of
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  Speaker 1: data on privately held companies. Basically we've been doing this.
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  Speaker 1: In two thousand and eight, we have seventy nine bank lenders.
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  Speaker 1: We do about twelve portfolio companies every quarter. And as
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  Speaker 1: a result, we as I said, we have all this
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  Speaker 1: financial information. We've been doing reports on the number of
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  Speaker 1: companies that show earnings growth year over year, revenue growth
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  Speaker 1: year over year. That we've done and other people have
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  Speaker 1: done that. But we thought, at the beginning of year,
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  Speaker 1: what happens if you could create an index, an index
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  Speaker 1: that depicts the value of middle market company's enterprise value,
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  Speaker 1: so that's earnings plus they're multiple. I had no idea
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  Speaker 1: how to do it in next I mean, that was
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  Speaker 1: like way beyond me. But we wound up collaborating with
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  Speaker 1: Steve Kaplan, who is a professor at the University of
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  Speaker 1: Chicago Booth Steve. Steve is probably the pre eminent expert
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  Speaker 1: on private equity. He brought in one of his colleagues,
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  Speaker 1: Mike Mennis, who's a professor of accounting, and they figured
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  Speaker 1: out the man. They looked at all the statard and
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  Speaker 1: said we we can pull this together. So about ten
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  Speaker 1: ten days ago we came out with this Lincoln middle
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  Speaker 1: Market Index, which again um depicts the the enterprise value
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  Speaker 1: of an average middle market company mental market companies. We
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  Speaker 1: we defined for the index as companies that have an
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  Speaker 1: EBA d A of a hundred million dollars or less.
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  Speaker 1: But the average in this is twenty seven eight million
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  Speaker 1: dollars um in EVA d A and there's about three
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  Speaker 1: hundred and fifty companies in the index. So ron before
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  Speaker 1: we get to uh, just the valuations themselves, I would
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  Speaker 1: love for you to give us a sense of how
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  Speaker 1: much this market of middle market corporate debt and company equity,
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  Speaker 1: how much it's grown, because, as you mentioned, business development
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  Speaker 1: companies are a big buyer of these companies, but it's
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  Speaker 1: not just them. Private equity firms are getting into private debt,
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  Speaker 1: so were hedge funds, were insurance company. This has been
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  Speaker 1: Holy grail increasingly. So how much has this market increased.
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  Speaker 1: It has increased exponentially and and and some of it
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  Speaker 1: has replaced the banks, the mental market banks, so so
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  Speaker 1: many of them used to be lenders to private equity firms,
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  Speaker 1: to these mental market companies, they pretty much have have
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  Speaker 1: exited the market. Interestingly, happen to be very big lenders
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  Speaker 1: to these new private dead funds, these um or or
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  Speaker 1: or BDC. So they might almost have as much money
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  Speaker 1: in the middle market today as they did before, but
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  Speaker 1: in a different um in a different aspect. But but
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  Speaker 1: the the number of these we we probably have when
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  Speaker 1: on the dead advisory side, we probably could go to oh,
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  Speaker 1: I would say a hundred and fifty hundred and seventy
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  Speaker 1: non bank lenders today. That that's that's how big the
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  Speaker 1: universe is. What is the bias of the non bank
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  Speaker 1: lenders when it comes to valuation? Um, well, that I
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  Speaker 1: think that I know I'm putting you on the hot
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  Speaker 1: seat a little bit, but but I think it's you.
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  Speaker 1: It's useful because they were also they have to respond
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  Speaker 1: to the market dynamic, right, I mean they can't just
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  Speaker 1: ignore what their investors are looking for. Um, that's right.
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  Speaker 1: I mean many many of these are SEC reporting entities,
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  Speaker 1: so they do want to play it down the middle.
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  Speaker 1: UM and I and I think, as I said, we
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  Speaker 1: do to hundred portfolio companies every quarter. I think I
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  Speaker 1: think our clients are very very um honest in what
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  Speaker 1: they're reporting. I think they do a really good job
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  Speaker 1: because you know, the consequences are just they're staggering. So
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  Speaker 1: I think I think everybody wants to play it by
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  Speaker 1: the book. So you said that there are a hundred
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  Speaker 1: seventy five uh non bank lenders that you could go to,
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  Speaker 1: what's it up from say five years ago? Oh, probably
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  Speaker 1: in two thousand a, two thousand nine. I bet they
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  Speaker 1: weren't more than thirty. I mean right right right now
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  Speaker 1: there there there there are fifty five sixty public b dcs,
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  Speaker 1: up from probably in two thousand eight business development corporations
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  Speaker 1: right through the new and the newest private b dcs.
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  Speaker 1: They are just um phenomenal. So I I think you
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  Speaker 1: probably have close to UM nine billion. I think is
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  Speaker 1: the last time I saw between public and private b dcs.
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  Speaker 1: Asset under management and I can't imagine that that it
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  Speaker 1: was much more than twenty billion and two thousand eight,
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  Speaker 1: So it it it has been exponential. Are you concerned
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  Speaker 1: about the lending standards considering how much money is chasing companies? I? I, UM,
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  Speaker 1: that's a really good question. I mean lending it is
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  Speaker 1: certainly a borrow is market today. UM. The one thing
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  Speaker 1: that I think is is a governing factor is we
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  Speaker 1: see that debt as a percent of total enterprise value
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  Speaker 1: is still in the sixty six range, which means there's
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  Speaker 1: about thirty equity below them um in terms of enterprise value. Now,
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  Speaker 1: the flip side of that is, enterprise values themselves are
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  Speaker 1: are rather frosth because multiples have gone up considerably UM
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  Speaker 1: debt today, and it is not uncommon for companies to
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  Speaker 1: get six times leverage UM. Middle market companies againting five
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  Speaker 1: to six times leverage, and and and and and I
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  Speaker 1: will say, what what does concern me a little bit?
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  Speaker 1: Proform adjustment. Most of these companies are lending a selling
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  Speaker 1: off of proformer adjustments. Ron Com thank you so much
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  Speaker 1: for joining us, Managing director of Lincoln International based in Chicago,
• 7:08
  Speaker 1: but joining us here in our eleven three oh studios.
• 7:10
  Speaker 1: This is Boomberg. Well, turmoil in Germany will not end
• 7:27
  Speaker 1: that soon. The latest news just crossing the Bloomberg Now.
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  Speaker 1: German Chancellor Angela Merkel said she would prefer to go
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  Speaker 1: ahead with new federal elections rather than try to form
• 7:38
  Speaker 1: a minority government. Uh, she is weighing her options after
• 7:42
  Speaker 1: the collapse of four party coalition talks late Sunday. Here
• 7:46
  Speaker 1: to talk about the implications of this is Kit Jukes.
• 7:50
  Speaker 1: He is chief global FX strategist for CETE General. He's
• 7:54
  Speaker 1: coming to us from London. Kit, thank you so much
• 7:57
  Speaker 1: for joining us. You know, there was a little bit
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  Speaker 1: of weakening in the euro initially last night as we
• 8:03
  Speaker 1: got news of four party coalition talks breaking up yesterday.
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  Speaker 1: That has reversed. But this latest bit of information might
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  Speaker 1: change the picture. What's your take. Yeah, this latest piece
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  Speaker 1: will see the eurocon a little bit of pressure again.
• 8:20
  Speaker 1: You know, there's obviously going to be a lot of
• 8:23
  Speaker 1: uncertainty that there's I guess potentially four outcomes. You know
• 8:27
  Speaker 1: that they continue or they've resumed the coalition talks and
• 8:29
  Speaker 1: this Jamaica coalition revives itself. I suppose that's still technically possible,
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  Speaker 1: or you can have a minority government, which Angler Michal
• 8:38
  Speaker 1: says she's not planning at the moment where she remains
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  Speaker 1: as chancellor and relies on presumably the FDP to to
• 8:44
  Speaker 1: support her when she needs support. On on an ad
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  Speaker 1: hoc basis, that would have looked like very little change
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  Speaker 1: to an outsider who would have had significant domestic implications.
• 8:54
  Speaker 1: But it would have been the kind of government you
• 8:57
  Speaker 1: might have seen various other bits of Europe. And I
• 8:59
  Speaker 1: think that's what was giving the market caused to say, look,
• 9:01
  Speaker 1: this isn't this isn't concerning us too much. We've never
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  Speaker 1: had we've never had a minority government in Germany since
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  Speaker 1: the sort of modern times, since since the Second World War,
• 9:13
  Speaker 1: I don't think, and we've not had fresh elections to
• 9:17
  Speaker 1: try to solve the problems that way over that period either.
• 9:20
  Speaker 1: But that's the other alternatives, so and will continue with
• 9:24
  Speaker 1: the uncertainty. I still, you know, when we look at
• 9:28
  Speaker 1: the potential outcomes for markets, if the foreign stange markets
• 9:31
  Speaker 1: relatively insucient um, the fixed income market equally, so it
• 9:35
  Speaker 1: hasn't had a significant impact on on European government bonds.
• 9:39
  Speaker 1: It's not making people nervous. The European central banks sits
• 9:42
  Speaker 1: behind the markets and keeps things calm. The economy is
• 9:47
  Speaker 1: moving ahead in Germany, is moving ahead in Europe. So
• 9:49
  Speaker 1: the fact that there's political uncertainty, in fact, stability and
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  Speaker 1: status grow, which is all you get with this inability
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  Speaker 1: to form a government. It isn't isn't the worst thing
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  Speaker 1: to do, you know, to see, but I think the
• 9:59
  Speaker 1: markets they will be nervous until they know what does
• 10:03
  Speaker 1: come out, and I suspect we might be sort of
• 10:04
  Speaker 1: grindingly increasingly nervous over the next few days. Just to
• 10:09
  Speaker 1: tell people, why is it called the Jamaica coalition and
• 10:12
  Speaker 1: has to do with the colors of the Jamaican flag.
• 10:15
  Speaker 1: I'm going to really have to work hard in terms
• 10:16
  Speaker 1: of the colors of the Jamasic coalition. But it's the
• 10:19
  Speaker 1: it's the black, red, yellow, green that you get to
• 10:23
  Speaker 1: get a coalition of the correct of the right, so
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  Speaker 1: you get the free Free Democrats are the are the
• 10:29
  Speaker 1: yellow right and the green obviously the green and the
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  Speaker 1: Christian Democrats are the black. The Free Democrats their pro business.
• 10:38
  Speaker 1: What do they not like or what do they like
• 10:41
  Speaker 1: about the potential coalition or does it have really to
• 10:44
  Speaker 1: do with migration and immigrants more to do with migration policy.
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  Speaker 1: I think that there were accusations within the coalition talks
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  Speaker 1: that they planned for a while to be pulling out
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  Speaker 1: and that this was a um, you know, an imprompt
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  Speaker 1: a move that seems remarkably well planned, if that's the
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  Speaker 1: right way of putting it. Um. So, it was always
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  Speaker 1: going to be hard to get them in, and they
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  Speaker 1: they in a sense, would be the ones who would
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  Speaker 1: be happiest with um with continuing with a minority government
• 11:13
  Speaker 1: is saying, right, there are things we don't like, but
• 11:15
  Speaker 1: we'd quite like to have power, and just we're not
• 11:17
  Speaker 1: going to promise a coalition deal where we find up
• 11:19
  Speaker 1: certain things will vacue on an ad hoc basis. Kid,
• 11:23
  Speaker 1: Is it fair to view the latest developments in Germany
• 11:27
  Speaker 1: through the lens of populism and sort of the increase
• 11:31
  Speaker 1: that we've seen in this populist uprising, whether it's the US,
• 11:35
  Speaker 1: or whether it's Italy or Spain or or wherever? I mean?
• 11:38
  Speaker 1: Is it basically another iteration of that, but this time
• 11:42
  Speaker 1: in Europe's most important economy. Well, if we have, if
• 11:46
  Speaker 1: we have another round of elections, I think most people
• 11:49
  Speaker 1: would expect that the big winners would be um the
• 11:52
  Speaker 1: f D party, so the most populist party, and so
• 11:57
  Speaker 1: it would certainly be interpreted that way. I'm part of
• 11:59
  Speaker 1: me wonders whether this is about populism or whether this
• 12:02
  Speaker 1: is about a push away from traditional parties. Um, you
• 12:06
  Speaker 1: could argue, you could argue whether President Trump is populist
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  Speaker 1: or isn't really a Republican. He's just flying under the flag.
• 12:13
  Speaker 1: And it's remove away from the sort of heart land
• 12:15
  Speaker 1: of the policies of of of your two main parties
• 12:18
  Speaker 1: in the States and likewise in other countries. So we know,
• 12:21
  Speaker 1: we could we could argue about the terminology, but it's
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  Speaker 1: certainly away from the accepted established over the last fifty
• 12:28
  Speaker 1: years sort of order of which are the big political parties,
• 12:30
  Speaker 1: into something that's got a populist element. But it's also
• 12:34
  Speaker 1: i think much more, much more uncertain, much more fluid
• 12:37
  Speaker 1: changes a lot. Wouldn't you expect to see you sell
• 12:40
  Speaker 1: off in European sovereign debt um, Yeah, you know, that
• 12:45
  Speaker 1: is more of a measure of uncertaintyan anything else. And
• 12:48
  Speaker 1: what's happening even now as we speak staring at my
• 12:50
  Speaker 1: screens is um. You know, Spanish and Italian debt is
• 12:56
  Speaker 1: out performing slightly German government today, So m you know,
• 13:01
  Speaker 1: when it's not risk aversion, it's more the Germans are
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  Speaker 1: doing less well than the others, which looks like stability
• 13:06
  Speaker 1: from from most angles. So you know, you want to
• 13:08
  Speaker 1: remember that we've still got the European Central Bank buying
• 13:11
  Speaker 1: government bonds on a regular basis and standing by the
• 13:13
  Speaker 1: market and has negative interest rates to underneath it. So um,
• 13:17
  Speaker 1: you know, when everything's difficult, there aren't very many government
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  Speaker 1: bonds to sell, and and that is almost coming back
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  Speaker 1: to the core of it. At this point in time,
• 13:24
  Speaker 1: the European Central Bank is is what matters most. The
• 13:27
  Speaker 1: euro is weakening on this news against the dollar now
• 13:31
  Speaker 1: at one point one seven. Do you think that it
• 13:34
  Speaker 1: will continue to weekend through year end and kind of
• 13:36
  Speaker 1: give rise to strengthen the dollar. I'll give you about
• 13:39
  Speaker 1: twenty seconds. We've been stuck between a one one eighty
• 13:43
  Speaker 1: range for almost so long I can't remember or dream
• 13:46
  Speaker 1: of a life outside that. I think we'll still be
• 13:47
  Speaker 1: in that range at Christmas. I'm a bread, thank you
• 13:50
  Speaker 1: very much. A kid. Jukes he is chief a global
• 13:53
  Speaker 1: effect strategist for Association or EL. He's joining us from
• 13:57
  Speaker 1: London and just to note that the European Central Bank
• 13:59
  Speaker 1: President Mario drag will be appearing before a committee on
• 14:03
  Speaker 1: Economic and Monetary Affairs in Brussels. I want to turn
• 14:18
  Speaker 1: our attention now to the world of automobiles, and we
• 14:21
  Speaker 1: have Kevin Tynan. He is the senior autos analyst for
• 14:24
  Speaker 1: Bloomberg Intelligence. Kevin bob Lutts, the former GM chief executive.
• 14:31
  Speaker 1: You know, he's been skeptical about Tesla uh and their
• 14:34
  Speaker 1: future for a long time, and he retired from General Motors. UH.
• 14:39
  Speaker 1: He also worked obviously for Ford and Chrysler and BMW,
• 14:44
  Speaker 1: and I believe he's got some very specific comments when
• 14:47
  Speaker 1: it comes to Tesla. He says, boy, the future does
• 14:50
  Speaker 1: not look good. Uh. He says Tesla is doomed. Why
• 14:54
  Speaker 1: do you think he says that, Well, just because of
• 14:58
  Speaker 1: the financial condition and the company. UM. You know he
• 15:02
  Speaker 1: talks about it where you you know, you can't cover
• 15:05
  Speaker 1: your cost of manufacturing. Uh. They've had access to capital
• 15:10
  Speaker 1: basically for free, and it's just not a sustainable model.
• 15:14
  Speaker 1: And the idea that I think the company gets valued
• 15:17
  Speaker 1: as if it's a technology company. And I think Bob
• 15:21
  Speaker 1: Lutz knows at the end of the day, they are manufacturing,
• 15:24
  Speaker 1: and it's expensive to do so, and you have long
• 15:26
  Speaker 1: lead times. Uh. So there's the is a company that's
• 15:30
  Speaker 1: not being valued as an automaker when what they're doing
• 15:32
  Speaker 1: is making automobiles. All right, So let's dig into some
• 15:35
  Speaker 1: of what it's making. Tesla just announced to Great Fan
• 15:38
  Speaker 1: Fan Fair trucks, autonomous trucks and electric trucks, and uh.
• 15:45
  Speaker 1: There is some speculation, Kevin, that they are pre selling
• 15:50
  Speaker 1: these trucks years ahead of their actually being made in
• 15:55
  Speaker 1: order to raise money to continue production of their current
• 15:58
  Speaker 1: orders rather than have to go to the public markets
• 16:03
  Speaker 1: through Wall Street. Do you think that there is much
• 16:06
  Speaker 1: truth to that? There's there probably is some truth to that.
• 16:09
  Speaker 1: I think at the end of the day, though, what
• 16:11
  Speaker 1: what they will need in the next capital rays will
• 16:14
  Speaker 1: be sooner and much a much, much larger scale than
• 16:20
  Speaker 1: what they would get through these you know, thousand roadster
• 16:25
  Speaker 1: uh deposits. Uh probably somewhere in the ballpark of two
• 16:31
  Speaker 1: billion dollars. You know, if you just look at their
• 16:34
  Speaker 1: cash burn run raid and what they have in the bank, Uh,
• 16:38
  Speaker 1: you're probably looking at miden where you know, and that's
• 16:43
  Speaker 1: assuming running it right to the edge. UM. And I
• 16:46
  Speaker 1: think one thing that they didn't do. They've had that
• 16:48
  Speaker 1: one profitable quarter of that third quarter last year, UM,
• 16:52
  Speaker 1: and they didn't go right to the market then. And
• 16:55
  Speaker 1: it's more of an issue of you have this fanfare
• 16:58
  Speaker 1: from the truck and the roads to UM and you
• 17:01
  Speaker 1: know you're gonna need to go back. I would be
• 17:03
  Speaker 1: doing it now while the hype is high, although the
• 17:05
  Speaker 1: stocks down big today. UM, you know, sort of doing
• 17:09
  Speaker 1: it when you can instead of when you have to.
• 17:11
  Speaker 1: So let's talk about a legal threat that they have.
• 17:14
  Speaker 1: Just to sort of put that two billion dollar potential
• 17:16
  Speaker 1: capital raise into context, there is a four point seven
• 17:22
  Speaker 1: billion dollar legal settlement that could be coming up for Tesla.
• 17:27
  Speaker 1: We haven't heard that much about this. Do you care
• 17:29
  Speaker 1: about this? Um? Yeah. There's a lot of noise, UM,
• 17:34
  Speaker 1: you know, from a lot of different parties, and and
• 17:35
  Speaker 1: you just think about uh, you know, the union, U,
• 17:39
  Speaker 1: A W trying to get in there. You know. So
• 17:42
  Speaker 1: it's I think you really have to be careful and
• 17:44
  Speaker 1: sift through that, he said, She said kind of things
• 17:47
  Speaker 1: that go on around this company. And really what I
• 17:50
  Speaker 1: try and do in that case is is get beyond
• 17:53
  Speaker 1: you know, that noise, the noise of this truck and
• 17:56
  Speaker 1: roaster and really get into what this what it's going
• 17:59
  Speaker 1: to take for this company to get Model three out
• 18:02
  Speaker 1: and delivered, um, you know, because that's the core business
• 18:05
  Speaker 1: that's going to enable them to fund all these other projects.
• 18:09
  Speaker 1: And really until that happens, there's a lot of this
• 18:11
  Speaker 1: other noise going on. Well, I wondered, Kevin, if you
• 18:13
  Speaker 1: could just speak a little bit about the credibility that
• 18:17
  Speaker 1: Elon Musk has, because in July when they announced the
• 18:21
  Speaker 1: Model three, they were anticipating a production rate of about
• 18:24
  Speaker 1: twenty thousand cars a month by the end of December,
• 18:28
  Speaker 1: And I read a couple of notes over the weekend
• 18:31
  Speaker 1: that said that Tesla produced two hundred and sixty Model
• 18:37
  Speaker 1: threes in the last quarter. That's three a day. Yeah,
• 18:42
  Speaker 1: and and it's really a different world in that sense him.
• 18:45
  Speaker 1: You know, we we think back to you know, Ala
• 18:48
  Speaker 1: Molally and and you know, even yeah, you know, you know, uh,
• 18:54
  Speaker 1: you know, under under promise and over deliver, and then
• 18:58
  Speaker 1: this is really a very different scenario areo. You know.
• 19:00
  Speaker 1: But at the end of the day, I think the
• 19:02
  Speaker 1: people that are are long the Tesla stock will say, well,
• 19:05
  Speaker 1: it doesn't really hit that many targets but he gets
• 19:07
  Speaker 1: there eventually and what he does deliver is really good. Okay,
• 19:10
  Speaker 1: but if you were able to if you did this
• 19:12
  Speaker 1: at let's say GM, which I think, what are they
• 19:14
  Speaker 1: selling how many vaults of five thousands? Well they did
• 19:18
  Speaker 1: about last month yea, so um no, But you're right
• 19:21
  Speaker 1: to your point. There's a lot of things and and
• 19:24
  Speaker 1: even electric vehicle technology in the first place. If you remember,
• 19:28
  Speaker 1: early in the early days of Model Left, there were
• 19:30
  Speaker 1: some fires just because of the battery chemistry, where I
• 19:35
  Speaker 1: think investors looked at General Motors and Ford and said,
• 19:37
  Speaker 1: how come you guys aren't doing this, And they said, look,
• 19:39
  Speaker 1: if we put cars out there that went on fire, we'd,
• 19:42
  Speaker 1: you know, we'd be crucified for that. So we're waiting
• 19:45
  Speaker 1: for the technology to develop to where we can put
• 19:47
  Speaker 1: vehicles out there safely. Autopilot as Tesla calls it. Is
• 19:51
  Speaker 1: another thing that General Motors could not get away with
• 19:54
  Speaker 1: any deaths in that we see what happens with the
• 19:57
  Speaker 1: ignition recall and what happens there the sort of idea
• 20:01
  Speaker 1: of beta testing on your customers. General Motors, Ford, Fiat
• 20:04
  Speaker 1: Christ are all the big manufacturers, the global manufacturers, Toyota,
• 20:08
  Speaker 1: couldn't get away with that. I'm just wondering when you
• 20:11
  Speaker 1: said about the people who are sticking with Tesla, I mean,
• 20:15
  Speaker 1: isn't a big part of this that the people sticking
• 20:17
  Speaker 1: with Tesla or Elon Musk himself that he owns a
• 20:20
  Speaker 1: good proportion of the shares. Yeah, absolutely, absolutely, but there
• 20:24
  Speaker 1: is a very loyal I mean, he in an industry
• 20:28
  Speaker 1: that is seen as company dinosaur companies. You know, he's
• 20:32
  Speaker 1: he's a breath of fresh air because his vision is
• 20:34
  Speaker 1: sort of unlimited. Um, you know, so, I think there's
• 20:38
  Speaker 1: there's a lot of believers in that sense that that
• 20:40
  Speaker 1: he's a disruptor and that this is the new Norman.
• 20:43
  Speaker 1: This is the kick that the auto industry needed, right.
• 20:47
  Speaker 1: Kevin Tynan, thank you so much for joining us. Kevin
• 20:49
  Speaker 1: Tynan is our senior autos analyst for Bloomberg Intelligence. He's
• 20:54
  Speaker 1: coming to us from our b I headquarters in Princeton,
• 20:57
  Speaker 1: New Jersey. Marvel Technology has agreed to buy the chip
• 21:13
  Speaker 1: maker Cavium for a cash and stock deal valued at
• 21:17
  Speaker 1: about six billion dollars, and this will set up more
• 21:21
  Speaker 1: competition with industry giants such as Intel and the Broadcom
• 21:25
  Speaker 1: Here to tell us more about This is ed Hamming,
• 21:28
  Speaker 1: our deals reporter for Bloomberg and ed uh, this seems
• 21:32
  Speaker 1: like a bid to really consolidate not only the semiconductors
• 21:37
  Speaker 1: that are used for data storage, but also communications and
• 21:42
  Speaker 1: networking chips, because that is Caviums hotspot, right exactly that
• 21:47
  Speaker 1: and that's that's really the key to this deal. I mean,
• 21:49
  Speaker 1: if you if you want to think about it like this,
• 21:51
  Speaker 1: this is really Marvel buying future. Because my vows business
• 21:56
  Speaker 1: is in hard drives, which obviously you know, we use
• 21:58
  Speaker 1: less and less. It's it's very slow growth, it's fairly stable,
• 22:02
  Speaker 1: but what they don't have is anything that would take
• 22:04
  Speaker 1: them into sort of the modern era in terms of having,
• 22:06
  Speaker 1: as you say, sort of networking processes. So that's what
• 22:09
  Speaker 1: they get through this deal with Cavium, which is why
• 22:11
  Speaker 1: you're seeing it's you know, it's a fairly healthy premium.
• 22:14
  Speaker 1: But also crucially you've seen Marvel's stock rise quite a
• 22:16
  Speaker 1: lot this morning on the back of this news. All right,
• 22:18
  Speaker 1: so let's talk about that premium. I mean, as we've
• 22:21
  Speaker 1: been talking, this has been a very active year for
• 22:24
  Speaker 1: chipmaker consolidation, at least discussions of such activity. And I'm
• 22:28
  Speaker 1: just wondering, is anyone questioning the prices that are being paid.
• 22:32
  Speaker 1: Marvel is shelling out or has agreed to shell out
• 22:35
  Speaker 1: about six billion dollars for Cavium, which, as you say,
• 22:38
  Speaker 1: is a premium. Is anyone saying it's too much at
• 22:42
  Speaker 1: this point? They're not. There's so much consolidation in the
• 22:44
  Speaker 1: space that you know, I think investors are rewarding those
• 22:48
  Speaker 1: companies are going out and acquiring because it's sort of
• 22:50
  Speaker 1: acquire or be acquired, and so there is some sense that, look,
• 22:54
  Speaker 1: Marvel does this deal now with Cavium, but that doesn't
• 22:56
  Speaker 1: actually take Marvel off the table in terms of being
• 22:59
  Speaker 1: a takeout targe itself. Um, and you saw on a
• 23:02
  Speaker 1: much much larger scale just a few weeks ago, and
• 23:04
  Speaker 1: Broadcom obviously announced the deal for or an offer for Quidcome.
• 23:08
  Speaker 1: I should say that value the company at a hundred
• 23:10
  Speaker 1: and five billion, which seems like an absurdly large amount
• 23:12
  Speaker 1: of money. Even then you saw Broadcom shares rise quite
• 23:15
  Speaker 1: a lot on the back of that announcement. I'm just wondering,
• 23:18
  Speaker 1: you know, in five years, are we going to view
• 23:20
  Speaker 1: this as exuberance that perhaps has the tint of a
• 23:26
  Speaker 1: rationality just because typically, desperation does not make for good deals. No,
• 23:31
  Speaker 1: it does not. And look, you could say that across
• 23:32
  Speaker 1: the market at the moment, I think we're seeing in
• 23:34
  Speaker 1: every sector sort of heavy, heavy number of deals and
• 23:39
  Speaker 1: and high price is paid. And you know, these are
• 23:41
  Speaker 1: premiums on top of what are already historically sort of
• 23:44
  Speaker 1: absurdly inflated levels in the stock market. So you know,
• 23:47
  Speaker 1: with the benefit of hindsight, a lot of these deals
• 23:49
  Speaker 1: and I don't limit this just to the semiconduct space.
• 23:52
  Speaker 1: I think a lot of these deals will be called
• 23:53
  Speaker 1: into question the amount of people paying. But the thing
• 23:55
  Speaker 1: worth mentioning here is that you know a lot of
• 23:57
  Speaker 1: the consideration for this is in the form of stock.
• 23:59
  Speaker 1: So if you are Marvel, it's like, you know your
• 24:02
  Speaker 1: currency is inflated, you're paying a full premium for someone else.
• 24:05
  Speaker 1: But hey, you know, as long as you're a value,
• 24:07
  Speaker 1: that doesn't matter. I was gonna say forty six billion dollars, right,
• 24:11
  Speaker 1: that's the price tag I believe for qual Calm wanting
• 24:14
  Speaker 1: to buy n XP, which I believe they just got
• 24:18
  Speaker 1: the Japanese approps approval, right, so that may go through.
• 24:22
  Speaker 1: And then as you just describe, you've got broad Calm
• 24:25
  Speaker 1: making this bid for qual Calm, So in a sense,
• 24:29
  Speaker 1: Broadcom will own if it's successful, they'll own qual Calm
• 24:33
  Speaker 1: plus n XP and that's a one hundred and five
• 24:36
  Speaker 1: billion dollars. But there's news out that one of the
• 24:39
  Speaker 1: larger owners of I believe qual Calm stock says give
• 24:43
  Speaker 1: us at least ten percent ten dollars more per ten
• 24:45
  Speaker 1: dollars more. Right, So, our colleagues in San Francisco did
• 24:47
  Speaker 1: this great story that came out this morning where they've
• 24:49
  Speaker 1: talked to a number of the big institutional investors in
• 24:52
  Speaker 1: Qualcom to sort of say, well, look what what would
• 24:54
  Speaker 1: knock this over? What would be enough to get you
• 24:56
  Speaker 1: guys to agree, And yeah, it sounds like a ten
• 24:59
  Speaker 1: dollar or they're about it's bumped from where we are
• 25:01
  Speaker 1: now would be enough, Which again, look that's a huge,
• 25:03
  Speaker 1: huge price and a very high multiple. But Broadcom has
• 25:07
  Speaker 1: built itself up through acquisitions and it's if you look
• 25:10
  Speaker 1: at broad up chairs I think they're up sort of
• 25:12
  Speaker 1: you know, in the region this year. So this is
• 25:14
  Speaker 1: something investors not just in this space but across the
• 25:17
  Speaker 1: market are rewarding those companies that go out and do deals. Alright, ed, Well,
• 25:21
  Speaker 1: this consolidation does have a potential loser, right, because if
• 25:25
  Speaker 1: these marriages end up with bigger chip makers that have
• 25:29
  Speaker 1: better pricing power, isn't that a problem for carmakers and
• 25:33
  Speaker 1: for Apple? I mean, who's the biggest loser here? You know,
• 25:38
  Speaker 1: Apple is almost a sort of outlier because they have
• 25:41
  Speaker 1: so much power themselves as we're seeing them. They're sort
• 25:43
  Speaker 1: of litigating with Qualcom at the moment. But I think
• 25:46
  Speaker 1: you're right. For the smaller customers, this is potentially a
• 25:49
  Speaker 1: problem because you're seeing so much consolidation, you're seeing a
• 25:51
  Speaker 1: shrinking supplier base. Um. You know, I think with with
• 25:55
  Speaker 1: this particular deal of the Marvel deal, one of the
• 25:57
  Speaker 1: arguments that they could Perford is, look, yes we're both
• 25:59
  Speaker 1: in the chip space, but we're in very different parts
• 26:01
  Speaker 1: of One is as as you mentioned it, sort of
• 26:03
  Speaker 1: network processing, and one is in hard drives, which is
• 26:05
  Speaker 1: a not quite yet redundant technology, but it is certainly
• 26:09
  Speaker 1: something that's going out. I think where you're going to
• 26:11
  Speaker 1: see problems is when these companies, you know, like Marvel,
• 26:14
  Speaker 1: which you're going to be built up through doing acquisitions,
• 26:16
  Speaker 1: when someone else goes out to buy them, it's then
• 26:19
  Speaker 1: also almost impossible that you don't have overlaps at Hammond,
• 26:22
  Speaker 1: thank you so much for joining us. Fascinating issue this
• 26:26
  Speaker 1: year of the chip maker takeover Marvel buying its rival
• 26:31
  Speaker 1: Caveum for about six billion dollars. At Hammond is a
• 26:35
  Speaker 1: Bloomberg Deals reporter and it's joining us here in our
• 26:38
  Speaker 1: eleven three oh studios. Thanks for listening to the Bloomberg
• 26:43
  Speaker 1: P and L podcast. You can subscribe and listen to
• 26:46
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 26:51
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 26:55
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 26:58
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• 27:10
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