WEBVTT - Opportunities for Digital Transformation Capital with David Roux 0:00:02.400 --> 0:00:06.720 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.520 --> 0:00:13.520 This is Master's in Business with Barry red Holds on 0:00:13.760 --> 0:00:15.200 Bloomberg Radio. 0:00:16.480 --> 0:00:21.880 This week on the podcast, another extra special guest, David Rue, 0:00:21.960 --> 0:00:27.480 is chairman of Baypine, a fascinating private equity firm. They 0:00:27.520 --> 0:00:33.080 are not interested in simply flipping companies or buying firms 0:00:33.760 --> 0:00:38.400 and then quickly selling them. What they do much more 0:00:38.640 --> 0:00:43.800 involved than a consulting firm. They are experts at digital 0:00:43.840 --> 0:00:51.760 transformation across a wide variety of sectors in the investing world, 0:00:52.320 --> 0:00:57.880 and they essentially take companies as varied as tire manufacturers 0:00:57.920 --> 0:01:04.000 and industrial producers and re tailors and find intelligent ways 0:01:04.440 --> 0:01:09.840 to use technology to make these companies more efficient, more productive, 0:01:10.040 --> 0:01:14.920 more profitable. And they're not again, they're not just consultants. 0:01:15.040 --> 0:01:17.840 They come in, they take a steak in a company. 0:01:18.400 --> 0:01:22.400 Sometimes it's a minority state, sometimes it's a larger steak, 0:01:22.880 --> 0:01:28.000 and they help affect this massive change with great results. 0:01:28.319 --> 0:01:30.920 They're one of the few companies that specialize in this. 0:01:31.840 --> 0:01:35.839 Their track record has been very impressive and the approach 0:01:35.959 --> 0:01:42.640 they bring to transforming old industry companies is absolutely fascinating. 0:01:42.920 --> 0:01:47.440 Previous to Baypine, David was one of the co founders 0:01:47.560 --> 0:01:53.520 of Silver Lake Investors, a legendary firm from the nineties 0:01:53.560 --> 0:01:57.440 and two thousands. With no further ado, my conversation with 0:01:57.560 --> 0:01:59.520 Baypines David. 0:01:59.240 --> 0:02:01.120 Rue, Thank you pleasure to be here. 0:02:01.400 --> 0:02:03.000 It's a pleasure to have you. I've been looking forward 0:02:03.040 --> 0:02:06.520 to this conversation for quite a while. Let's start out 0:02:06.520 --> 0:02:11.840 with your background. Bachelor's from Harvard, Masters in philosophy from Cambridge, 0:02:11.919 --> 0:02:15.560 and then an NBA from Harvard Business School. What was 0:02:15.600 --> 0:02:16.440 the career plan? 0:02:16.880 --> 0:02:19.440 You know, I originally wanted to be an architect. 0:02:19.720 --> 0:02:22.920 Really, I've always wanted to pretend to be an architect's 0:02:24.000 --> 0:02:26.400 That's an area I'm fascinating And why did you not 0:02:26.480 --> 0:02:27.400 go into that space? 0:02:28.280 --> 0:02:31.720 You know, I grew up, you know, building goat karts 0:02:31.760 --> 0:02:37.240 and treehouses and the like. But I think when I 0:02:37.280 --> 0:02:46.120 got to school, I found that I could make models, 0:02:47.440 --> 0:02:52.880 build software, maybe create organizations, and that it was as 0:02:52.960 --> 0:02:55.640 much fun as building a building. 0:02:56.040 --> 0:03:00.800 There's a different sense of creating a company versus creating 0:03:01.560 --> 0:03:05.639 a certain type of space inhabited by people, no doubt 0:03:05.639 --> 0:03:08.840 about that. So let's talk about some of those companies 0:03:08.880 --> 0:03:12.120 that you built. You begin at a few tech startups, 0:03:12.200 --> 0:03:16.000 you found day Techs, which eventually gets acquired by Lotus. 0:03:16.360 --> 0:03:19.959 What was the startup process? Like, this was mid nineteen eighties, 0:03:20.000 --> 0:03:20.720 is that about right? 0:03:21.000 --> 0:03:24.080 Yeah, early eighties. You know, in business school, I realized 0:03:24.160 --> 0:03:32.560 this is the kind of early PC boom. And I 0:03:32.639 --> 0:03:37.280 realized from my academic work, you know, there were word processors, 0:03:37.320 --> 0:03:41.040 there were spreadsheets, but there was not very good database 0:03:41.160 --> 0:03:46.240 technology for PCs. They didn't have what the mini computers 0:03:46.240 --> 0:03:49.560 had and the mainframes had. So I saw an opportunity 0:03:49.600 --> 0:03:55.120 to create some software and also to be able to 0:03:55.160 --> 0:03:59.720 marry that up with data for people to use on 0:03:59.760 --> 0:04:03.640 their PC. And that was the idea behind day Text. 0:04:03.840 --> 0:04:07.480 So day Text gets acquired by Lotus, who eventually acquires Lotus. 0:04:07.920 --> 0:04:12.680 Lotus is eventually acquired by IBM by coincidence. That was 0:04:12.680 --> 0:04:15.120 a relationship I managed. So I had a very good 0:04:15.880 --> 0:04:20.280 kind of ringside seat in all that. They were very 0:04:20.320 --> 0:04:26.680 interested in the company's suite of primarily communications technologies ccmail, 0:04:27.520 --> 0:04:32.040 Lotus notes because the sort of networking boom had already 0:04:32.080 --> 0:04:34.960 started up, and they saw a world where all of 0:04:35.000 --> 0:04:37.160 these PCs would be interconnected. 0:04:37.240 --> 0:04:39.040 How did you end up at Oracle? 0:04:39.360 --> 0:04:44.560 I had met Larry Ellison during my Lotus days I'd 0:04:44.600 --> 0:04:48.760 done another company, which we sold to Symantec. Larry had 0:04:48.760 --> 0:04:51.400 contacted me and said, look, we've got a tiger by 0:04:51.400 --> 0:04:55.120 the tail. The business is growing like crazy. I think 0:04:55.120 --> 0:04:57.920 there might be some M and A opportunities. We really 0:04:57.920 --> 0:05:00.760 don't have a corporate development function. Would you be interested 0:05:00.800 --> 0:05:03.200 to come here and build one. That's how it happened. 0:05:03.400 --> 0:05:07.520 Oracle, especially in the eighties and nineties, became famous as 0:05:07.560 --> 0:05:13.320 a serial acquirer of all sorts of pieces, spinouts, roll ups. 0:05:13.520 --> 0:05:14.800 How long did you stay at Oracle? 0:05:15.000 --> 0:05:18.359 How was there all through the nineties till nineteen ninety nine. 0:05:18.680 --> 0:05:22.560 You know, it was really a terrific experience, extremely rapid growth. 0:05:22.920 --> 0:05:25.240 I ran the venture fund, did all the investing off 0:05:25.279 --> 0:05:26.160 the balance sheet. 0:05:26.480 --> 0:05:27.279 I also. 0:05:28.520 --> 0:05:32.159 Started and managed the M and A programs. So yeah, 0:05:32.200 --> 0:05:33.040 it was fantastic. 0:05:33.200 --> 0:05:35.720 Yeah. I can imagine Oracle in the nineties as you 0:05:35.720 --> 0:05:36.840 were out in California and. 0:05:36.839 --> 0:05:40.200 Assume right Silicon Valley, right in the heart of things, 0:05:40.400 --> 0:05:43.600 ground zero, and I got to think Oracle and Ellison 0:05:44.240 --> 0:05:46.000 like I cut my teeth on them. 0:05:46.120 --> 0:05:49.560 In the nineties, he seemed to have been everywhere. Oracle 0:05:49.720 --> 0:05:53.279 was consistently ranked best company to work, Top ten, Fast 0:05:53.279 --> 0:05:56.840 and growing companies like Oracle. I think people who just 0:05:56.880 --> 0:05:59.040 came into the market in the past ten twenty years 0:05:59.600 --> 0:06:03.800 don't know what a powerhouse Oracle was and still is. 0:06:04.520 --> 0:06:07.039 Yeah, it has a remarkable history, you know, a class 0:06:07.080 --> 0:06:15.120 of eighty six, meaning that's the same year as Microsoft, Sun, Apple, 0:06:15.600 --> 0:06:19.080 and so they've been at it and doing a great 0:06:19.240 --> 0:06:23.120 job for a while. You know, Larry's often thought of 0:06:24.040 --> 0:06:29.800 as a very aggressive and astute business mind, but I 0:06:29.800 --> 0:06:33.880 don't think he gets enough credit for his technical chops 0:06:34.720 --> 0:06:37.440 if you look back, think about it. He has been 0:06:37.680 --> 0:06:45.600 fearless about betting the company on major new architecture. So 0:06:45.960 --> 0:06:49.040 you know, he made the original bet around relational databases 0:06:49.040 --> 0:06:52.240 when everyone else was doing something else. He then made 0:06:52.240 --> 0:06:54.880 a major bet on Unix when it was a kind 0:06:54.880 --> 0:06:59.280 of obscure, you know, scientific operating system. He then made 0:06:59.320 --> 0:07:05.559 a huge bet around enterprise applications, big bet around client server. 0:07:06.200 --> 0:07:11.360 And then maybe the most courageous bet was in the 0:07:11.400 --> 0:07:16.559 mid nineties when Netscape had gotten the first browsers out 0:07:16.880 --> 0:07:20.440 the Internet boom it started. A great story came in 0:07:20.480 --> 0:07:24.800 one morning after a weekend. We all sat down at 0:07:24.840 --> 0:07:28.240 our little executive committee call and he says, look, I've 0:07:28.240 --> 0:07:30.920 been thinking, I think this Internet thing is more important 0:07:30.920 --> 0:07:34.760 than most people understand. I would like to change one 0:07:34.840 --> 0:07:38.600 hundred percent of what we're doing in development. I want 0:07:38.640 --> 0:07:41.000 to stop all of the client server work, and I 0:07:41.040 --> 0:07:45.480 want to replatform everything that we're doing on a web architecture. 0:07:45.520 --> 0:07:50.200 Three thousand engineers, dozens hundreds of products, affecting you know, 0:07:50.360 --> 0:07:54.240 thousands upon thousands of customers. And he very casually said 0:07:54.320 --> 0:07:55.960 I'd like to do this by the end of the day. 0:07:56.760 --> 0:07:58.840 Sounds like that's a multi year project. 0:07:58.920 --> 0:08:02.560 He was he talking, no, no, no, he was talking about 0:08:02.600 --> 0:08:05.080 I want I want to direct to the turned to 0:08:05.120 --> 0:08:06.960 the director of engineering and said, I want this done 0:08:06.960 --> 0:08:09.000 by the end of the day. Just poured it over 0:08:09.040 --> 0:08:10.280 to its just going to stop. We're not going to 0:08:10.280 --> 0:08:13.320 write another line of client server code. It's done. This 0:08:13.360 --> 0:08:15.280 is going to be the new architecture. This is the 0:08:15.320 --> 0:08:17.880 future of computing. This is what our customers are going 0:08:17.920 --> 0:08:19.920 to want in two and three, in five years time, 0:08:20.560 --> 0:08:23.120 so we need to start building it now for it 0:08:23.160 --> 0:08:26.400 to be ready. Then it was really the thing I mean, 0:08:26.880 --> 0:08:31.800 I mean, just a incredibly gutsy bet, but a very 0:08:31.840 --> 0:08:36.839 good sense of his technical prowess and the confidence he 0:08:36.960 --> 0:08:40.120 had about the kind of what's coming next next part. 0:08:40.760 --> 0:08:44.079 It sounds like Oracle was quite an experience at the 0:08:44.200 --> 0:08:47.880 end of the nineteen nineties. You co found silver Lake 0:08:48.000 --> 0:08:51.760 in nineteen ninety nine. What led to that? You were 0:08:51.840 --> 0:08:53.679 you were at Oracle. You were like a fifteen year 0:08:53.760 --> 0:08:55.360 veteran at Oracle. Is that about right? 0:08:55.520 --> 0:08:59.240 No, not quite. But I'd been there a while and 0:08:59.320 --> 0:09:04.320 it was, you know, a fantastic experience. I had a 0:09:04.360 --> 0:09:08.360 great job, really good relationship with Larry, rest of the team. 0:09:08.840 --> 0:09:10.679 You know, I was my late thirties. I'd kind of 0:09:10.720 --> 0:09:12.719 come to realize that it was always going to be 0:09:12.800 --> 0:09:16.760 Larry's business, rightly so, and that I was looking around 0:09:16.760 --> 0:09:20.440 and I saw what I thought of, as I've come 0:09:20.440 --> 0:09:24.600 to call it, an OIPSE, which is acronym OIPS for 0:09:24.640 --> 0:09:28.680 an opportunity and plain sight. And I couldn't understand the following. 0:09:29.000 --> 0:09:33.679 I couldn't understand why investors were pouring money into venture firms, 0:09:34.040 --> 0:09:38.320 pouring money into growth equity, and not doing anything to 0:09:38.440 --> 0:09:42.360 invest in technology using a private equity format. Didn't make 0:09:42.400 --> 0:09:45.080 sense to me. That it would be a good small company, 0:09:45.440 --> 0:09:47.160 it would be a good medium sized company, and then 0:09:47.200 --> 0:09:48.840 all of a sudden it would not be an appropriate 0:09:48.840 --> 0:09:52.640 place for fiduciary capital. That didn't make sense, and I thought, gosh, 0:09:52.720 --> 0:09:55.760 that must be a huge opportunity. You know, we were 0:09:55.840 --> 0:09:59.200 right in the middle of the Internet boom, so tech was, 0:10:00.040 --> 0:10:06.200 you know, front and center of the news, and yet 0:10:06.520 --> 0:10:12.000 there was none of the traditional firms were there. In fact, 0:10:12.000 --> 0:10:14.280 they were actively avoiding it. You know, it was sort 0:10:14.280 --> 0:10:17.400 of not considered an appropriate place to invest that kind 0:10:17.440 --> 0:10:17.880 of capital. 0:10:18.080 --> 0:10:20.240 Why was that? Was it that people were just so 0:10:20.360 --> 0:10:24.199 distracted by the new hotness, by the dot coms and. 0:10:24.160 --> 0:10:25.760 The Internet or I don't think so. 0:10:25.920 --> 0:10:29.080 Well. Were the public markets there for larger companies if 0:10:29.120 --> 0:10:30.080 they needed capital. 0:10:30.520 --> 0:10:32.960 No, No, I don't think that. Here's what I think, 0:10:33.920 --> 0:10:35.520 because this is what they told us. I mean, I 0:10:35.520 --> 0:10:39.199 asked that exact question. The theory was this, you couldn't 0:10:39.200 --> 0:10:43.040 go write checks for hundreds of millions of dollars if 0:10:43.080 --> 0:10:47.240 you couldn't underwrite the technical innovation at the heart of 0:10:47.280 --> 0:10:51.000 these business models, if you didn't understand how the semiconductor worked, 0:10:51.040 --> 0:10:53.840 if you didn't understand how the software was built. 0:10:54.080 --> 0:10:54.320 One. 0:10:54.760 --> 0:10:55.160 Two. 0:10:55.600 --> 0:10:58.839 There was a theory that these businesses had volatile cash 0:10:58.880 --> 0:11:04.320 flows and therefore couldn't be leveraged, which was the you know, 0:11:04.400 --> 0:11:08.040 the whole point of leverage buyout. And finally that they 0:11:08.080 --> 0:11:12.200 were companies run by children, you young folks. I was 0:11:12.320 --> 0:11:15.360 in the business, and when I heard all that, I said, 0:11:15.360 --> 0:11:18.760 you know, those guys in New York and the skyscrapers, 0:11:18.840 --> 0:11:21.000 and the guy in London and those people in Munich 0:11:21.040 --> 0:11:23.280 and Tokyo, I don't think they really know what's going 0:11:23.320 --> 0:11:27.920 on here. These are actually really good businesses. The cash 0:11:27.920 --> 0:11:33.080 flows are unbelievable, customer franchises are very, very durable. There's 0:11:33.160 --> 0:11:38.040 incredible organic growth here. This is a really big and 0:11:38.120 --> 0:11:43.079 attractive opportunity. I think someone's gonna make a great return 0:11:43.320 --> 0:11:44.440 by building a business here. 0:11:44.480 --> 0:11:48.679 And you don't need to underwrite the entire underlying technology. 0:11:48.800 --> 0:11:54.400 You're really just talking about that transition to whatever makes 0:11:54.440 --> 0:11:57.800 those companies that much more attractive. Is that a fair assessment? 0:11:58.640 --> 0:12:01.480 When you're doing what silverl does and what it was 0:12:01.520 --> 0:12:07.560 built to do, you are making a fundamental bet technology. 0:12:07.559 --> 0:12:12.040 It's like when people buy technology or enter into an 0:12:12.040 --> 0:12:14.920 agreement with a company like an Oracle or a Microsoft. 0:12:15.400 --> 0:12:18.000 You're not buying what they're selling you today. You're buying 0:12:18.000 --> 0:12:21.079 the promise that they will continue delivering. It's like buying 0:12:21.120 --> 0:12:23.760 a lot on a river. Now you're not buying the 0:12:23.760 --> 0:12:25.680 water in front of your house, You're buying the promise 0:12:25.720 --> 0:12:29.400 that the water will continue to flow. And so you 0:12:29.559 --> 0:12:34.160 do need to have a point of view about how 0:12:34.280 --> 0:12:37.280 well positioned these companies are for the future. 0:12:37.640 --> 0:12:41.280 You co found silver Lake with this is some lineup. 0:12:41.400 --> 0:12:46.240 Glenn Hutchins, Jim Davidson, Roger mcnamie. Tell us about your 0:12:46.280 --> 0:12:47.640 silver Lake co founders. 0:12:47.880 --> 0:12:52.719 Well, look, they're each enormously talented and capable in their 0:12:52.800 --> 0:12:55.640 own right. You know, we all live near each other, 0:12:55.760 --> 0:13:01.120 knew each other professionally beforehand. We talked extensively about this 0:13:01.240 --> 0:13:05.880 opportunity and agreed that it was the next big thing. 0:13:06.559 --> 0:13:08.600 And I think that, you know, looking back on it, 0:13:08.720 --> 0:13:12.439 I've been very fortunate at silver Lake and prior companies 0:13:13.559 --> 0:13:15.760 when I started something to do it with a group 0:13:15.800 --> 0:13:19.760 of people, and that it's always been great to have 0:13:19.800 --> 0:13:25.680 folks from different backgrounds, different styles, different professional experience. You know, 0:13:25.720 --> 0:13:28.640 it's very complimentary and you know it's not for everybody, 0:13:28.679 --> 0:13:30.160 but for me, it's it's the way I like to 0:13:30.160 --> 0:13:30.680 do business. 0:13:30.920 --> 0:13:35.000 They weren't an oracle prior. How did the how. 0:13:34.880 --> 0:13:36.720 Do we all know each other. Yeah, Glenn and I 0:13:36.760 --> 0:13:41.880 have been college classmates, tennis partners, fly fishing buddies. He 0:13:42.120 --> 0:13:45.800 was previously at Blackstone. Jim Davidson and I are both 0:13:45.920 --> 0:13:50.480 big sports fans and shared season tickets for the Sharks 0:13:50.880 --> 0:13:53.920 and the Warriors, so we would spend a lot of 0:13:53.960 --> 0:13:58.439 time together. He was running the H and Q Investment Bank, 0:13:58.640 --> 0:14:03.439 and then Roger was my next door neighbor and very 0:14:03.480 --> 0:14:07.720 good friends with Jim. So you know, it was a 0:14:07.720 --> 0:14:10.120 group of people who already kind of knew each other, 0:14:10.280 --> 0:14:13.680 had some personal relationships to build on, and you know, 0:14:13.720 --> 0:14:15.359 came with a different set of experiences. 0:14:15.559 --> 0:14:19.240 What was silver Lake like in two thousand as the 0:14:19.320 --> 0:14:21.080 dot COM's all imploded. 0:14:20.840 --> 0:14:23.600 Well, you know, it was an interesting thing. I would 0:14:23.640 --> 0:14:27.120 jokingly tell people that we bought high, sold low and 0:14:27.200 --> 0:14:29.280 made a ton of money, and you know, it was 0:14:29.320 --> 0:14:33.280 a very challenging economic environment. The NASDAK during that period 0:14:33.280 --> 0:14:36.520 fell eighty percent right over from the front front end 0:14:36.560 --> 0:14:40.360 of the fund to the back. The fund itself, in 0:14:41.160 --> 0:14:45.720 a very fundamental way, was set up as a counterpoint 0:14:46.080 --> 0:14:49.680 to the mania around the internet. And what we would 0:14:49.760 --> 0:14:53.560 tell people pointedly, as we say, look, you're completely right 0:14:53.880 --> 0:14:59.120 to be excited about the technology sector. It's underinvested. It's 0:14:59.240 --> 0:15:03.160 underappreciated for its scale, it's underappreciated for its growth, it's 0:15:03.240 --> 0:15:06.840 underappreciated for the strategic value that it plays in the economy. 0:15:07.520 --> 0:15:12.280 But you're investing in the wrong companies at the wrong price. 0:15:12.800 --> 0:15:14.560 And I had a little chart that I would show them. 0:15:14.640 --> 0:15:18.560 So here's a thousand, approximately one thousand public company public 0:15:18.560 --> 0:15:23.080 tech companies at that time. These ten percent are what's 0:15:23.200 --> 0:15:29.320 driving the entire valuation. They're trading at ten to thirty 0:15:29.360 --> 0:15:35.840 plus times revenue, not earnings, not earnings revenue. And I said, 0:15:35.880 --> 0:15:38.680 I can just tell you that is the wrong price. 0:15:39.240 --> 0:15:42.440 Not necessarily bad companies, but that's those are the wrong prices. 0:15:42.640 --> 0:15:45.360 I said, but look at these other ninety percent. If 0:15:45.400 --> 0:15:49.040 you take the rest of the publicly traded technology companies, 0:15:49.280 --> 0:15:52.360 they're traded at one time's revenue. It's the same as 0:15:52.400 --> 0:15:54.040 the S and P at the day of. 0:15:53.960 --> 0:15:55.760 The day, pretty reasonable, more. 0:15:55.720 --> 0:15:59.640 Or very reasonable, and they grow twice as fast. So 0:16:00.120 --> 0:16:05.920 you have an opportunity to buy growth at half price. 0:16:06.640 --> 0:16:09.840 You've got this situation. There's sort of the fundamental insight 0:16:10.480 --> 0:16:13.240 at the heart of the silver l like value proposition. 0:16:14.080 --> 0:16:18.800 Is that technology, the entire tech sector was on sale, 0:16:19.360 --> 0:16:23.200 even at a time when people thought it was super expensive, 0:16:23.240 --> 0:16:26.680 because ten percent of the market was super expensive, but 0:16:26.800 --> 0:16:27.560 most of it was not. 0:16:27.960 --> 0:16:31.480 How much of what's been going on in the twenty 0:16:31.520 --> 0:16:35.360 twenties has been a focus on that same top ten 0:16:35.400 --> 0:16:40.479 percent of tech companies as being overly concentrated and wildly expensive. 0:16:40.960 --> 0:16:44.440 Do you think the same situation is starting to show 0:16:44.560 --> 0:16:45.880 up in the modern era? 0:16:46.240 --> 0:16:50.840 Well, there are some parallels and also some important differences. 0:16:51.600 --> 0:16:58.560 The parallels are that there is a concentration of interest. 0:16:59.120 --> 0:17:06.160 The differences those companies are now huge businesses with gigantic 0:17:06.280 --> 0:17:12.639 levels of profitable unprecedented levels of profitability and growth rates 0:17:12.680 --> 0:17:17.280 that have never been achieved before by companies at that scale. 0:17:17.880 --> 0:17:22.120 So that's the part that's really different, Right. A lot 0:17:22.200 --> 0:17:27.080 of the things in Internet time was highly speculative. The 0:17:27.119 --> 0:17:31.919 other thing that's different is that today the companies with 0:17:32.040 --> 0:17:38.040 the most spectacular valuation levels are private. People aren't wrong 0:17:38.119 --> 0:17:41.199 to say they are a winner the sort of the 0:17:41.200 --> 0:17:43.320 bed of courses. Are they the only winner? 0:17:43.440 --> 0:17:43.840 Right? 0:17:44.000 --> 0:17:46.879 And so you have to believe that there won't be 0:17:47.280 --> 0:17:51.560 successful competition, you know, I would only point out that 0:17:52.280 --> 0:17:59.200 forty percent of their sales go to four big vendors, 0:18:00.320 --> 0:18:04.600 each of whom has their own chip development program. And 0:18:04.680 --> 0:18:06.639 so I'm not saying they're going to build a better chip, 0:18:06.840 --> 0:18:09.879 but they're definitely going to build a cheaper chip, and 0:18:09.960 --> 0:18:13.560 so there'll be some dampening for sure from that. 0:18:14.280 --> 0:18:17.119 And you know, I'm around long enough to remember when 0:18:17.480 --> 0:18:24.840 it looked like Intel was impregnable, that they had a 0:18:24.880 --> 0:18:28.280 position in the ecosystem that nobody could touch, and now 0:18:28.320 --> 0:18:30.359 it feels like they're and also run well. 0:18:30.400 --> 0:18:32.840 This goes back to the point that you raised earlier, 0:18:33.440 --> 0:18:35.840 which is if you're going to do tech investing, you 0:18:35.960 --> 0:18:38.719 need to have an opinion about the tech. It's not 0:18:39.560 --> 0:18:44.600 just that you can look at a series of financials 0:18:45.320 --> 0:18:47.240 and say, oh, they had a good quarter last quarter, 0:18:47.640 --> 0:18:49.679 they had good year every year numbers I like the 0:18:49.680 --> 0:18:54.280 three year trend and say fine, you have to separately 0:18:54.920 --> 0:18:59.919 underwrite the quality of the underlying architecture, what's going on 0:19:00.040 --> 0:19:02.800 in the industry, and believe that they're going to be 0:19:02.840 --> 0:19:06.159 able to keep going. And so like, if you like 0:19:06.280 --> 0:19:09.520 go to end video, let's talk about that. You can 0:19:09.520 --> 0:19:11.600 look at the financials and say this is fantastic. You know, 0:19:11.680 --> 0:19:15.080 they're doubling and trebling, and these are incredible numbers and 0:19:15.119 --> 0:19:18.879 growing blah blah blah. The way they've gotten their improvements 0:19:19.600 --> 0:19:23.119 has been to go beyond what has been possible in 0:19:23.200 --> 0:19:27.560 any other chip manufacturer. The other chip manufacturers have gotten 0:19:27.600 --> 0:19:32.240 their productivity improvements around the physical geometry by making the 0:19:32.320 --> 0:19:36.800 chip smaller and smaller, more and more transistors. 0:19:37.680 --> 0:19:40.879 Classic More's law down to ever smaller. 0:19:41.520 --> 0:19:45.520 Ever smaller. Right, these guys have got have stolen a 0:19:45.560 --> 0:19:48.080 march on the rest of the industry with their GPU 0:19:48.320 --> 0:19:53.000 chips by doing other things. They've gotten probably two or 0:19:53.000 --> 0:19:56.760 two and a half times, which is a lot of improvement. 0:19:57.240 --> 0:20:01.040 But they're talking about improvements of things that are kind 0:20:01.040 --> 0:20:06.320 of eight ten, twelve, sixteen times productivity improvement. So they're 0:20:06.359 --> 0:20:09.960 doing it other ways. They're doing it with algorithms, they're 0:20:09.960 --> 0:20:13.719 doing it with other approaches, and so you have to 0:20:13.720 --> 0:20:16.560 form an opinion as an investor about what is the 0:20:16.760 --> 0:20:20.159 likelihood they can keep doing that because it's been the 0:20:20.240 --> 0:20:22.400 key driver, and keep doing that for the next three 0:20:22.440 --> 0:20:25.320 to five years, not just the next quarter. Bingo. 0:20:26.160 --> 0:20:28.919 So let's talk a little bit about Silver Lake and 0:20:28.960 --> 0:20:33.840 how that eventually leads to Bay Pine. It feels like, 0:20:33.920 --> 0:20:37.960 and I don't know if my memory is correct. Silverlake 0:20:38.080 --> 0:20:42.159 was one of the first buyout shops built around making 0:20:42.200 --> 0:20:46.119 technology investments or investments in technology companies. Is that a 0:20:46.119 --> 0:20:46.840 fair description. 0:20:47.280 --> 0:20:51.360 Several other deals had been done, but they were occasional 0:20:51.359 --> 0:20:54.040 and they weren't the central focus for anyone. 0:20:54.200 --> 0:20:57.720 Tell us some of your memorable investments at Silverlake. 0:20:57.560 --> 0:21:00.359 Well, I think some of the investments that the firm 0:21:00.480 --> 0:21:04.960 is best known for out of the box. First was Seagate, 0:21:05.240 --> 0:21:09.600 which was a hard disk drive manufacture. It was at 0:21:09.640 --> 0:21:13.160 the time the number one producer dis drives. They had 0:21:13.520 --> 0:21:18.760 the best technology, great management team, very complex, but finally 0:21:18.800 --> 0:21:24.880 crafted extended supply chain through Asia, and Wall Street hated them. 0:21:24.920 --> 0:21:27.840 It was hardware in the age of the Internet. So 0:21:27.880 --> 0:21:30.840 the other thing that traded really really hot back then 0:21:31.000 --> 0:21:35.119 was any new telecom business, right optical this telecom That 0:21:35.920 --> 0:21:39.680 one of the insights that we had as a group, 0:21:39.720 --> 0:21:42.600 and it stemmed from the fact that we were not 0:21:42.720 --> 0:21:46.639 finance people but industry people with operating backgrounds, is we 0:21:46.760 --> 0:21:52.439 understood that the entire tech industry is an ecosystem. It 0:21:52.480 --> 0:21:55.080 operates like your body, right, All the parts sort of 0:21:55.119 --> 0:21:59.679 need to fit together and they operate inter dependently, and 0:21:59.760 --> 0:22:02.760 so everybody at that time was talking about the information 0:22:02.880 --> 0:22:05.920 super Highway and they were buying the highway, right, They're 0:22:05.920 --> 0:22:08.040 buying the telecom companies, and they were buying all these 0:22:08.119 --> 0:22:11.080 new applications that you could do on the Internet. But 0:22:11.160 --> 0:22:16.560 people forgot that you couldn't have an information super highway 0:22:17.080 --> 0:22:21.120 without parking lots. In other words, the electron the bit 0:22:21.480 --> 0:22:24.360 had to start somewhere and it needed to end somewhere. 0:22:24.760 --> 0:22:29.200 So if you believed that broadband was going to explode, 0:22:29.800 --> 0:22:35.240 then you must also believe that storage is going to explode. 0:22:35.400 --> 0:22:39.080 And so we were able to look at that kind 0:22:39.080 --> 0:22:43.320 of systemic arbitrage around the architecture and say, you know, 0:22:44.480 --> 0:22:47.240 the comm's piece is overpriced. I don't think we should 0:22:47.240 --> 0:22:49.639 pay ten and fifteen times for a pike when we 0:22:49.720 --> 0:22:55.479 can pay six times EBITDA, EBITDA. Earnings for the number 0:22:55.520 --> 0:22:59.520 one storage company in the world, Now, there was a 0:22:59.520 --> 0:23:03.440 bunch of applications around things they owned, and you know, 0:23:03.520 --> 0:23:05.240 it was a public company, so it was a leveraged 0:23:05.280 --> 0:23:07.879 buyout and all the rest of that, but that was 0:23:07.920 --> 0:23:09.359 really the fundamental insight. 0:23:09.840 --> 0:23:13.479 So it sounds like a lot of the public market 0:23:13.520 --> 0:23:18.959 investors had a fundamental misunderstanding about the entire tech sector, 0:23:19.119 --> 0:23:22.280 the ecosystem as you described it. What are the things 0:23:22.280 --> 0:23:28.280 did people just not get, not understand, overlook obvious investments 0:23:28.320 --> 0:23:28.960 in plain sight? 0:23:29.480 --> 0:23:34.640 Yeah? Well, I think in that case it was a 0:23:34.680 --> 0:23:41.359 hangover from the very real war of attrition that for 0:23:41.440 --> 0:23:46.399 the prior twenty years had preceded that moment in time 0:23:46.800 --> 0:23:49.680 where the industry went from one hundred and twenty disdrive 0:23:49.800 --> 0:23:51.359 companies to sex or seven. 0:23:51.440 --> 0:23:53.080 We had an idea who are the winners who were 0:23:53.119 --> 0:23:54.080 going to be well? 0:23:54.119 --> 0:23:56.879 And so the question was is there going to be 0:23:57.960 --> 0:24:00.639 more blood in the water or have we arrived at 0:24:00.680 --> 0:24:05.560 an industry structure where everybody is going to do okay 0:24:06.320 --> 0:24:08.240 and the number one player is probably going to do 0:24:09.080 --> 0:24:13.639 better than most. That was one. The second issue is 0:24:13.920 --> 0:24:19.000 could anyone figure out a way to At the time, 0:24:19.480 --> 0:24:23.199 Seagate owned some shares and other software companies, and it 0:24:23.240 --> 0:24:27.080 wasn't clear to the market how they could sell those 0:24:27.560 --> 0:24:29.359 in a tax efficient way. And that's one of the 0:24:29.359 --> 0:24:32.040 things that with structuring we were able to figure out. 0:24:32.680 --> 0:24:36.440 I'll give you another one where we bought a vago 0:24:36.960 --> 0:24:41.760 Eulett Packard's semiconductor division in this TI frame, the early 0:24:41.800 --> 0:24:46.040 two thousands, it was very much the fashion to be 0:24:46.240 --> 0:24:49.320 out of semi. Semis were out of fashion, right. The 0:24:49.359 --> 0:24:53.480 world was infatuated with the other end of the stack, 0:24:54.000 --> 0:24:55.359 not the you know, I didn't want to hear it. 0:24:55.400 --> 0:24:58.159 People didn't want to hear about semis. They didn't want 0:24:58.160 --> 0:25:00.800 to hear about subassemblies, they didn't want to hear about components. 0:25:00.800 --> 0:25:03.119 They didn't want to hear about computers. They wanted to 0:25:03.119 --> 0:25:07.360 hear about all the sexy, high margin, no cost of goods, 0:25:07.880 --> 0:25:15.040 no capital equipment, software services, internet applications sounded wonderful. You know, 0:25:15.080 --> 0:25:17.760 this is the age of pets, dot com, that thing. 0:25:17.960 --> 0:25:20.920 And so it wasn't wrong to say that software was good, 0:25:21.119 --> 0:25:25.600 but it didn't automatically follow that hardware's bad. And so 0:25:25.720 --> 0:25:28.960