Is Capex the New M&A for Big Tech?
Goldman Sachs’ annual private tech conference this week was, from one angle, a study in East Coast realism versus West Coast optimism. Spreadsheets versus innovation. Bankers’ slacks versus Palmer Luckey’s shorts.
One of the most high-profile founders on stage, Perplexity’s Aravind Srinivas, cited the satirical TV show “Silicon Valley” as an inspiration during his start in the tech industry. A big Chicago-based fund manager, minutes later, openly fretted about whether artificial intelligence investments would really provide decent returns.
The tension between the two mindsets is, of course, more nuanced than this. Wall Street loves AI plays like Nvidia and big tech. And even venture capitalists are getting more skeptical of early-stage AI valuations, as we’ve written.
To me, the upshot of the conference was that investors are generally optimistic about markets but still fret about how exactly to make the right startup bets. Nearly everyone expects a steady uptick in IPOs and M&A to help the investments they made five to 10 years ago. The latest vintage of funds, however, is still a jump ball.
A few slides senior Goldman tech bankers Jane Dunlevie and Ryan Nolan presented encapsulated some of these strange realities hovering over tech markets. The volume of tech mergers of $500 million or larger is up 59% this year, about half the volume in 2021. But private equity firms are doing more than half the deals, way above historic norms.
Big tech, in part because of antitrust, has been quiet on the acquisition front. Cash spending from big tech firms on M&A was down 56% this year. Meantime, their capital expenditures, largely to build data centers, more than doubled. “For big tech, is capex the new M&A?” a slide read.
The question at least adds depth to the current understanding of the stalled M&A activity in tech. Maybe antitrust isn’t the entire problem. The AI cycle has tech firms preferring to put their money into infrastructure rather than AI startups, which are rapidly gaining traction and then just as quickly losing steam.
“It’s still a new technology, and it’s hard to pick winners,” Nolan told me.