In this podcast, Motley Fool senior analyst Jason Moser and host Deidre Woollard discuss:
- Whether the departure of Illumina's CEO will impact the company's efforts to keep its Grail acquisition.
- Carl Icahn's history of activist investing.
- Thoma Bravo's success in buying companies and repackaging them for sale.
Also, Motley Fool producer Ricky Mulvey interviews Anjay Nagpal, host of the Brokers, Bagmen, and Moles podcast, about the curious history of the Chicago Mercantile Exchange and its ramifications on today's investing universe.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 12, 2023.
Deidre Woollard: Illumina's CEO steps down and private equity makes a big sale. Motley Fool Money starts now.
Welcome to Motley Fool Money, I'm Deidre Woollard. I'm joined in studio by Motley Fool analyst Jason Moser. Hi, Jason. How are you doing today?
Jason Moser: Hey. Doing great. How are you?
Deidre Woollard: Doing good. I feel like one of the time-honored PR techniques is you kinda sneak out news on a Sunday night. We got one of those last night with the news that Illumina's CEO, Francis deSouza, he stepped down. Illumina, they're a biotech company. They're focused on genetic testing. DeSouza, he's been through it the last few months really. He's been the subject of this activist attack from Carl Icahn -- which he outlasted -- over the Grail acquisition. Not the first time we've seen a CEO go through something like that and step down. Is this a case of him just outlasting that and then choosing his own moment to exit?
Jason Moser: It's possible. This has been quite the soap opera, though. Ultimately, you see, what's going on here from the inception of this acquisition -- buying back this company that they spun off -- does seem like there's a level of hubris that came with Mr. deSouza that could have backfired on him. When you go through a deal like this, and regulators voice concerns, and you go ahead through with the deal. You close everything. You go against regulators' wishes. They just thumbed their nose at regulatory concerns there. I don't feel like that's good for business. It feels like you're not necessarily in a position to be making those calls.
And this is a big deal. It was an $8 billion acquisition. Illumina, a $30 billion market cap. It was relatively large in the context of the business itself. So maybe, maybe this was a matter of him choosing the right time to get out. But it sure does seem like the activism was not playing in his favor.
Again, I go back to that word -- hubris. It feels like there was a level of hubris involved with this decision that probably backfired on him. Could it have swayed things had he just taken a little bit more of a conciliatory tone, or exercised some patience? Maybe, I don't know. But it does feel like the regulatory concerns were justified in this, potentially putting Illumina in a position where competitors really wouldn't have an opportunity to compete fairly with them.
Deidre Woollard: It was interesting to see: Immediately after the news came out, Icahn went to Twitter, he was declaring victory. Then you had deSouza, he was on LinkedIn talking about how he still believes the Grail deal will go through. So, definitely had that soap opera element to it.
Let's talk about the Grail deal. This was what really had Icahn so upset. It's this cancer detection test. It's the former subsidiary, as you mentioned. FTC said it was going to stifle competition, Illumina appealed -- that's still going on. DeSouza, in that LinkedIn post, he was very much saying he still feels like this is good for the company even though of course he no longer has a say in that. What happens next?
Jason Moser: That's a good question. It does feel like there are some tones here -- save the hubris, I guess -- I would say, it does feel like there's some tones here of Microsoft and Activision Blizzard. And this has been going on for a while and it's really tough to try to figure out exactly what the endgame is or what's going to happen. But it does seem like the signs are pointing toward this not happening.
I don't know that deSouza stepping down makes any difference. I'm sure there's probably someone on the regulatory side that's maybe saying "I told you so." But I don't know that this is a matter of having a different CEO or different leadership installed. Really, at the end of the day, this boils back -- and you look at the criticisms that Mr. Icahn lobbed up in regard to this deal. It's generally the feeling that they're overpaying, which they very well may have -- valuation is somewhat subjective. But ultimately, this boils down to shareholders. This is something where it was felt that this is not a shareholder-friendly deal. This is not something that really plays into shareholders' favor. Regardless of the CEO, I don't know that that really changes the dynamic of this deal.
Ultimately, it does go to the risks of growth via acquisition. Illumina is a company that's run into a little bit of headwinds there in regard to growth, and so acquisition is one way you get past that. In this case, it doesn't look like this acquisition is going to work, and so then you got to go back to the drawing table and feel like, "OK, what exactly are we going to do to spur that growth?" I don't know that this deal is going to happen, and I don't think a change in leadership makes a difference.
Deidre Woollard: Interesting. I wanted to dive into that a little bit more, the idea of what happens when a deal like this, as you said, it's been going on for so long, both companies highly engaged in it. Now, if they go off in their different directions, you said, maybe does Illumina look for something else or do they try to grow without acquisition? And what does it mean for Grail?
Jason Moser: Well, I think that really depends on who fills Mr. deSouza's role. New leadership will come in with new strategy. It is a little bit of a waiting game to see exactly who does fill that role. That will dictate, I think, a lot of how Illumina is approaching these next few years. Certainly, if they do look for additional acquisitions, they're going to have to be very thoughtful in regard to regulatory concerns there, because it does feel like -- not just in regard to Illumina -- but it does feel like regulators are giving a lot of these deals a lot more scrutiny than they had been over the last several years. Maybe that is a little bit of changing of the narrative there going forward. Not just for Illumina, but for companies all over.
Deidre Woollard: Yeah. Certainly, we've seen that in biotech as well with, I believe it was Amgen and Horizon.
Let's talk a little bit about Carl Icahn. He's such a fascinating figure to me. There was that HBO documentary about him; recently, that Hindenburg short report that claimed among other things that Icahn's just pumping up his dividend. He owns around 84% of the company. He doesn't take his dividend in cash, but it's got an attractive dividend yield. Since that report, the stock has been down dramatically. He's a fighter. Is he fighting too many things at once?
Jason Moser: It's possible. I would say probably so, but I think he likes that. I think that he's doing what he really loves to do. He has a long activist history, for sure, and always seems to be in the headlines. There's no doubt this stuff gets personal sometimes. I think that's really the biggest risk beyond just spreading yourself too thin, which we see often with leadership: They try to focus on doing too many things and they don't do anything really terribly well.
I wouldn't necessarily put Icahn in that position yet. But it does seem like some of this stuff gets a little bit personal for him. You go back through the years, look at some of the battles that he and Bill Ackman have waged. It's difficult for that stuff not to get personal at some level, because they just start lobbing attacks against each other. And investing, at the end of the day, really is just one big disagreement. We've got a buyer and a seller, and both parties think they're right. But I think that speaks to the greater risk in investing, not just for someone like Bill Ackman or Carl Icahn, but for us. Emotions can be a real risk for investors, and it's important to be able to find ways to keep those emotions in check, because they can make you make decisions that don't necessarily take the long-term into view.
Deidre Woollard: He's very aggressive in his language too, in the presentations that he makes, and things like that. It always seems like he's got an ax to grind.
Jason Moser: Probably, a little bit of hubris there too. I think there are a lot of good lessons that come from these [folks]. We often talk about the way we invest versus some of these things you've seen the headlines, and these folks are playing a different game. We're not playing the same game. Maybe there is an attitude and a level of hubris that is required for what they are doing. But regardless, it can all lead to potentially bad decision-making or at least some short-term-focused decision-making which oftentimes didn't work out well.
Deidre Woollard: That's true. Well, let's move on to some M&A news. We get those on Mondays, too. We've got Nasdaq acquiring Adenza. Adenza, if you've never heard of it, a lot of people haven't heard of it. Deal for $10.5 [billion]. Adenza, is actually a mix of two companies that were acquired by Thoma Bravo, which is a private equity firm. It's Calypso and AxiomSL. Both of them are regulatory software, one is for brokers, it seems, and one for the more bankers/financial end. Tell us a little bit more about what this deal means.
Jason Moser: It's funny, we usually see this going the other way. The news is always that Thoma Bravo is acquiring another one of our favorite software firms. I still remember the day they acquired Ellie Mae, and I was a little bit salty about that one. But this is just an interesting combination. I think you go back to -- what was it, 2020? -- Bravo acquired AxiomSL. Then in 2021 or around that same time, they had acquired Calypso, but ultimately, they merged Calypso and AxiomSL to become Adenza, and Adenza -- a software firm that helps manage trading and risk management and post-trade processing, along with technology that helps streamline reporting to regulators.
I think that's an important dynamic of the business because when you start bringing regulatory reporting, regulatory framework into the mix, that can become a little bit more of a competitive advantage, particularly in the world of finance. Again, it does feel like while we normally see Bravo making the acquisitions, it's always interesting to see this news when they're actually selling something and realizing a bit of a return on their investment.
Deidre Woollard: One it's interesting too, because Thoma Bravo, they pick up around 15% of Nasdaq in the deal because it's a cash-and-stock deal, so that is absolutely significant as well. But really thinking about where Nasdaq is going, it seems to be in the middle of a push. It's becoming maybe a back-end fintech provider. Is that necessary for Nasdaq if it wants to expand as a company to bring in these other aspects of the business?
Jason Moser: I think it's going to help. We talked earlier about just the risks of acquiring growth. But in this case, I think this is a complementary business. When you look at Nasdaq before this deal -- Nasdaq, it's a very transactions-centric business, and that comes with a level of expenses. And you can see that in their market platforms, which make up the lion's share of the revenue before the transaction expenses. But once you back out those transaction expenses, it becomes more on par with their capital access side of the business. So this is going to be something that helps diversify them away from that exposure to the transaction side of the business. Ultimately, I think that's a good thing. It's just a matter of whether they can make this integration seamless. That always is a risk that comes with acquisitions. But generally speaking, it seems like it's a complementary merger here for these two.
Deidre Woollard: Thoma Bravo, they're fascinating because they've been really aggressive the last couple of years. As you said, they've bought up some of the companies that we've liked. They've also been doing this thing where they've been pairing up certain companies, and we see this with this one. They did something similar with Magnet Forensics and Grayshift. They're combining that into a new company, still private for now. But does this deal shift it that maybe Thoma Bravo is now done with the acquiring and maybe starting to maybe start selling off companies? What do you think might be happening here?
Jason Moser: It's possible, but just given the nature of Bravo's business, this is what they do. It is a P.E. firm. They have better than 75 portfolio companies today. They manage around $130 billion in assets. And because they specialize, right, they're so focused on the software side of the world, and they have a level of expertise that they've really built throughout the years, so they can see businesses that may make sense being together versus businesses perhaps that are separate. So you see them maybe making a couple of acquisitions, combining these businesses, and creating a little bit more of a value proposition, a bit more of an attractive asset.
If you look at just the numbers, Bravo bought Calypso for around $3.7 billion. They bought Axiom for around $2 billion. You look at this acquisition today, they're selling for around $10.5 billion. Clearly, that's a nice return on that investment in a very short period of time. And I think you'd attribute that partly at least just to their expertise in this space. The nature of their business model. You find attractive assets at attractive prices. You have a strategy in place. You buy them. And at some point they want to realize the gain on that investment one way or the other. So selling these for more than they bought them is a nice value proposition for Bravo as well. You just rinse and repeat, right?
Deidre Woollard: Who doesn't love doing things like that? Do you think that there's more software acquisitions in their future? It seems like it's still a good time to be buying. A lot of companies, they can't get a lot of venture capital, they can't really go to the IPO market right now. We're still in that weird space. Is this still an active, fertile place for them to be hunting?
Jason Moser: I would imagine it is. Obviously, I mean, I guess technically we've entered a new bull market -- doesn't really feel that way though, does it? I mean, let's wait and see if this really lasts. But I think that there are still plenty of valuations out there that certainly look a lot more attractive than just a few years ago. In that regard, I would imagine they are absolutely taking a very close look at a number of businesses. It seems like they're going to have a nice little cash infusion here very soon where they'll be looking to put some of that money to work. I would not be surprised to see them making an announcement of an acquisition or two here before the year's end.
Deidre Woollard: Makes sense. Thanks for your time today, Jason.
Jason Moser: Thank you.
Deidre Woollard: Even if you don't trade options, stock investors still feel their waves. Anjay Nagpal is the host of the podcast, Brokers, Bagmen, and Moles, about the birth of financial futures and a little-known FBI investigation of the Chicago Mercantile Exchange.
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Ricky Mulvey: Can you set up the era of the Merc before financial futures were even trading there?
Anjay Nagpal: The Chicago Mercantile Exchange and the [Chicago] Board of Trade, they started out as agricultural exchanges. Literally, where farmers in the 1800s would go to exchange crops, to buy and sell crops and livestock and things like that. Then, over time, instead of actually trading the animals and the crops, they started trading futures on those things. And that was the very short version of how these exchanges came to grow into the behemoths that they were.
Ricky Mulvey: But there's a key figure that you cover in your show, Leo Melamed, who has this idea to move the center of finance out of New York City. Something that was surprising to me was that on Wall Street, they didn't want to do the options for financial instruments like stocks and mutual funds, where you could bet on the future price of a security.
Anjay Nagpal: Leo Melamed is really the single person. He's known as the godfather of futures. We tell a great story in one of our episodes about him, where he had this idea to create features not just on agricultural products, but on financial ones. And that really spurred the massive growth of the exchanges in the '80s. And it was a study that he commissioned by Milton Friedman that actually convinced his fellow exchange executives and other people to allow him to do that, so it's a really fascinating story.
Ricky Mulvey: One part of that story that I found interesting is that he faced a lot of pushback in bringing these financial instruments to exchanges, which would be, for me at least unexpected for Wall Street or Chicago.
Anjay Nagpal: I think no matter what industry you're in, there's people that are a little bit afraid of innovation, and are a little bit afraid of evolution, but Leo is definitely a forward thinker. But he got his point across.
Ricky Mulvey: I want to get into some of the trading itself because you talked to some people who knew Leo, and you would think a guy like this would be an excellent trader because he set up the game. And while you met many traders who might've had an edge in somewhat savory and unsavory ways, Leo didn't necessarily have an edge trading securities on the game that he created.
Anjay Nagpal: Well, first and foremost, all of the information on trading is anecdotal. We haven't obtained any trading records for him, but it's anecdotal from a lot of people, and so we can infer that was the case that he didn't make a lot of money trading at all. In fact, quite the opposite of what we heard many times. But the other thing that says about him is that he wasn't taking advantage of his position. He wasn't getting inside information from D.C., as was accused or rumored to be accused around these times. He was a gambler, was a trader, traded a lot apparently, and like you said, creating the products didn't help him. As you know, as your listeners know, the market is hard, and it doesn't favor anyone.
Ricky Mulvey: But the thing that really seemed to work to his disadvantage was that he was very emotional about his trades.
Anjay Nagpal: That's the story we heard from several of his former employees and I think Warren Buffett definitely is the embodiment of the opposite side of that coin. He'll tell you not to get emotional.
Ricky Mulvey: If you're a trader or investor, I think one thing you really have to think about is your edge. One trader you spoke with was Lewis Borsellino. He said that his edge was temperament, the ability to stay calm when others were panicking. Do you think that was the most important edge for a lot of these traders? What were the edges that you encountered in reporting your show?
Anjay Nagpal: Certainly, staying calm while others are panicking is very important. I've experienced that myself and many great traders will tell you that. There are certain other aspects, certain other characteristics that make someone a great trader. Especially on those exchanges though, it was really, the set of skills that you needed to be a good trader on the floor of the exchanges, it's very different than the set of skills needed now. And we can talk about that in a second. But at the time, it was almost like being a good poker player -- you had to know how to read the room.
So you can see, for example, if you're standing next to a big broker and he gets some really big order, his eyes might go wide or he might get a little nervous, or he might start looking at his biggest local traders that he's going to trade with, and so you can kind of pick up on, "Oh, this guy's got something, there's an order coming into the pit, and it looks it's going to be a big one." And you also can keep track of things. So, if let's say Goldman Sachs came in and bought a bunch of futures in the S&Ps, well, you know now that they're long, and at some point, they're going to probably unload those, so keeping in mind which customers have what positions is also another one. But just really thinking fast, reacting fast, reading a room, and being incredibly aware of your surroundings is what made Lewis a great trader, and what made a lot of great people great traders on the floor of the exchange.
Ricky Mulvey: It seems to be that ability to process a lot of information at the same time -- and that would be information that someone who's outside of the trading floor wouldn't necessarily have -- and you can see how the game changes a little bit.
You were a trader at the Merc from 2000 to 2005. How did you see that sort of trading change throughout your career? And then we can get to how it continues to change today.
Anjay Nagpal: I was there during a time of great transition. I traded options rather than futures, and options are really complex. The pricing of options is an art and a science that involves understanding calculus, and multivariable calculus at that.
Trading evolved a lot during those years, because first of all, they were starting to go electronic, so at least trades were being entered as opposed to being written by hand on a card. They were now being entered into little computers and memorialized instantly, and that's a big part of what was wrong at the Merc and the Board of Trade for so long. It was hard to create an audit trail for a trade because the rules said that you had to hand in these trading cards of what you did at the end of the day, and that time period kept getting shorter. Then it was 15 minutes, and then it was a few minutes, and then it was pretty instantaneously, which makes sense if you're going to be able to regulate a trading floor like that in open-outcry trading, you've got to have an audit trail. You can't just hand in a bunch of cards at the end of the day and expect nobody to take advantage.
Ricky Mulvey: What exactly was the FBI looking for on the floor of the Chicago Mercantile Exchange?
Anjay Nagpal: What they claimed was that they were trying to catch brokers stealing from their customers. That was the claim, but what we reveal on our show, if you get to the last few episodes, is that they were actually there for more than that.
When it comes to brokers stealing from their customers, it's a really hard thing to prove because there's so much happening at once on the trading floor. So trying to trace trades by sitting next to someone and having a tape recorder in your pocket is really hard, and it was hard to prove in court. So there's a lot of dynamics that made it such a fascinating investigation, but the gist of it is, these guys are taking orders and they're in a variety of ways ripping off their customers and giving some profits to people around the pit and then splitting the difference with them and pocketing money that is being stolen from customers.
Ricky Mulvey: So take us to the floor. What's it look like to go undercover as an FBI agent trying to look for these bad actors fixing trades?
Anjay Nagpal: It wasn't until I actually sat down and talked to the FBI that I really developed a lot of admiration for how hard their job was. They didn't always design the investigation, they didn't prosecute it. Their job was just to go down there and fit in, and that was probably the hardest part of their job, was to fit in because Chicago is -- episode No. 1 of our show is called "The Biggest Small Town in the World." So a lot of the people that were at the Board of Trade and the Mercantile Exchange, they knew each other or they had some relatives in common, they had some commonality. So these four FBI agents had to go undercover and pretend they belonged, and that in and of itself was hard. Then they had to learn futures trading. That's hard. Then they had to gain the trust of a crooked broker who wanted to use them as a bagman to park money that they would rip off from the customer and later on split.
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Deidre Woollard: As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
