Independent Thinking^®

Everything to Play for in Silicon Valley

Editor’s note: J. Stuart Francis joined Evercore in July 2014 as the head of the firm’s growing Silicon Valley technology practice.

He was previously the chairman of Barclays’ global technology group and has 35 years of experience in advising leading companies, including Amgen, Aruba Networks, Avago Technologies, Abbott Labs, Cisco Systems, Facebook, FireEye, Google, NetApp, Netsuite, Qualcomm, Sunpower, and Workday. Here are extracts from a recent conversation with Independent Thinking.
 

Changes In Technology

The Technology and Internet Sector is not quite a winner-takes-all market, but it is certainly a winner-takes-more-than-ever-before market. In any sector there are really only a few big winners now, which are the companies that have excelled at knowing what their consumers want and making it available rapidly around the world. There has never been a time when there has been a greater opportunity to capture market share.
 
The reason for this is because we are in a very unique period, in which we are seeing the rapid individualization and consumerization of information technology, or IT. The power of IT is essentially being transferred primarily into the hands of the end user. This dynamic transfer is shaping social media, mobility, big data and analytics, the Cloud and – across all these areas – security.
 
The social media titans, like Google, Facebook, Twitter, and LinkedIn, as well as a number of smaller companies, are producing spectacular numbers. Apple, Samsung and Qualcomm have done a great job in the mobility space; Splunk and Tableau are the two leaders in predictive analytics and big data; and in the enterprise software market, Workday is taking business from its competitors on the Cloud.
 
Security is a fundamental issue that still hasn’t received enough attention, even though companies like Palo Alto Networks and FireEye have interesting and focused offerings. The big data sets that have been created through this individualization of IT need to be properly protected, as do the corporations themselves. The recent high-profile hackings experienced by Sony, Target, Home Depot and others illustrates this issue clearly.
 
If you think about it, where do you have better IT? At work or at home? For almost all of us now, our own technology is better than that provided by our workplaces – and we expect our corporate support services to accommodate us. The head of IT used to be something of a dictator. Now, he or she is really more like an elected leader of a democracy, trying to manage a secure system while providing flexible access to workers using a wide range of devices. This is a huge challenge that is just not going away.
 

The Outlook for Silicon Valley

Silicon Valley is uniquely positioned to continue to build leaders in each of these sectors. Indeed, I think we can make the case that there has never been a period in the history of the world when one small geography has had as much global influence as Silicon Valley has right now.
 
There are other important technology centers and markets, of course, but we have yet to see the level of innovation in China or anywhere else that we are seeing in Silicon Valley. We are also seeing improvements in the companies’ ability to protect that innovation in the judicial systems around the world through intellectual property laws.
 

The Challenge for Large Incumbents

Most of the major companies are either late or they have missed many of the major trends that we’ve been talking about. When they’ve tried to grow new businesses organically, they’ve struggled. And they’ve been hesitant to make transformative acquisitions.
 
It’s not easy. The quarterly pressure to produce earnings growth is significant. When a company is transitioning from an old model within a company to a new model, it generally has a high cost base and declining or flat revenues for the existing products. It’s a real challenge to make the transition to the high-growth sectors when you’ve got to protect the flank.
 
Acquisitions can be tough, too. It’s difficult for companies to justify paying maybe seven times revenue for a company when they themselves are trading at, say, 14 times earnings. They get hung up on dilution. But paying modest value for modest growth and thinking that you can get there through integration and cost cutting doesn’t work in this winner-takes-more-than-ever-before environment. If you believe in the trend, you need the backbone to get the deal done.
 

Direct Relationships with Senior Evercore Advisors

Leaders in the technology sector receive a service from Evercore that is very hard to find elsewhere, with focused, senior-level attention from bankers and great research from Evercore ISI. There is a real demand for advice that is based on experience. Our clients, including both young CEOs and major large technology companies, want to know how to build sustainable, long-term value and differentiate their company in an equity-driven sector that operates to a pretty tight timeline. They want advisors and lead investment bankers who have deep knowledge, a lot of experience, and very senior-level contacts either in the buy side or, from the strategic M&A standpoint, with the major corporate buyers.
 
Evercore has assembled a significant Silicon Valley team of seasoned trusted advisors with deep market understanding. The local Silicon Valley team can now provide deep strategic advice and execution to all of its technology and Internet clients.
 
For information on Evercore in Silicon Valley, contact Iain Silverthorne at [email protected]. He is based in the San Francisco office of Evercore Wealth Management.