Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to season 6, episode 3 of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert.

David: I’m David Rosenthal.

Ben: And we are your hosts. Today, we are tackling an episode to cover the question we get asked most, “What are the best acquisitions of all time and what can we learn from them?” So today, here it is, The Acquired Top 10.

David: Acquired Top 10. We figure we're over a hundred episodes, and now it's time for the greatest hits album.

Ben: Yeah, listeners. The idea originally started as a blog post, which you can find linked at the top of the show notes. But we wanted to do an episode with really more of a director's cut of the list and how we thought about each one since. Even though there are lots of numbers involved, it's not quite an objective exercise.

David: We reserve the right to great as we see fit.

Ben: As always. All right, a few announcements before we dive in. First, if you haven't seen already on Twitter or in the Acquired Slack, we have sadly canceled our South by Southwest live show due to precautions regarding COVID-19. We hope to be back in Austin at some point to meet many of you in the future.

David: And a huge, huge thank you to Ben Grenal in the Slack and a friend of the show for helping us get that set up and we can't thank him enough. Hope to make it happen at some point in the future.

Ben: No kidding. Next, we had a great Limited Partner episode this week with Hamilton Helmer and you can listen to a segment of it attached at the end of this episode. For those who don't know Hamilton's name, he is the author of 7 Powers which, David recently described to me as the best business strategy book out there. David is in good company here getting high praise from strategy master, Reed Hastings at Netflix, Daniel Ek at Spotify, Peter Thiel, and many, many more. We had to, of course, have the author on the LP show.

If you want to go deeper on company building topics, you can become an Acquired Limited Partner and get access to all the things that come with that by clicking the link in the show notes or going to glow.fm/acquired and all subscriptions come with a seven-day free trial.

David: Hamilton was fantastic; super fun.

Ben: Indeed. All right. Lastly, listeners before we dive in, we want to welcome our sponsors for all of season six, Silicon Valley Bank. Whether you are at the seed stage scaling to Series A or beyond, SVB has the insights and expertise to help you hit your next milestone.

I’m here with Robby Kumar, a Managing Director running SVB’s corporate finance team in LA, focused on later-stage companies. Robby, in your experience, what makes an acquisition go particularly well for the acquirer?

Robby: One of the elements that is usually overlooked but is surprisingly a key element of M&A success is cultural fit. Most of the work going into the deal focuses on financial metrics such as Accretion/Dilution Analysis as well as cost synergies. People overlook the social dynamics of bringing two sets of teams together and how you get them to work together going forward. That’s typically left out after the closing.

The most successful deals that I have observed have taken those key elements of bringing the teams together earlier on in the process and having those folks work together through to the closing.

Ben: Awesome. Thank you, Robby.

Listeners, you can visit svb.com/next to learn more. All right, David, how on earth are we structuring this episode?

David: Instead of history and facts, we're going to replace that with notes and methodology today.

Ben: It must be two things, a couple by the end and the middle.

David: Exactly. Ampersand, not an and.

Ben: Oh, isn't it an ampersand? Do you know that they're not interchangeable?

David: Really?

Ben: Yeah.

David: Whoa, that's shocking to me.

Ben: This is a little known nerd fact. I'm not going to get this exactly right, but it is when you are coupling two things together, rather than when you are using and in the way that you would in a sentence.

David: It’s like a compound sentence as conjunction and whatnot. Yeah, okay. That makes sense.

Ben: Yeah. Also, it has a cousin called et cetera. You can go research the evolution of this glyph. But if you think about the and sign, the ampersand sign, not the big curly one that looks like an S but the smaller one that has two curly things on the side, is actually an ET, and it comes from the same root as et cetera does.

David: I think we could have a whole spin on the podcast about this.

Ben: I think so, too. Origins of odd typography and linguistics.

David: All right. Back to the lecture at hand. First off, we thought about all acquisitions out there in history. We didn't necessarily limit ourselves to just the technology universe (as you will see as we go through the list here), but the big caveat is it's based on what we know in our universe and our experience. There may be ones out there that we didn't identify that we slipped. We thought a little bit about some of the Berkshire Hathaway acquisitions. Obviously, they are fantastic, but some of the criteria that we look at don't quite compare to what we have on our list. A big caveat that we may be missing some. Please write in if you have super interesting ones and we’ll discover him on the show in the future.

Ben: Yes, please. Also, the Acquired Slack at acquired.fm would be an awesome place because I think this one is going to be good fodder for community discussion.

David: Yeah. Okay, so that's caveat one. Caveat two, enough time has to have passed since the acquisition that we can make a definitive call. We're not going to be talking about Visa’s acquisition applied here or Credit Karma or anything that just happened in the last few weeks or even in the last couple of years. We need to be able to say definitively what the outcome was here.

Ben: Yup. Another thing is it must be a majority purchase. There are many amazing pickups of minority shares and companies better known as investments.

David: Naspers’ Tencent comes to mind.

Ben: Yeah. One listener pointed out Liberty Media buying 40% of SiriusXM which is now worth over $20 billion.

David: I remember being a media investment banking analyst on Wall Street at the time and seeing this happen and just being like, “SiriusXM. My dad listens to SiriusXM. That’s a dumb idea. These guys are going to go bankrupt.” That was why I'm no longer a media investment banker.

Ben: Yeah, just a world-class podcaster instead. Another one, this represents a moment in time with company market capitalizations as of the end of March 3rd, last night, when we compiled a lot of this data in the midst of the US Democratic primary, Coronavirus, and everything else going on in our macroeconomic world right now. This episode may not be the exact order that we would rank it five years from now, even one year from now, even six months from now. It definitely represents a moment in time, though I think directionally correct for a while.

David: Yeah. This episode, we may actually be the actual music that is playing on the Titanic while deck chairs are being rearranged, but we'll see. Hopefully not.

Ben: Yeah. As you know on Acquired, the way we issue a grade is using these criteria, how good of a use of capital was it for the big company to buy the small company? The way we ended up ranking our list, best we can tell, is what is the absolute dollar return in value to the big company from buying the smaller one? In other words, if I have a company worth a billion dollars like Acquired, and I buy David's piddly little startup.

David: Only a billion?

Ben: David, your little startup is worth a dollar and I pick it up for that. My company then later becomes worth $2 billion by integrating your product, we would look at this as an acquisition that added nearly a billion dollars of value and that's how we would run its core.

David: $999 million...

Ben: Look, I'm rounding up for you.

David: I got no value-added, minus the acquisition price because this is going to be important in a couple of days.

Ben: It’s a fair point.

David: The last thing is in cases where—or was the last notes of methodology that I have—the acquired companies product ended up becoming a component of a larger product within the acquired company, we thought of some subjective discount in our estimation, what percentage is this acquired company's product responsible for the success of the ultimate product.

Ben: Yeah. You could imagine if you bought maybe a way to make chips or maybe a programming language or something like that, you might say that that’s not responsible for all of the company’s feature value or even all of that product line’s feature value.

David: Yup.

Ben: All right. With all that out of the way, I think it's time to actually start moving through our top 10, and dare I say, our top 15.

David: Absolutely, 16.

Ben: Oh, adding too many on the list here.

David: We’re only going to rank the top 10, but we have some honorable mentions to start with. First and most, absolutely given recent Acquired history, we would be completely remiss if we don't mention WhatsApp on this list. The buying estimate and as we talked about on the episode, definitely one of the best acquisitions of all time.

The way we tried to estimate market cap contribution of the acquired companies into the parent companies was via the percentage of revenue that that company is now responsible at the parent company and then what the revenue multiples of the parent company. We totally recognize that a lot of these companies don't trade on revenue multiples. They trade on a free cash flow basis, but we can't get the cost structures of the acquired companies anymore, so this is the best we could do.

Ben: Yup. Again, I think it's directionally correct. The fun part about getting to do a show that's kind of the director's cut here is we can talk a little bit especially in playbook as we get into it and hem and haw a little bit about ones that we were too generous on or not generous enough by just thinking about it as revenue contribution to the business.

David: By our screen, WhatsApp essentially generates zero revenue from Facebook, so they're not going to show up on the list.

Ben: They were far lower than 16.

David: But definitely deserve to be mentioned.

Ben: For sure. It's funny how that one's a six-year-old acquisition that's still in camp. Too soon to tell.

David: Yeah, seriously. We know that it was (as we talked about) not too soon to tell him the defensive move front.

Ben: Right.

David: Too soon to tell him the revenue front.

Ben: Yup. All right. Coming in at 15th or I guess our first of our honorable mentions coming in, an episode that we have not yet done yet, but a couple of listeners especially recently have been suggesting in the Slack that we try it. That is VMware being acquired by Dell EMC.

David: First acquired by EMC and then later, EMC was swallowed up by Dell. This one is super interesting. EMC acquired VMware for $625 million. VMware currently is doing right under $9 billion in revenue. EMC acquired 80% of VMware, so VMware has always had this public stub that trades publicly of the rest of the equity.

Super, super interesting though, the only reason this is so far down on the list is because of all the complicated EMC Dell stuff (we'll get into when we do this episode someday). Dell is actually trading in the public markets at a significantly lower value than what their stake in VMware is worth.

Ben: It's crazy.

David: It's completely nuts.

Ben: I think we saw this with that holding company… What episode was that? There was a nine-person holding company based in—

David: Oh, it was Altaba.

Ben: Altaba, that’s right. Owning the stake in Alibaba, where they traded lower than what their percentage of Alibaba was worth.

David: We thought that was crazy. We haven’t done all the math here and know the whole corporate structure and everything, but with that caveat, the discount at which Dell is trading on the public markets simply to the 80% they own VMware, which is also publicly traded, is astounding.

Ben: Yeah. On the one hand, it's a cheap way to pick up some access to VMware. On the other hand, the way the stock market is behaving, they're putting a massive, massive discount on it for its lack of being able to escape out of Dell.

David: Yeah. Okay. Next, we have our near and dear to our hearts but a heartbreaker, and our very first Acquired episode.

Ben: Pixar.

David: Pixar.

Ben: In 2006, Disney bought Pixar in a landmark $7.4 billion deal. I thought this one would be a lot higher, but we'd like to walk you through how we did the math on this. The absolute dollar return that we're looking at from a bunch of our estimates in this methodology is about $2.3 billion to Disney's market cap.

The way we thought about that is Pixar is basically good for a film a year. As much as I wanted to do this by summing all of the profits or maybe abstracting one layer up and summing all of the revenues from all their films, really the right way to think about (especially as we're thinking about) contribution to market cap is how much revenue of Disney's annual revenue are they responsible for every year, which is effectively one film’s worth.

Now, what is one Pixar film worth in revenue from it’s worldwide gross after release? It's about a billion dollars in the success case. You look at the Incredibles 2 or Toy Story 4, each brought in right around a billion dollars.

Because of our Disney episode, we know that you make about twice as much from perks and merch as you make from the film itself, or at least the division as a whole does, so we felt it was reasonable to say triple the amount of money that any given film gets from the box office to its total revenue contribution to Disney, and you get about $3 billion. Contributing about $3 billion in revenue per year to Disney out of their close to $70 billion in revenue.

David: You get to just under $10 billion in market cap contribution from Pixar. But of course, they paid $7.4 billion for it. When you net those two out, you get incrementally about $2.3 billion in market cap contribution from Pixar.

Ben: You should also know it’s our lowest annualized return out of anything from the entire list with about 2% per year since this was a 14-year old acquisition.

David: We're going to have some more discussion in grading about this one. Next on the list, another fun episode from Acquired’s history, our first big independent live show, Venmo picked up by PayPal in 2012 for $26 million. Venmo was recently announced doing about $300 million in annual revenue within PayPal. You do the math and that nets out to market cap contribution within PayPal of about $2½ billion. Not bad for buying it for $26 million.

Ben: Yeah. Of course, this went through Braintree, so it’s $26 million that Braintree bought it for and then less than a year later that was picked up for $800 million but rolled that $26 million forward since that is the isolated number for Venmo alone. Now, David, I will say still not profitable.

David: Indeed.

Ben: But not a part of our analysis here.

David: Profits. What profits? What are you talking about? I care about revenue here on Acquired.

Ben: It is worth noting that they did give guidance that they thought that by the end of the year, Venmo would be a profitable unit. It’s an interesting update to our Venmo episode.

David: Yup. Next, we have Bungie, near and dear to my heart, played so many sessions of Halo over the years. Microsoft picked up Bungie in the year 2000 for an estimated $30 million. Now, this one was really interesting to think about because the Halo franchise in total has generated about $5 billion in revenue over the life of the franchise. Of course, Microsoft got that IP as part of the acquisition. But you also gotta think about how many Xboxes did Halo sell. Know Halo, what would have happened to the Xbox franchise?

The Xbox franchise generates about $11 billion in annual revenue from Microsoft. We estimated the current market cap contribution of that $30 million Bungie Halo pickup in 2000 to be about $8 billion currently.

Ben: It's funny. This is an honorable mention that doesn't make our top 10 list. But, oh my God, getting that thing for $30 million, even with all the work they poured into it afterward was a freaking steal in order to bootstrap the Xbox business.

David: Totally. It was the killer app.

Ben: Yup. All right.

David: Speaking of killer apps?

Ben: Yeah. P.A. Semi. Longtime listeners of the show will know that we did an episode early on with Apple's 2008 purchase of P.A. Semi, which at the time was working on very advanced...

David: ARM infrastructures.

Ben: Yeah, developing IP for new chips that they didn't manufacture.

David: [...] semiconductor?

Ben: Yup. Many firms these days outsource it. It seemed not contrarian, but a little odd for Apple to be buying this researchy CPU company.

David: Yeah. This is right after the first iPhone had come out.

Ben: Yup.

David: People were confused.

Ben: And they paid a bunch of money, too. I mean, it's $278 million. This isn't like some of our other ones that were tiny little pickups. Apple's market cap back then, let's just say they weren't a trillion-plus dollar company. This is a decent-sized bet for them, but as we know today, the iPhone being as differentiated and creating as magical of an experience as it does, is in many ways attributable to Apple making their own silicon which of course all started with P.A. Semi.

You also look at Apple's innovations in silicon elsewhere in their wearables division, being able to do the W series chips for the AirPods and the watch. There are the W chips and then there's another one—

David: [...] like an S series of chips, I think?

Ben: Yeah. Actually, I think the touch bar has its own ARM CPU in it which probably is attributable to—

David: These have been rumors for years, but the rumors are this year maybe or next year, we're going to see ARM-based in P.A. Semi technology-based MacBooks.

Ben: Yup. This is the hardest thing to figure out and this is probably the most fun thing to debate on this show or at least in this format. How do you account for something like this that is necessary but not sufficient to create the product line that they have today? That if you look at the revenue contribution of the iPhone, the iPad, and the wearables division (which are all made possible by Apple making their own silicon), it's $188 billion a year in revenue. Necessary but not sufficient. So what do you do?

David and I took a little bit of a hack job of estimates here, but basically what we said is, “Look, you can probably say 25% of iPhone revenue is attributable to making their own silicon.”

David: Yup. iPhone, wearables, and iPad. The 25% of the differentiation is from the chips.

Ben: Five percent then, we further discovered that, and said 5% of making their own silicon is attributable to their acquisition of P.A. Semi. What that basically says is, “Well, let's take all that revenue and go grab 1% of it.” I promise we didn't come up with that 1% number. We first came up with this 25% and then that 5%.

David: We love false precision here in Acquired.

Ben: It is false precision at its finest, but that gives us the funniest metric of all time that Acquired should probably trademark the discount adjusted current market cap contribution and we look at that as contributing about $11 billion to Apple's market cap, which (of course) is a nice 36% absolute dollar return of over $11 billion. But somehow, still not making our list.

David: Just missing the top 10.

Ben: My God. Is this a gilded set of acquisitions that we've got on the top 10?

David: All right. Should we move into the official top 10?

Ben: Yes.

David: Okay. Coming in at number 10, what we and I have sometimes referred to on the show as the best media acquisition of all time.

Ben: Turns out that’s not.

David: There's going to be one that's above it coming later in the list, but Disney's 2009 acquisition of Marvel. This was just brilliant.

Ben: Who would buy some defunct comic book?

David: Comic book company.

Ben: That's IP is already basically leased out to everyone and cut up 11 ways for 10 years.

David: Totally. I'm going to talk more about this in playbook. Marvel was—I can't remember exactly—going on being a 70-, 80-year old company. It was a very old company at this point, been around forever. Of course, Marvel Comics, one of the pioneers of the comic industry. But Marvel Studios and Iron Man, the first film out of it, had only launched a year earlier. It was actually pretty early in this part of the market for Marvel. Disney, of course, paid $4.2 billion to acquire all of Marvel in 2009.

Ben: Which of course is $3 billion less than Pixar.

David: Yes, $3 billion less than Pixar. For Marvel, we did essentially the same thing as we did with Pixar, but you'll note with Marvel, as opposed to Pixar where they're cranking out one feature-length film per year, with Marvel they're cranking out multiple feature-length films. They're cranking out TV series. They're cranking out action figures. They're doing comic books, of course, still, all sorts of stuff. We took their revenue since the acquisition. We did that on an annualized basis. We applied the same 2X multiple for perks and merch that would apply to the content revenue that they're creating.

Ben: Yup. That revenue that you mentioned at the beginning, that we are only taking their films revenue and—

David: But that’s what we had access to. Yup. You do that, you get between $6–$7 billion of annual revenue contribution from Marvel to Disney out of $70 billion in total revenue.

Ben: Which is fascinating. It's basically more than twice as much revenue per year from Marvel than it is from Pixar.

David: I mean, 10% of Disney's revenue by this estimation coming from Marvel.

Ben: It's crazy.

David: Crazy. We may not be correct on that, but it seems reasonable.

Ben: It’s a reasonable swag. Yeah. I just want to do this comparison to Pixar. They're making over twice as much money per year, they paid almost half as much for it originally, and they did it three years later. Every lever that you have the ability to pull and make this one a better acquisition, they did.

David: If you just look at the stats, we have an absolute dollar return market cap contribution minus the price they paid for the acquisition of over $16 billion on Marvel. Incredible. Fantastic. Not quite the Incredibles, but even better than the Incredibles.

Ben: Also coming in, right around $16 billion of an absolute dollar return is Google's acquisition of three companies, Where2, Keyhole, and ZipDash.

David: The Google Maps suite.

Ben: Yes. Around 2004, they created Google Maps that we know of today. Now, estimates are that Google Maps does about $3 billion in revenue. This mostly comes from the sponsored products that you see that are basically the ad units that are shown on maps.

David: And the Maps API revenue, I believe.

Ben: That’s right. So bought for $70 million, doing about $3 billion in revenue 16 years later. We looked at the current market cap contribution of about $16 billion to Google's near trillion-dollar market cap. That pencils.

David: I can maybe even make an argument. It should be a little higher.

Ben: Than 1.6% of the value of the company? Totally. When you look at similar to Marvel, you look at the absolute dollar return was about $16 billion. There's another number that we have here that's interesting to compare, the ROI multiple. What's the return on the invested capital there with Marvel it was 5, with Google Maps it was 242.

David: Yeah. We'll talk about this in playbook and grading more. You can become a little myopic on the investment you focus on, return on invested capital, or cash-and-cash multiples or whatnot. That's nice, but it's paper money that feeds your family and pays the bills. At the end of the day, $16 billion is $16 billion, whether it's a 240X ROIC or a 5X ROIC. It's still $16 billion in incremental dollars.

Ben: Everything else is a vanity metric.

David: Yup.

Ben: And speaking of those vanity metrics, we are going to publish this whole table. So if you click the link in the show notes, you can go check out. With probably some false precision, all the numbers that we came up with across all of these different measures.

David: Next highest on our list.

Ben: What do we have? That was nine.

David: That was number nine. We're here at eight. The actual best media acquisition of all time. We're going right back to our friends at Disney. Actually, ABC Capital Cities. The acquisition of ESPN, 1984. This is the oldest acquisition on our list, the acquisition price of just under $200 million. ESPN currently is contributing over $10 billion in revenue to Disney through, obviously, advertising revenue and subscription fees, and including ESPN Plus in there now, too. Just incredible.

Even though this acquisition happened in 1984, generated by our estimation over $30 billion in absolute dollar returns, 166 ROI multiple. We also calculated the annualized return to just try and adjust for time here a little bit. Fifteen percent annualized returns since 1984 is just incredible. That is like Berkshire Hathaway levels of return by an acquisition within a company.

Ben: Yeah. If you found a financial advisor who could figure out how to guarantee you a 15% annualized return for 35 years.

David: 1984. It was born in 1984 and I'm 35.

Ben: Yeah. I'd happily pay whatever they need for their cash and their management.

David: I’ll pay management fees on that.

Ben: Absolutely. All right. Moving on to number seven.

David: The mafia.

Ben: eBay's acquisition of PayPal in 2002. David, as you say, the mafia, it is not just for all the future value that would be created by all those founders starting every company from Tesla to Yelp.

David: To LinkedIn. You name it.

Ben: Wild Group. But actually, the value of PayPal growing inside eBay was freaking crazy. The way that we did this one because eBay actually did spin PayPal out in full.

David: In 2015.

Ben: In (I think) 2015. Is that right? Yeah. 2015, 2016, somewhere in there.

David: We have exact numbers.

Ben: We do have exact numbers and we know an exact annualized return. We're not pegging that to the market cap today, but rather the actual spinout. When they did spin it out, the market cap of the independent PayPal entity was $47 billion. Now, in 2002, they bought the company for $1.5 billion. So no analysis needed. That was $45.6 billion of an absolute dollar return for eBay shareholders. A 28% annualized return. Just an unbelievable job of picking something up relatively on the cheap, both doing a nice job integrating it with PayPal to create new, dare I say, synergy and value, and of course betting on a trend that was Internet payments and being spot on there.

David: Yeah. Now, we're going to start into some of the real fun side. I mean, not that all these aren't fun. The next one, this acquisition was so incredible that the company that bought this little company back in 2005 has now fully changed its name, even though this was a large public company buying tiny, tiny little company. The company is now called the name of a little company. We're talking about Priceline’s acquisition of booking.com and Active Hotels as we discussed about on the episode with Drew. It was those two companies together even though Booking was the larger at the time and is still the larger. $135 million in 2005.

Booking.com, as best as we can tell, separating out what the core Booking and Active Hotels revenue is within. Now, the Booking Holdings, right?

Ben: Booking Holdings. It is no longer the Priceline Group but Booking Holdings.

David: Booking Holdings is over $10 billion in annual revenue contribution.

Ben: The company does about $15 billion in revenue. At least $10.8 billion comes from what they call the agency revenue which is basically Booking’s original business model. There's even more. There are other segments of their revenue that Booking also contributes to, but we were conservative in our analysis here and basically said, “Let's just call booking.com’s contribution here the agency revenue,” so responsible for over ⅔ of Booking Holdings revenue now, and as David mentioned, $10 billion.

David: So that translates to an absolute return of just under $50 billion. It was crazy. We were talking about annualized return with ESPN a minute ago. Thirty-years years of 15% annualized return. Here, we're talking about 15 years, so not 35. They got a long way to go to get to 35. You know what the annualized return on this one is?

Ben: I'm not looking at my screen so I don't know.

David: Forty-eight percent annualized return compounded for 15 years.

Ben: Insane.

David: That’s a good acquisition.

Ben: The other fun one about this is I think all the rest of them that we're going to mention come up very, very commonly in conversations where people say, “What's the best acquisition of all time?”

David: I actually think number two is going to be a surprise for people. It was a surprise for me.

Ben: Okay, fair. But with Booking, it's one that I think people don't realize.

David: Still don't appreciate.

Ben: Yeah.

David: I haven't checked the latest market caps but I remember back when we did the episode, Booking Holdings is worth roughly by market cap several multiples of Airbnb, several multiples of Expedia.

Ben: Expedia is a $13 billion company right now market cap. What's Booking?

David: Booking is $70 billion. Now, of course, we're doing this in the middle of the Coronavirus breakout. All travel companies market caps have been taking a big hit.

Ben: Particularly people in the Seattle area don't appreciate how much larger Booking is than Expedia.

David: Yeah, absolutely. Again, what happened says it all. The company is now called Booking Holdings.

Ben: Very true. Okay. The next one, number five.

David: Next is NeXT.

Ben: How can I get both of these ones? So number five, Apple’s 1997 acquihire Steve Jobs.

David: Greatest acquihire of all time.

Ben: And all of the incredible technology that comes from NeXT.

David: That's the thing. It's not just Steve Jobs.

Ben: Right.

David: What's NeXT?

Ben: Right. This one had to be in there because Apple is a $1.4 trillion company now that certainly would not be but for the NeXT acquisition. This is another situation where we have necessary but not sufficient. Apple makes this move, get Steve Jobs back. They also get the new and blooming object-oriented programming. The Objective-C language and runtime NeXTSTEP, which turns into MacOS 10, which then gets refactored into iPhoneOS, which then became iOS, which then forked to iPadOS, which then forked to watchOS.

For as much as we want to attribute value to the hardware from P.A. Semi, the software in everything that is Apple today.

David: Comes from NeXT.

Ben: Yeah. It is not [...] Copland and all these machinations. Machinations? I don't think I know that word. Of MacOS IX.

David: Machinations.

Ben: Machinations progressing through. It was, “Nope. New thing based on NeXTSTEP.”

David: Yeah. Don't forget they also got the cube.

Ben: They also got the cube.

David: They also got the cube.

Ben: How do we value this one? First of all, the acquisition price is $429 million. Again, big freaking pickup for Apple. You think about 1997, that much money for them. Huge bet. The funny thing is, the company wouldn't do literally any of the revenue of the $260 billion in revenue that they do today without that acquisition.

David: Look at all their business lines. All the iOS business lines. iPhone, iPad, wearables, none of that. Mac, none of that. Services, none of that. Everything.

Ben: Then how do we do the math here? What we basically just squinted at, as we said that the discount for future dependency. This discount that we apply, where we're basically saying what percentage of the product that ships today came from outside the assets acquired, we're going to say it's about 95%. Necessary but far, far, far 95% from sufficient, so we take a 95% discount on Apple's current market cap today.

David: Here's the crazy thing. Oh, what's 5% of Apple's market cap? Some tiny number. $63 billion.

Ben: Providing us with an absolute dollar return of $62½ billion that is very squinty math here, but honestly, it's hard to come up with something better that would yield for Apple buying NeXT.

David: Yeah. Okay. Number four, just a hair's width outside of our top three. We'll reveal what it is. This is going to win the prize for ROI multiple here by a long, long shot. We are talking about Google's 2005 acquisition of Android for $50 million.

Ben: One of the things this points to is how you can get these gigantic multiples from early-stage investing? I mean, when you say this one wins the award for ROI multiple, what I really hear is it must have been a really cheap pick-up price.

David: Yeah, exactly. But again, you can't eat ROI multiple. That's why this is number four and not number three, two, or one, but still a monster. Android, $50 million to buy this thing. We tried to think about how do you account for what Android’s current revenue contribution is to Google.

Ben: Google is not helpful to us at all in this segment that when they report Android revenue, they report the search revenue that is generated from people searching on Android phones, which is not really how you'd want to do this.

David. Yeah, that’s Google Search [...]. That’s not Android.

Ben: Yeah. Those Google Searches were going to happen somewhere anyway, whether they had Android or not. How should we think about this?

David: Well, there's one piece of the revenue that is actually the much, much easier part which is Google Play Store revenue. That is fully attributable to Android. That was gonna happen. There's no sharing of that. It's like no Android, no Google Play Store.

Ben: Yup, exactly. The other component which is a little bit harder to squint at is what we call Traffic Acquisition Cost. It is reported that Google currently pays Apple about $9 billion a year in order to keep Google as the default search engine on the iPhone. That is an insane number in their cost structure.

One big thing that we determined on the episode with Android in addition to the Play Store, how should you think about the value of Google creating Android in-house? You should think about it as money they don't have to pay anyone else for that traffic because if they own the operating system, then they can for free keep Google as the default search engine. The way that we went about that as we compared the amount of money that is spent on the iPhone through the App Store to the amount of money—

David: The purchase intent that would be monetizable search traffic.

Ben: Exactly. To the amount of money that is spent on Google's Play Store. Apple makes about twice as much money as Google does on the App Store versus the Play Store which gives us a sense of those. If you think about gross purchase intent or basically the value of the traffic on iPhones, about twice as much as the value of the traffic on Android phones. That’s how we backed into, “Let's add another $4½ billion dollars in “revenue” per year to Google for owning Android because it's basically a cost they don't have to pay to anyone else.

David: Yeah. Here’s the surprising thing to me, though. The total number that we come up with revenue contribution for Android is right around $13 billion, right?

Ben: Yup, $13½ billion.

David: $13½ billion. $4½ billion of that worth, attributed by our flawed methodology here—flawed in some way, we don't know why—to search. I realized this. There's so much revenue in the Play Store. It's so big now. Even though the iOS App Store monetizes more as you know.

By estimates, Google did about just under $30 billion in total gross merchandise value in the Play Store last year in 2019. They take a 30% cut of that. We're slightly under $10 billion in super high margin revenue to basically infinite revenue, infinite margin revenue to Google. That's incredible.

Ben: Yup. Listeners, we would love to hear your thoughts if you have a better way of thinking about Google’s revenue contribution. We fully recognize that this cost-saving is different than revenue. We also fully recognize that taking a ratio of the App Store's earnings and using that as a ratio of Traffic Acquisition Cost.

David: Search, yeah. We may be vastly underestimating search value here.

Ben: It's true. Of course, the $9 billion that they pay to Apple is not a Google disclosed number, that is a reported number. We’d love to have more conversation around that.

David: We net out all of this when your current market cap contribution taking out the $50 million acquisition price of $77.68 billion in absolute return on this acquisition of Android, which represents an ROI multiple of 1555X compared to a 5X for Marvel.

Ben: And a nice little annualized return of 63%.

David: Man, 63% over 15 years. Now, of course, that's not hard cash like Booking, which is the 48% annualized of, “Yup. You can take that to the bank,” but still, going to rank this one super high.

Ben: All right. Well, our Google streak continues.

David: Oh, it’s going to continue for a little while here.

Ben: Number three, Google's 2006 acquisition of YouTube, which I think the Acquired podcast called this a C when they did that episode.

David: Those guys are morons.

Ben: Yeah, they definitely need to revisit this one.

David: Definitely need to revisit this one.

Ben: Consider this a primer on our revisit. Big acquisition price. I mean, this is a $1.65 billion acquisition.

David: For a year old company.

Ben: For a year old company that was basically incubated inside Sequoia.

David: Yeah. I believe, still to this day, the only publicly available Sequoia investment memo out there because, of course, it was part of discovery in the YouTube-Viacom lawsuit.

Ben: Yup. We'll link that in the show notes. If you're listening to this show and you find this interesting, you will love geeking out over this investment memo. It’s awesome.

David: Yeah, so good. I think this was RealOp's first investment at Sequoia.

Ben: It's real. It's remarkably cogent for someone's first successful investment memo.

David: Yeah, it's better to be lucky than good. He's good, too.

Ben: Google finally did us a favor and broke out YouTube in its most recent earnings, a fast-growing revenue segment of $15 billion a year. I've got lots of comments on this, but I'm going to hold it for our playbook section. We're going to do a little more analysis. But you look at the acquisition price of $1.65 billion, now doing $15 billion in revenue. Google total is doing about $160 billion in revenue. That comes to a market cap contribution to Google's trillion dollars of $86 billion in market cap contribution for YouTube which is an $84 billion absolute return on Google's cash.

David: We're just getting into silly numbers with this one.

Ben: Yeah. If you can get a 52 X ROI multiple on a billion and a half dollar investment, you're doing pretty good.

David: You're doing pretty good.

Ben: There are lots more I want to say here—

David: We'll hold this one for the end of the show. All right. Number two. I was shocked by this. I'm just shocked. We have not covered this as an episode. I mean, listeners, you're listening along. What would you think number two is going to be? This is not what you think it's going to be.

Ben: You probably know what number one is going to be based on the number of times we reference it.

David: On the show. Yeah.

Ben: So what's two?

David: What is two? Okay, big caveat here. We haven't done this episode. We need to dig in more. This episode is coming right up to the top of the list now. We need to do the work here. Another Google acquisition.

Ben: Let's pause. It's another Google acquisition. Listeners, take five seconds and think about, "What else did Google buy?"

David: 2008 when it happened. DoubleClick. Ben, when you first put this on the first draft of our list, I was like, "DoubleClick. Come on. No." I mean, there's revenue and stuff in there, but a bunch of that was already in Google. Then they did other stuff so we almost took it off the list. We actually dug in a little bit and we're like, "Wow, no."

The former DoubleClick assets now contribute a massive amount of revenue to Google. Google Ad Manager, that business line and the business unit that it's within which is almost all DoubleClick and AdMob. They acquired AdMob, when was that? 2012?

Ben: Somewhere in there for $750 million.

David: $750 million. If you put those two together, that's about $22 billion of revenue within Google today. Now, obviously, that's not search revenue, that's display revenue but that's revenue.

Ben: Listeners, the way to think about this is of the two big Google Ad segments, we're excluding YouTube here, there's the stuff they own. There are search engine ads that come up and that used to be called AdWords. It may still actually be called AdWords.

David: I think they just changed it to Google Ads.

Ben: Google Ads, okay. That's the larger segment. There's this other still very large segment, that's the stuff they don't own, the ads that they're showing on other people's websites which used to be called the AdSense.

David: Yeah. That predates the DoubleClick acquisition. That's why initially I thought like, "Oh, yeah. AdSense has been around forever. That wasn't DoubleClick." But AdSense, that product line is actually quite small these days, almost all in Google Network ads or something like Google Network advertising, maybe something like that, almost all of it is DoubleClick and AdMob.

Ben: It's wild. This requires a much more nuanced understanding of the digital ad serving ecosystem and understanding DoubleClick for publishers and understanding what's an ad network versus DoubleClick, is it a DSP?

David: DoubleClick for publishers and then there's DoubleClick for advertisers I believe. Again, we're not ad tech experts, but I believe that's the standard rails that all third-party ad tech runs on these days.

Ben: Yup. I know every publisher for sure still has DFP as the main container that all the ad networks plug into on their site. The TLDR on this one is they created an unbelievable amount of value. It's still massively a value creator for Google and we're excited to do an episode on that.

David: Yeah. They bought it for $3.1 billion in 2008. The current revenue contribution of this segment within Google is just a hair under $22 billion, multiply that out by the market cap and you get $126 billion in market cap contribution, net out the acquisition price, $123 billion in value creation.

Ben: Anyone should be trepidatious spending $3 billion, but when you have any guess that $103 billion could pop out the other end or I guess $126 billion could pop out the other end, have a little more faith.

David: All right. Number one on our list. No surprises here.

Ben: The king.

David: The king. The goat.

Ben: After three Google's in a row, we have Facebook buying Instagram in 2012. They bought it for a billion dollars. Recent estimates say that there's about $20 billion in revenue that comes from advertisers going into the very same portal on Facebook that they use to buy Facebook ads and instead of buying Instagram ads.

David: Or in addition, probably most often.

Ben: Yup. Facebook's current market cap, around $540 billion dollars. They do about $70 billion in revenue so $20 billion of this $70 billion comes from Instagram.

David: And that's nuts. Two-sevenths of Facebook's revenue is Instagram.

Ben: Yup. Not ridiculous to say that they contribute somewhere around $150 billion to Facebook's current market cap. Let's just round and say somewhere around $150 billion in absolute value return nuts. You think about how recent that was to 2012 that puts it at an 88% annualized return for Facebook.

David: Yeah. On our whole list, this is the highest annualized return. Now, only 8 years, but still 8 years the annualized return of 88%. Wow, 88% compounded annualized return. There's nothing more to say.

Ben: It's funny. This percentage does really force you to understand. For folks who aren't used to looking at IRRs or annualized returns, you'll notice even the best one isn't 100%. It really forces you to think exponentially, which humans are bad at.

David: Yeah. There's the Warren Buffett and Charlie Munger re-quote of, I believe it was Albert Einstein that said, "Compounding interest is the eighth wonder of the world." If you can compound something at 88% per year for even just 8 years, you get the greatest acquisition of all time.

Ben: It's true. We're going to do a little bit of a modified version here of the acquisition category. David, how are you thinking about this?

David: I went through our top 10, only the top 10 that qualify, and I categorized. For me, this may be slightly different than what we did on the episodes of the show, maybe different than what you think. I categorized each real quick. Instagram has a business line, DoubleClick business line, YouTube business line, Android product, NeXT, people plus technology, booking.com business line, PayPal business line, ESPN business line, the Google Maps Suite as a product, and then Marvel business line. Of that, we have two products, one people plus technology, and all the other seven business lines for me.

Ben: Wow.

David: You agree?

Ben: Yeah. I would not change a single categorization there. Did you call Instagram a product or did you call it a business line?

David: I call it a business line. That's maybe somewhat debatable.

Ben: It was not generating the revenue when they bought it. I think it's a product that plugs into Facebook's existing business line.

David: Yeah. That's debatable on that one. I could see that. That straddles the line.

Ben: Yeah, because we define a business line as, if not sustainable then having a path to sustainability business on its own, right?

David: Yup, like booking.com, of course. ESPN, of course.

Ben: Yeah.

David: YouTube, of course.

Ben: Was YouTube generating ad revenue and they sold? I guess that's not that important.

David: No, but it's pretty [...].

Ben: It's in the same way that Instagram would have implemented some ad products.

David: Yeah. Right, would have. Yeah.

Ben: Wouldn't have been as successful because it wouldn't have been aggregated on the back end with all of either Google's existing advertisers or Facebook's existing advertisers in either of those cases.

David: I think Android is definitely a product because Android got integrated into so much.

Ben: They're going to Window's style, sell licenses and OS?

David: It wouldn't have worked. There's no way Android's business model could have existed except within Google and the same with the suite of Google Maps acquisitions. They were building Google Maps, so they weren't gonna build the business of Google Maps.

Ben: Right. It's funny. I generally agree with your thesis that the dominant tech theme here is business line acquisitions. If you would ask me 100 episodes ago or 110 when we started the show, what do you think your takeaways might be? I think we had this categorization thing within the first few episodes. I don't think I would have told you that the most successful ones would be the business line acquisitions.

David: Yeah. What makes me think, it's a justification for venture capital for me because I know you could maybe make an argument that some of these super, super successful acquisitions that are business lines are the parent company, the bottom of the venture capitalists that they funded. Google funded YouTube for a long time. YouTube turned out to be an amazing business. It's a separate standalone business. Same thing about Instagram.

We'll talk about in just a sec about the acquisition and philosophies of different companies. That's how they think about things, like the Facebook “style” acquisition of, "We're gonna buy you and we're going to leave you alone." It's what it would be like if you're operating as a standalone venture-backed company.

Ben: Yup. That's a great point. It's funny. As you talk about the companies that show up here—we're drifting into playbook and themes here a little bit—notably missing is Amazon. Nowhere in the top 15. You've got Microsoft, Google, Facebook, Apple. You don't have Amazon.

David: Yeah. Okay, let's talk about this. The other thing I wanted to talk about in the category section is to use this to talk about the acquirers. Let's talk about each of these. Maybe can we start with Google? Google has four of the top ten.

Ben: Yeah, it's amazing.

David: People know Google. Google has the best M&A track record in history, right?

Ben: Yup.

David: Four of the top 10, and 3 of the top 4. That's pretty good.

Ben: And they were in a bidding war for Instagram.

David: That's right.

Ben: It could have been four of four.

David: It could have been for the top 4 and 5 of the top 10. Maybe Eric Schmidt, I can see. But Larry and Sergey, they don't scream like M&A genius to me.

Ben: Yeah. I was tempted to blame it on the M&A spree that they were on in late 2000 and early 2020.

David: We get enough shots on goal, you're going to hit some winners.

Ben: Yeah, but those ended up being the $20–$100 million pickups. They were doing as a bunch of YC companies with a bunch of Google alums.

David: Those were acquihires. They were just fine employees.

Ben: Yeah. These were bets. If you look at $1.65 billion, you look at $3 billion, these are big strategic bets that they were making out of the company in 2005 and 2006. How much was Google worth in 2006? $1.6 billion was very real money from that.

David: I remember. One of my interviews was the Google YouTube acquisition that had just happened. The question was, "What do you think about this?" I remember saying like, "Oh, man, they spent so much money. This seems crazy."

Ben: Here is my thesis on it. When you say Larry and Sergey don't strike me as M&A geniuses, obviously, Eric Schmidt was very active in the company at this point. He was the CEO.

David: He was CEO during all of these acquisitions, I think.

Ben: Very seasoned technology executive. But the way I think about Google is at their founding, they were tech geniuses. They figured out something very disruptive but didn't really realize it. They didn't know what to use it for.

David: As Doug Leone said, it took him a couple of years to figure out. They knew they had something, but exactly what it was, they didn't know.

Ben: They fell backward into a business model. They realized that, "As this thing that we're doing by having the fastest and most accurate search results with the lowest cost structure because of our distributed compute infrastructure, we can do that thing that Overture is doing and have an incredibly high margin, incredibly defensible revenue." “Oh, okay. I guess we'll start doing that.”

David: Yeah. But they didn't invent that.

Ben: I think the thing that they did realize was the power of that. I think it's a billions quote that Bobby Axelrod says, "When you have an advantage, press it." I think they became very good at figuring out, "Hey, how do we leverage our existing strategic position to just widen the moat and create more business lines or create things that just add tremendous high margin revenue to our existing business lines?"

David: Here's the interesting thing, though. All of these fantastic acquisitions happened 10 to 15 years ago for Google. You could argue, as we said at the top of the show, we're not going to include recent acquisitions in this because it's too early to tell. Maybe Google has made some recent acquisitions that are going to turn into this, but I don't think so. I think two things happen to Google, maybe three things in the period after when they're making these incredible acquisitions. One, Facebook showed up and started making some of these acquisitions. Whereas before, Google was the only scale tech acquirer, now Facebook is on the scene.

Ben: And tons of alumni at Facebook from Google. I mean, the whole Facebook Ads team was the original Google Ads team. Cheryl moving over.

David: Yup. Facebook gets Instagram, Facebook gets WhatsApp, and then Facebook gets Oculus, which is not on this list. It was a big bet to make. You should be making these bets as takeaway here. Playbook. NewsFlash. Make these bets. Though, maybe in response to that, Google starts shifting to this strategy of like, "Oh, we're going to build stuff in-house with Google X and whatnot." I just don't think that works as well.

Ben: That's a good point.

David: I see the rationale, but the incentives are wrong. If you're an entrepreneur and you're going to build a company, you're going to be all in and aligned. If you're making a Google salary and you're building a company, that doesn't work the same way.

Ben: I mean, we sit here the day after Waymo finally took external capital.

David: Right. I mean, maybe Waymo will become… Anyway, that's two. I think three, related to both of these, was the leadership change at Google. Eric Schmidt steps back, Larry Page becomes CEO. Larry and Sergey, both incredible entrepreneurs, incredibly stewardship of Google and everything. But this isn't their MO making these acquisitions.

Ben: Yeah, Google Xs. I don't know as much lore around the founding of Google X, but it does strike me as trying to recreate the conditions upon which Larry and Sergey invented Google Search. I'm sure there are many business school professors who studied this professionally, but it strikes me that you can do that once and then when you hit your tipping point, and what you need to do is grow and defend M&As a much more high likelihood of hit rate strategy, than trying to replicate those initial conditions.

David: Which brings us to the next company to talk about which is Facebook.

Ben: I thought coming into this, that my takeaway would be that Facebook is the greatest acquirer of all time.

David: Well, they got number one locked down.

Ben: Yeah, and ultimately, the value from number one as it continues for it in the future may actually prove that nothing else matters.

David: Power law. Number 1 beats 2 through 10 combined.

Ben: Yup.

David: Maybe.

Ben: But at the end of the day—holding my comments about online advertising—there are two very different modalities of this traffic. There's intent-based and then non-intent-based or I don't know what you call Facebook, but “mess around in your free time”-based.

They both serve an incredibly different and incredibly powerful purpose and they haven't really stepped on each other yet. They've tried in different ways. Google Plus tried. Facebook hasn't launched a search engine, even though they index most of the web which is still interesting. I do think both of those will continue as independent enduring juggernauts because they serve very different purposes for the types of advertising that they serve people and the moment in which they catch them.

David: Yup. It's interesting to think about Facebook. We were just talking about Google in this incredible era and then ceding that (definitely not intentionally) to Facebook. But Facebook also hasn't made acquisitions like this in quite a while. I wonder if that's because the venture capital industry has been so robust over the past few years, where it used to be like, "Oh, yeah. Facebook wants to buy you for a billion dollars, a couple of billion dollars, $20 billion."

Ben: "We have a small fund. That sounds great to us."

David: Now, you can raise money at a $10 billion valuation.

Ben: That’s a great point.

David: Yeah, interesting.

Ben: One of my big tech themes is like, "Oh, my gosh. These have all happened largely in the last 20 to 25 years." Based on your comment there, maybe the case was that there was a 20–25-year window where the best M&A of all time existed. If this ability to both stay private longer and raise huge amounts of capital, and there are people with huge funds to support you to do that, or as you said, robust venture capital infrastructure, maybe we don't see this thing as much anymore because if YouTube was started five years ago, actually what would happen is it wouldn't be a competitor to Facebook at this point. It would be a large independent company. I mean, TikTok is what would have happened otherwise, if YouTube was 10 years later.

David: It's both on what would have happened. It's a counterfactual and a counterfactual to a counterfactual, that they bought Musical.ly. Musical.ly is too early to tell if that's going to make the list, but it could. There's a world in which it could and that's a recent acquisition. It makes me very glad that we broadened Acquired from just acquisitions to your first IPO. These are great technology companies because the era of these types of acquisitions is never going to be over, but that fertile window from 2005 to 2012, I don't think it's going to come again.

Ben: Yeah. You needed the right overlap of a technology wave and a capital wave. I think the interesting thing about the technology wave is these are all Internet companies. You alluded to this at the beginning where you said, "Hey, we are going to cover non-tech companies, too, and we're thinking with a lens of covering non-tech companies." But when you think about it, software being distributed over the Internet.

David: Zero marginal costs.

Ben: Yeah. Holding my comments about YouTube, you look at Instagram's gross margins. They don't have to pay anything for the content. The advertisers are all aggregated anyway from their big stable with Facebook and even more people coming for the combine Facebook and Instagram. The bandwidth cost to serve it out to the billion-plus users on the platform now, not zero but much, much lower than the revenue that they're generating off of this.

David: It's not just cost structure, but it's also even more important than, at least by our bias lens, we can only have tech and a few media companies in here, just the ability to scale. If you're making widgets, you can't go from a million people buying your widgets to one out of every two people in the world buying your widgets within 10 years if you can do that.

Ben: Unless you're Apple.

David: Yeah, unless you're Apple I guess.

Ben: That's a fair point. There's margin, scale, and defensibility that all come. You're not going to unseat Instagram at this point. Try a Snap might.

David: Let's go run through quick the other big tech companies. Apple is on this list. But Apple's whole approach and MO to this is, "Oh, definitely you're going to make hardware, right?" They buy components.

Ben: “Apple buys small technology companies from time to time,” is always their comment.

David: We thought about that as a name for the show originally, right?

Ben: That's right.

Ben & David: Glad we didn't do that.

David: Yeah. Microsoft. What do you think?

Ben: They have none in the top 10. We've got Bungie as an honorable mention.

David: Yup.

Ben: Microsoft famously bungled M&A for most of the Ballmer era.

David: Yeah. Which is interesting, given they had such a robust team. They had probably a bigger, more robust team, but maybe they overthought things.

Ben: It's a couple of things. They all stem from the same thing. It's Microsoft's culture. Either the Not Invented Here syndrome just crushed anything that came into the point where they weren't going to play nice.

David: Right. Microsoft bought [...] at the same time Google bought DoubleClick.

Ben: Yup, that's the counterfactual. Or the crony culture or the cronyism that emerged from the culture there. People would make these acquisitions for political reasons within the organization and then refer to point one for wouldn't end up playing nice when they try to get integrated. I think, frankly, for as dominant as Microsoft was, and as much as the culture helped them get to that position, I think it was pretty value-destructive for being able to grow meaningfully through M&A.

David: Yeah. That makes sense to me. Under Satya now with the new Microsoft. Is Microsoft currently the largest company in the world by market cap?

Ben: It's up there.

David: I think they may be above Apple now.

Ben: I do know that their stock went up 50% between December 30th, 2018 and 2019.

David: Wow. Obviously, Satya is doing an incredible job leading the company. It would be interesting. We were just saying, the great golden age of M&A may be over. If it weren’t over, though, would Microsoft and can Microsoft (even in this era) make some...

Ben: You look at Minecraft. That's what they bought in the last few years.

David: They bought LinkedIn, of course. LinkedIn is never going to qualify because it was already so large, so much value had already been created.

Ben: Yup, which to your point, like this robust capital environment. Although, LinkedIn was the same era as they—

David: It was but they went public. LinkedIn went public right before Facebook. There was a huge drought of tech IPOs after the financial crisis. LinkedIn broke the logjam. Anyway, the only other one I want to mention, that we have to, Disney got 2 of the top 10 media companies.

Ben: Yeah. I had this blog post that I've wanted to write for a long time that might be just better as an LP show, but what is the same and what is different between content and software? I mean, if you look at software, it's really just content. I mean, it executes, but it's copyrightable. It's words-ish. It's a set of instructions that is processed by some brain just like an essay is. It has the same characteristic where you create it once and then you can create an infinite number of copies, so zero marginal costs.

This era, it has basically the same distribution cost as software does. Putting 4K video out there obviously is a little bit more expensive to host and distribute (YouTube) than other forms than SaaS, for example. These things are the same, but then the things that are different, you have to create the constant next thing in content in the way that you don't in software. You need to maintain it and stuff. When was the last time Slack added a new feature that was meaningful to your life? Never.

David: Right. Whereas we go for three weeks without making an episode and we start getting real antsy.

Ben: It's nothing. It's like what Doug Leoni says, "Without the next great investment, we just got the chickens back."

David: Twenty chickens right in.

Ben: That's how it feels.

David: We have to use that line more often. That's really good.

Ben: Totally. I mean, there's a difference between building an enduring thing that has a snowball effect and grows over time versus having to start from square one each time.

David: Yeah.

Ben: To me, the reason why these content things are on here is that they have zero marginal and low distribution costs so they can have this high gross margin characteristic, where you sink a ton of money into making it, and then you can amortize that over tons and tons of people. But the reason why they're not in the top one, two, three, four, five, and the reason why Pixar didn't make the top 10, is because it's all about your next hit.

David: That's so funny. Just stay with me on this for a minute. Pixar didn't make the top 10. Marvel and ESPN did. Marvel and ESPN are more predictable and repeatable. Pixar is dependent on the brand trust coming up with something great every year.

Ben: Yup.

David: Sometimes they don't. Sports are getting played every day of every year.

Ben: That's true. The content creates itself, too.

David: And with Marvel, the depth of the bench and existing libraries like, "Yeah, you got to make good content movies, got to be good and whatnot", but you're taking a lot less risk than you are on like, "Okay, brain trust, go make me something good."

Ben: Yup. That's a great point.

David: Okay. Playbook?

Ben: Yeah. Can we talk about the fact that the top three are all online advertising?

David: Yeah. Let's talk about that. What I think you're going to say is also my number one theme here.

Ben: There are a few different ways to attack this. One is a defensibility perspective, which I think is interesting. Once you already have all the advertisers and you already have all the users, it's a far cry to ever break that bond that's created.

The other side of that coin is being anti-competitive. The fact that our top three are all online advertising network effect businesses that were bought by other online advertising network effect businesses, that may pay some credence to the drum that Ben Thompson has been beating around. Do we need a new regulatory framework Internet? So, hugely value created for the companies that bought them. Open question of whether it's net positive for the world for this combination to exist. What other angles do you have?

David: I agree totally with everything you said. My angle on this, though, certainly for this insight that the top three are all online advertising markets, but also the whole list and all the honorable mentions, this comes back to me, like this is another “beat yourself over the head with a hammer” moment of, “You want to build a big company? Target a big market.” You're not going to build a big company if you don't target a big market. There are lots of big markets out there. Think about it for a minute. Online advertising is probably the biggest market in the history of markets.

Ben: It's interesting. Advertising all up (at least in the US) consistently tracks as 1% of GDP.

David: Yeah. You could argue that residential real estate is larger. I buy that argument. But those two, I can't think of anything bigger because advertising and online advertising, you're taking a [...] on everything that is sold, all those costs.

Ben: You get a [...] on the economy.

David: Yup. It's so big that it can support the three biggest acquisitions of all time.

Ben: If you look at household consumer spend, there's a big chunk. I think 30% is their housing and then 10% to 20% is their car and 10% to 20% is food.

David: But if you think about all of those, even housing advertising.

Ben: Right, Zillow.

David: Yeah.

Ben: But I guess the point I'm making is maybe it's the single largest high margin addressable market by a number of consumers perspective, but from an absolute dollar perspective I bet those other markets are larger. The only difference being, you actually have to do the hard stuff like making the food, bringing the food, whatever it is, cars, making cars, margins, segments. Online advertising knows no segments. Everybody Googles. Everybody has a social network account. It's crazy, and ease of scale.

I don't think the amount of revenue available in online advertising compares to the amount of revenue available in residential real estate. However, the reason these market caps are the way that they are and the reason these multiples are the way that they are, is gross margin, lack of segmentation, and gross characteristics.

David: Ability to scale, yes. Now, what we're talking about at the end of this episode in our clips with Hamilton as we talked about in the whole episode with him, the mistake that VCs always make is they only look at market size. That's only one half the equation. The other half of the equation is your ability to create defensibility within that market.

We haven't talked about that in this episode, this is not the time and place for it, but all of the top companies on this list were able to do that. The other two quick sub-bullets of that that I want to say are, if you look at all these acquisitions on the list with a couple of notable exceptions (DoubleClick being a really notable one) these acquisitions were done early in that particular markets development in the life cycle, the market. Hamilton also talks about this. It's the growth phase of a market, that's when you can create power. You can create defensibility. If you wait too long, you can enter markets later but you're never going to dominate a market unless if you until later.

Now, DoubleClick is interesting in that Google bought that in 2008. I think DoubleClick was founded in 1995. But you could argue. That was an evolution in the market anyway. My other sub-bullet is, if you're big-game hunting, if you're big elephant hunting, price doesn't matter, bring a big gun. You can spend $1.65 billion for YouTube and still end up number three on the list.

Ben: All right. Before we move into our final section here, we'd like to thank Wilson Sonsini, the official legal sponsor of season 6 of Acquired. Wilson Sonsini is the premier legal adviser to technology, life sciences, and growth enterprises worldwide, as well as the venture funds, private equity firms, and investment banks that financed them. Thank you to WSGR.

David: Thank you.

Ben: All right, David. In the final section, most commonly known as grading in every other episode, we're going to use this to talk about things we might want to adjust in this list.

David: Acquired adjusted ranking.

Ben: Acquired adjusted ranking. We're not going to actually change the rankings at all, but there are some things like you can't serve all masters and there's a master we didn't serve namely profit contribution, gross margin, the strategic value that deserves to be talked about here. This is our opportunity in this to grade.

David: Are there entries on this list that maybe should be higher or lower?

Ben: Yeah. First, let's just talk about how unbelievable Instagram is again. There's a defensibility amazingness to it that I think gets harped on over and over and over again. There's another thing that they don't pay the creators for the content on it. Instagram generates $20 billion in revenue from content that they get for free.

David: It's incredible.

Ben: Yeah.

David: What’s interesting is—we're going to talk about YouTube in a sec—they got to pay for the content. They got to pay the creators. Then you look at Facebook, you're like, "Oh, Facebook gets their content for free." But the nature of the content on Instagram is super high. It's art. That content has value, whereas Facebook content does not have value. If it does, like me typing out a status update or whatnot.

Ben: You haven’t been on Facebook in a while. It's the same as Instagram. It's videos. It's—

David: Oh, is it? Yeah. I don't think I've been on Facebook.

Ben: Professional photographers and brands and people creating incredibly highly produced content.

David: They're putting their content for free. I love that. Yeah.

Ben: You could go spend a million dollars to make a film that you released on Instagram for free. Crazy.

David: Crazy.

Ben: A million might be high, $100,000. Compare that against YouTube where they pay something like half of their revenue out to creators. When Google says, “We generated $15 billion in revenue in our YouTube segment last year,” there's an argument about if that's even revenue. They chose to report it as revenue and have higher revenue, lower gross margin percentage business line there rather than I think what you could have done and said, "We have $7–$8 billion revenue here."

David: This is DMV.

Ben: Exactly. That is what it is. Also, YouTube is serving 4K content. Their bandwidth and hosting costs got to be at least $3-ish billion. Instagram is I'm sure are high, too, but you think about the level of compression that people are totally happy with on mobile screens and the fact that like, "Oh, they haven't released an iPad app." They’re resource-constrained but, gosh, you might want much higher quality stuff if you're having it shipped down to a Retina iPad Pro.

I guess the macro point here is I think it's always worth comparing two similar companies like this, YouTube and Instagram. Instagram doesn't pay for a lick of their content. YouTube has half its revenue going out the door. I think probably significantly higher hosting and bandwidth costs.

David: Yeah. It's important to know. too. We're not going to do value creation, value capture on this episode, but they're a bunch. We're not talking about what's good for the world, what's not good for the world, having a lot of arguments on Instagram is bad for the world and how it is right now. But purely as a shareholder from an investor economic perspective, if I could hold shares on Instagram versus YouTube, I would put all 100% of my dollars between those two into Instagram and zero into YouTube, even though I love YouTube.

Ben: Burn. Totally.

David: It's everything we were just talking about.

Ben: Yeah. The other thing that's worth talking about YouTube (now that we've denigrated it), is the strategic value, which we didn't talk about anywhere in here. I think this is still true. YouTube is the second highest traffic search engine in the world. And they're owned by the highest traffic search engine in the world.

In the same way that with WhatsApp we said, was it worth Facebook paying 20% of their value to go and make sure that their core isn't threatened? It's hard to put a price on Google, who also owns the second most valuable search engine in the world.

David: Yup.

Ben: I think it deserves to be up there probably for that reason alone, albeit that's not how we made this list.

David: Yup. Another one that I want to discuss here, again, we're a little bit out of school because we haven't done the episode on it yet and we absolutely need to, is VMware. The only reason VMware is as low as it is, is because of this crazy thing going on with EMC and Dell right now. To acquire 80% of VMware for $625 million, if I could go do that again, I would go mortgage my house a million times over to do that.

Ben: It turned out virtual machines were a thing.

David: And also reflects all the playbooks we were talking about early in a big market. Also interesting that it's the only kind of enterprise company on this list.

Ben: Oh, that's interesting. When you're talking about attacking big markets, I thought that was the direction we're going to go earlier.

David: Consumer is a big market.

Ben: Yeah. DoubleClick is arguably—

David: It's the end-customers as consumers.

Ben: Right. It makes sense that the biggest companies would be consumer companies because the consumers pay retail price for something, and then there are 11 businesses that are chopping up all the revenue that you gave to the retailer along the way to power the back-end of the retailer that all has to add up to less than what you bought it for otherwise, the retailer’s losing money. It makes sense that the biggest companies would be consumer companies and the most successful acquisitions would be consumer acquisitions.

David: Makes sense.

Ben: Yeah. I think we pointed that out before.

David: Do you want to make your Pixar apology statement, not that you're sorry, but a justification for Pixar here?

Ben: Of why is it all the way down at 14?

David: Why it's worth more than what we say it is.

Ben: Yeah. That's right. We talked about this last night. A thing that we didn't do is also count the Disney animations value that it created.

David: And a revitalization of the whole company.

Ben: Totally. What's the phrase from the Iger book? “So with animation, goes the company.”

David: Yeah.

Ben: Jeffrey Katzenberg did an incredible job with Aladdin, Beauty and the Beast, and Lion King. We had him leave even though we had the Lilo and Stitch era and we had Tarzan. Those are the good ones. You have Disney Animation falling off a cliff which as animation becomes a company. In acquiring John Lasseter, Ed Catmull, and the rest of Pixar, they revitalized—

David: [...] doctor and the whole brain trust.

Ben: Totally. They revitalize Disney in a way that it's hard to put a value on. The easy way to put a value on it is just multiply the number of basically that value that we said that it contributed by two.

David: For every one Pixar movie, you get one Disney animation movie.

Ben: Exactly. That's been largely true. Both studios have basically done one big mega-hit per year. Some sometimes they try to, but sometimes you get Frozen, like it worked. If we were considering strategic value, then I do think you'd probably want to say Pixar contributed not, what did we say, $3 billion a year but $6 billion a year, something like that. But that wouldn't materially put it up with some of these other ones.

David: Software, it's hard to beat.

Ben: Yup. Any other comments?

David: I don't think so. The only other topic that we said in the beginning, I'll say again. We're probably missing some in here. Please, write to us in acquiredfm@gmail.com, join the Slack, hit us up there, but I can't wait to do a DoubleClick and a VMware episode. It's gonna be super fun.

Ben: I think this just pointed out the need to do both of those, if not this season then soon.

David: Yeah.

Ben: All right. Carve-outs, we haven't done them in a while.

David: Oh, we haven't done them in a while. I got to. First is the piece of software, To-Do List. I'm loving it.

Ben: Me too.

David: Apple Reminder is just like… I just finally couldn't take it anymore. It got buggy. It was so icky even though my whole life ran on it for years. I tried a whole bunch of different options and finally landed on To-Do List and I just love it. It's great. It's everything I want. To-Do List reminder which sounds simple, but I managed my whole life on it.

Ben: I can assure you as someone who's built a to-do list, ignore the [...] it's actually harder. This is any piece of software, but it's actually harder to make it feel simple than it actually is to make it feel [...].

David: Everything should be as simple as it can be, but no simpler. To-Do List does a really good job of this.

Ben: What's the Hamilton quote, "Simple but not simplistic"?

David: Yes, that's right. Simple but not simplistic that you'll hear from Hamilton in a minute here. Ben, on the WhatsApp episode, your carve-out was computer glasses?

Ben: Yup.

David: Out of sponsorship, but Felix Gray, direct to consumer computer glasses brand. Fans of the show listen and reach out to us and they sent us pairs of computer glasses and I've been using them. They're awesome. I love them.

Ben: Welcome to the party.

David: I'm very lucky my vision is normal. But when I wear glasses, I look very erudite. But I'm almost like, "I'm not going to be that guy that wears glasses that don't actually have prescriptions just to look erudite. Now, I have an excuse to look erudite.

Ben: I love it. I don't actually know what that word means.

David: Knowledgeable, intelligent.

Ben: I see. I think you look that way anyway.

David: Thanks, Ben.

Ben: All right. My carve-out is the master class taught by Deadmau5. For anyone out there who’s masterclass subscriber or wants to give it a shot, I spent a couple of weekends ago watching and then experimenting a little bit on my own with producing some music and watching the Deadmau5 class. It was awesome. It's cool that he agreed to do it because with that many hours of just somebody's talking about their craft, you really get a sense of how his creativity works.

It's interesting from a learning perspective, learning the software. It's interesting from watching the ways in which he is resistant to using a lot of out-of-the-box software or cookie-cutter loops and he's like a massive wall of things that he's actually plugging into and dials and doing it all sort of analog and then recording the analog sounds.

David: Acquired goals.

Ben: Dude, it's really cool and it's really creative. For anyone who likes to watch the creative process in action, I highly recommend it.

David: That sounds awesome.

Ben: Whether you're an EDM fan or not. So, I can't recommend it enough.

David: Do you think D-Sol watched it and learned from it?

Ben: DJ D-Sol? Probably not. I don't know if that guy has the time on his hands to be able to.

David: Yeah, probably not.

Ben: Yup. All right. Listeners, if you aren't subscribed and you like what you hear, you should. This particular episode is different and that it has an accompanying blog post that we're going to publish the full data table and a little probably short paragraph on each company. We got to write it so who knows exactly what it will be. But the hope is to create the first enduring piece of Acquired artifact outside of just these 100 plus episodes that we've done that is a little bit more referenceable and I think discoverable for folks who aren't already big fans of the show.

Feel free to click the link in the show notes to check it out, to share it with your friends. We'd love to have a conversation about it both on Twitter at acquired.fm and in the Slack.

David: By the way, you can join the Slack. Go to our website acquired.fm and there'll be a big button to get an invite to the Slack there. We have 5000 people hanging out there, all sorts of great stuff going on.

Ben: It's true. Stay tuned after this for an excerpt from our LP episode with Hamilton Helmer who is the author of 7 Powers. If you'd like to become an Acquired Limited partner, subscribing gets you access to our LP show, where we dive deeper into the nitty-gritty of building companies in real-time. To listen, you can click the link in the show notes or go to glow.fm/acquired and get a seven-day free trial for all new listeners. With that, thank you to Silicon Valley Bank and Wilson Sonsini. We will see you next time.

David: See you next time.

‍