Ben and David return to technology acquisitions by examining a classic: eBay's 2002 purchase of PayPal.
Items mentioned in the show:
"The Carve Out":
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or just-plain-hilarious transcription errors)
Ben: Yeah, in fact those Drake lyrics, “I got enemies, got a lot of enemies, got a lot of people trying to keep me from…” Yeah, I don’t know the rest but it’s great.
Welcome to Episode 11 of Acquired, the show where we talk about technology acquisitions that actually went well. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And this is our show. Today, we are talking about eBay acquiring PayPal. An older acquisition, one that kind of set the tone for a lot of modern technology acquisitions, changed the value forever, birth of PayPal Mafia, lots of great stuff to come. But first I wanted to remind you if you have not yet and you like the show, we’d really appreciate a review on iTunes.
David: Yeah, and as always, hit us up on Twitter @AcquiredFM or @gilbert or @djrosent. We love feedback.
Ben: We do. We promise we’ll listen and we’ll try to make it better. We’ve heard rumors that audio was a little quiet in the past, so working hard to make sure that we… at least that, you know, appropriate listening volume now.
David: We’re iterating.
Ben: We are, we are. We’re a little startup ourselves, it’s cute. Also, I apologize for the last month of no episode. We got some people saying, “Finally, a new episode.” I had ACL surgery but I’m a real human now and I’m fully off the oxycodone. So, we’re back in action.
David: You should know Ben has been a real trooper here. We were recording last time. You were, what, like 5 days post surgery if I’m remembering that right.
Ben: Yeah, yeah. I was barely post oxycodone. But yeah, stay away from the narcotics, kids. That’s my advice.
David: All right. Let’s do it?
Ben: Yeah, acquisition history and facts.
David: Let’s do it. Acquisition history and facts. Man, I am excited for this episode. There is so much to dive into and unpack here. So I will get through the acquisition history and facts quickly, but first, a quick note. We're going to focus this show on the first act of PayPal, the founding, the acquisition by eBay and then the first period of history thereafter. We may do a future show on the spinout that happened last year where PayPal was spun back out from eBay and we could also do another show on PayPal an acquirer.
Ben: So they themselves have done a few interesting ones especially recently.
David: So much interesting stuff with this company.
Ben: But there’s definitely a whole episode for us to do.
David: There’s at least one more episode in the tank here. So with that, okay.
So, December 1998, Peter Thiel, Max Levchin, and Luke Nosek found a company that they called Confinity and they decided to make an application, a payment and cryptography service for Palm Pilots.
Ben: Amazing. The PayPal that we use today started to be money back and forth between Palm Pilots.
David: Quickly they realized that that’s a small market and in 1999 they decided to switch over and start working on a money transfer service that they’ve come up with and they called the product “PayPal”.
Also in 1999, a guy named Elon Musk, you might have heard of him, he fresh off of founding and selling Zip2 starts a company that he calls X.com as an online financial services and email payment company.
Ben: Domains were cheap back then.
David: Yeah. Geez. X.com. March of 2000, a short while later, they decided to merge, apparently orchestrated by Michael Moritz at Sequoia who was an investor in Confinity. Neither confirmed nor denied, but that’s what the internet says. Elon from X.com initially remains the CEO of the company that quickly changes and Peter Thiel comes back as CEO of the combined company.
In October of 2000, Elon was still the CEO and he makes the call, the PayPal product is doing so well that they focus all the efforts of the combined company just on PayPal. Then in 2001, they renamed the company as PayPal.
Ben: Yeah. There’s a classic case of Elon being Elon and doing what he does best and that’s focus.
David: Yup. No more Palm Pilots. Then in February 2002, PayPal goes public and it’s… actually, this is interesting. Remember this is February 2002, this is after the crash, after the .com crash. This was the first consumer internet company to go public in 18 months, and it does pretty well. PayPal has a close on the day of the IPO, has about $1.2 billion market cap. Very quickly thereafter, only a few months later in July 2002, eBay announces that they’re acquiring PayPal in all-stock deal depending on how you account for the transaction somewhere between $1.2 billion and $1.5 billion, which was about a 20 percent premium to the stock’s closing price the day before.
So interesting and we’re going to dive far more deeply into this. But pretty quickly the whole team leaves. I believe the status is within four years of the acquisition, over half of all PayPal employees have left and including all of the founders of both Confinity and X.com. Interestingly, actually the history of PayPal, the president of PayPal within eBay has been a little bit of a… I don’t want to say a hot seat, but some interesting figures have gone through there including Scott Thompson. Do you remember him, Ben? This is the guy who left being the president of PayPal to become the CEO of Yahoo! and then it was very quickly revealed that he had completely fabricated his resume.
Ben: His pre PayPal resume?
David: Yeah. I believe, I could be wrong in this, and that he said he had a computer science degree and it turns out he didn’t have a college degree at all. Yeah, it was a whole big controversy and then ended up in Marissa Mayer afterwards coming to Yahoo!
After him, David Marcus, who had actually come to PayPal from the acquisition of Zong which was a payments company that he had founded, was the next president and he is now running Facebook Messenger. Interesting.
Yeah, and then PayPal remains part of eBay for 13 years during which sees meteoric growth and then in July 2015, as mentioned, eBay under shareholder pressure from Carl Icahn spins off PayPal into once again a separate standalone publicly traded company. When they do, PayPal is worth at the time, when it begins trading, about 1 ½ times the value of eBay. So it is significantly more valuable than all of eBay. Today, PayPal has about a $46 billion market cap as a public company.
Ben: The question we’re here to address today is: was it a good decision for eBay to pay that call it $1.3 billion to in-house PayPal given where they are today?
David: So much to unpack financially, no doubt.
Ben: Yeah. I mean, should we take this from a shareholder of eBay’s perspective where we assume that they end up with one PayPal share and one eBay share?
David: Which is what happens at the spinoff, yeah.
Ben: Yeah, yeah, that feels reasonable. I think we can talk a little bit about the actual impact that it had on eBay’s core marketplace business, but I think it will be interesting to look at how did it feed the marketplace business, and how did the PayPal business grow, and would the PayPal business have grown like we’ve seen it grow if eBay hadn’t acquired it.
David: Yup. Let’s do it. Should we start it with acquisition category?
Ben: Yeah, I think there’s a few questions that I sort of want to get to before we categorize. There’s a few interesting nuggets in here. The biggest one that I think is interesting is eBay transactions generated two-thirds of PayPal’s payment volume at the time of the transaction.
So here’s PayPal where they finally have found product market fit because people seem to be using it all the time for this eBay thing. They’re not really succeeding in pure payments. They’re getting embedded on some websites but that business is largely fed by the fact that eBay sellers are using it on other websites that they operate. eBay’s effectively… their entire market segment and their distribution to get to new markets.
David: Ben was mentioning to me a quote. Was it a Peter Thiel quote that PayPal was essentially an app built on top of eBay? I thought maybe I read that somewhere.
David: Anyway, maybe that’s essentially what it was.
Ben: Yeah. That’s a precarious position for a company. eBay was in-house building a very similar solution and they were partnering with Wells Fargo. I think it was called Billpoint.
In looking at kind of the way that eBay was facing decisions at this point was okay, we love electronic platforms in our platform. I think at the time of the PayPal acquisition it was about a third, let’s see, Forty percent of eBay transactions. And Meg Whitman who was the CEO at the time said that she hopes that figure will increase dramatically.
So eBay’s highly incentivized to make these really fast electronic transactions occur. They built Billpoint in-house. It’s an interesting sort of business on its own clearly as PayPal was demonstrating. eBay faces this decision as okay, 1 in 4 auctions on our platform are settled with eBay. They’re pretty much entirely dependent on us.
David: Settled with PayPal.
Ben: Sorry, settled with PayPal. They’re pretty much entirely dependent on us, we could buy them. We could build this thing in-house, which they did call Billpoint. We could cut them off. But that exposes them to risk of regulatory pressure.
So there’s this interesting dynamic going on there where it’s like a game of chicken.
David: Not to mention that this product that the PayPal team had built is really, really hard.
Ben: Yeah, and among other things like the way that they actually got classified as not a bank but a money transfer service. There’s a lot of regulatory things that they did that were really hard but from a product perspective, making people feel safe, sending money over the internet when the internet is till this immature thing and then actually backing it up with the fraud detection, I mean, there’s bodies buried all over the place in these PayPal-like services at the time that didn’t succeed because they couldn’t keep a lid on their fraud detection.
David: Yes, absolutely and interestingly which we’ll get more into later. The core of PayPal’s fraud detection technology became the inspiration for Palantir.
Ben: Wow, interesting. I knew it’s Peter Thiel but is that like other people from…
David: Yeah, some of the core engineers that were doing fraud detection at PayPal helped start Palantir with Peter Thiel. A lot of that technology came from the frau detection days of PayPal.
David: If you think about the types of jobs that machine learning is uniquely qualified for, fraud detection is right up at the top.
David: Let’s move into category and I think we can discuss a lot of these themes and unpack them as we go.
David: So I’ll go first with category. I’m going to say business line here, but it’s an accidental business line. Without knowing exactly what the eBay executives were thinking at the time, I could imagine that they thought about this as a feature acquisition almost. “Gosh, electronic payments are a critical part of our product and our marketplace. We’ve been trying to do this ourselves, these PayPal guys are doing it way better. We should just buy them and implement them as the feature on the site.”
Then over time, it turned out that that was actually in and of itself a way bigger and better business than eBay itself.
Ben: Yes, it’s interesting. I don’t think eBay tried to get into the peer to peer payment space. I mean, I think yeah, it was a very Apple thing to do as a very we want to create the best user experience by making sure that we control all the key components of our product.
David: Which is crazy to back up for a minute. At the time of the acquisition, you said about 40 percent of settlements on eBay were being done electronically in total.
Ben: That’s correct.
David: So that means 60 percent of eBay transactions were not settled electronically.
Ben: Yeah. I was trying to figure this out. Does that mean they’re mailing checks around?
David: I have no idea. That’s crazy.
Ben: Yeah, it’s easy to forget. I mean, it’s what, 14 years ago what the world was like where you couldn’t just transfer money everywhere
David: I was at high school. People were buying Beanie Babies.
Ben: And I was selling Beanie Babies on eBay. I think I made about 550 bucks. I sold a Jerry Garcia bear for 350, fish for 100.
David: Oh, man. I remember that one.
Ben: Yeah. And like an inchworm or something for 100.
David: I think we should take a step back too and just do a little more stage setting here, which is it’s hard for us to remember. I would argue fairly young. I would like to think of myself as fairly young, but you know, these were the days. I mean, I was like…
Ben: David, I’m going to Snap from you in a while.
David: I love Snapchat though. You’re just not on my, you know…
Ben: Oh yeah, that must be it.
David: But I was like a freshman/sophomore in high school at this time and these were the days right before the bubble burst when I remember my classmates trading internet stocks during breaks between classes in high school in my freshman year. I remember one of my buddies buying a whole bunch of Western Digital stock which was a hard drive manufacturer.
Ben: Best hard drives there are. Just not using a lot of hard drives right now in computers. I think you nailed it. I think ultimately it was a control play where there was risk that was going on by PayPal having a large part of their business dependent on something they didn’t control and they wanted to bring that in-house. They saw it as an accelerant to their business to make it more reliable that you were going to get paid by transacting on eBay. They were clearly billing it themselves and an opportunity to bring this in-house. It was probably the right one and they took it.
Now, what it turned to, I think, was a behemoth that was not in the cards at the time and it would be super interesting to look at what was in Meg Whitman’s head and if they really though that this could be something that they grew independently because I think there’s been a lot of discussion since then, kind of like hindsight is 20/20 that that was the vision the whole time was to grow this new internet business where we can just transfer money anywhere all the time.
I think it was the original vision for PayPal but they very quickly realized like wow, there’s this very specific need for when people need to transfer money and that very specific need is after auctions on eBay.
Ben: Today, it’s going to something tremendously bigger and I don’t think it’s what they saw. So I think they thought they were acquiring a feature.
David: I think that’s likely too. It’s interesting too, you know, one of the sort of aphorisms in the tech world is you can’t build a really big company on the back of somebody else’s platform. This is the example that both proves and breaks the rule like PayPal became a huge company obviously and did it on the back of the eBay platform, but ended up having to sell to eBay because they were so captive to that platform. I guess it gets a little bit into the, you know, what would happen otherwise.
Could you happen in those fragile early days? Remember, it was 13 years between the acquisition and the spinoff when all of the vast majority of the now value and PayPal was created. Could that have happened if during those early years when it was so much dependent on eBay, it had been a separate company and eBay could have made changes to completely kneecap PayPal?
Well, yeah, I think we’ve moved on to the what would have happened otherwise segment.
Ben: Yes, absolutely.
David: Officially. But it’s interesting too to think about this. I’m thinking about this question of building a big company on the back of somebody else’s platform and I think perhaps you could make an argument that you can do it if you can essentially raid the platform, get all the users from it and then migrate to your own platform. So like I’m thinking about Pinterest grew really fast in the early days for a bunch of reasons, but one of them being that – I don’t know if folks remember – they really figured out viral Facebook user acquisition. I was getting messages all the time, emails from Facebook of “My friend Ben has joined Pinterest. Do you want to join as well?” Those users of Pinterest were successfully able to migrate those users over to their own ecosystem.
Now I’m thinking about PayPal back in those early days when it really was just eBay that was the primary use case. I don’t think they were migrating anybody from using PayPal to settle their eBay transactions to them doing peer to peer money exchange, which is the big business that PayPal has built over time. But would they have been able to do that successfully had they not been part of eBay? I don’t know.
Ben: Yeah, the companies that have done that well have been really sneaky about it and have succeeded and flown out of being crushed like just in the nick of time. A good example is actually LinkedIn, right? They grew on the back of stealing your entire address book and then emailing everyone.
Ben: And it only cost them $100 million or something a few years later when there’s a gigantic class action suit for doing that. They’re a real successful company because they piggybacked off that existing network.
David: Or think about Airbnb. There are a bunch of articles out there and Airbnb doesn’t talk about it that much but definitely in the early days they were auto-posting to Craigslist and pulling a whole lot of both supply and demand out of Craigslist and onto their platform.
David: But again, I think the key is you have to kind of exfiltrate the users and then keep them captive within your own ecosystem.
Ben: Right. I was young at the time but I don’t necessarily remember ever like PayPal only existed to me when I was, again, selling beanie babies and then boy scout patches on eBay as my way of transacting on eBay. It never really seemed like the purpose of it was to…
David: Anything else.
David: Interesting. So, had eBay not acquired PayPal when it did, PayPal is a public company, what would have happened to both companies? We’ve just been talking about PayPal. Perhaps it would have been hard for the… eBay could have made life really hard for them. What about eBay? You were talking earlier about what’s the value that PayPal brought to the eBay marketplace.
Ben: Well, similarly, could PayPal have made life hard for eBay and could PayPal have done something where…
David: Could they have started their own marketplace attached to PayPal.
Ben: Oh, wow. Yeah, that almost seems farfetched. It’s such a different and large business.
Ben: Yeah. I don’t think PayPal had a whole lot of power over eBay other than if they went away, maybe people would have been kind of uncomfortable with the electronic platform that eBay was providing because it wasn’t as secure yet, but I bet eBay would have figured that out pretty quick.
Yeah, I think this is a slim scenario but you can imagine a scenario where PayPal finds a different market besides eBay. The money transfer, what they have grown into today which people eventually did become very comfortable with but were uncomfortable at the time. So they probably would have had to ride out some tough times for a while if they had moved away from eBay, and eBay maybe doesn’t figure it out and figure out the fraud detection, and then people are uncomfortable transacting on eBay and they never get everyone onboarded to their own payment platform, and people don’t like using eBay because they still have to use an analog system. Then someone comes along and builds…
It all feels farfetched actually. The more I talk about it, it’s like they would have figured it out. Actually, before that, PayPal just never would have moved away. That was the cash cow. Finally, they had found product market fit in this, in being effectively like a vendor or supplier for, yes, probably a vendor for eBay.
So what would have happened to eBay? I can’t imagine a scenario where eBay doesn’t win here.
David: I think the only, well, not the only but one potentially negative picture you could paint for eBay here is if you think about over the subsequent 13 years between the acquisition and the spinoff, PayPal grows so much that it has colored 60-65 percent of the entire value of the company, maybe even 70 percent. Certainly all of the growth engine of the company, eBay have been able to recruit and attract and retain top quality talent if it didn’t have this really sexy growth business attached to it. Would eBay have stagnated a lot earlier?
Ben: That’s a great point. Yeah, I think that’s predicated on the idea that actually that status or that state could actually persist for many years. The state of them being separate businesses and both of them needing each other, that symbiotic relationship.
David: It seems hard, I mean, we’re biased by history and what actually happened here but it does seem hard to imagine these two companies existing separately.
David: Until you get to the point where you are now where PayPal is really a large and viable business with eBay only being a minority of it.
Ben: Yeah. I mean, in my opinion, it’s like here’s what happens: if eBay doesn’t acquire PayPal in July to October of 2002, eBay acquires PayPal for a different price at a different time.
David: It’s interesting to think whether that would be higher or lower.
David: It could go either way.
Ben: That’s true.
David: All right. Should we move on to tech themes?
Ben: Yeah, yeah, I think that’s interesting.
David: Okay. I’ve got it. Well, I really want to dive in here. This is somewhat related to the acquisition but I think we would just be remiss if we didn’t really talk about… I mean, for me, this is the PayPal Mafia. I think you could make a very valid argument. It might even be hard to argue against a thesis that this single event, this acquisition of PayPal by eBay was the catalyst to create everything that we now know of as Silicon Valley and the technology startup ecosystem.
We’ll unpack this but just the chain of events set in motion by this acquisition is really incredible, when you think about the people that were at PayPal. There’s a great article on the Tech Republic – we’ll link to it in show notes – it’s titled, I believe, How the PayPal Mafia Redefined Success in Silicon Valley. Many of the founders of PayPal talk about how they were all these incredibly young ambitious people and they’ve just been through this super difficult but exhilarating experience at PayPal where they had to figure out a whole bunch of stuff that it had never been done before. Like we were saying, it was really hard. Then they made a bunch of money and then they showed up at eBay, and it was a complete culture clash, and they hated it there, and they all left quickly. But they were all still really young and ambitious and wanted to prove themselves.
So I’m going to talk about two sets of companies here. The first are companies founded by PayPal alums: LinkedIn, Yammer, Yelp, YouTube, Palantir, SpaceX, Tesla, and then Reddit was not founded by YouTube alums but it was the CEO of Reddit for a while, Yishan Wong was YouTube alum or a PayPal alum. So that company is actually founded by this group of people. Then, other companies in Silicon Valley and related environs where PayPal Mafia alumni were very early investors or advisors instrumental in starting the company – Facebook, Uber, Airbnb, Square, Pinterest, Stripe and it just goes on and on and on.
David: I mean, you’re talking practically every major company that Silicon Valley has produced since that acquisition can trace its history either directly or indirectly to the PayPal Mafia.
Ben: Yeah. I made a joke today before the show. I was reading up and I was like, “Ha! We could get a guest for this but all the people that were there are so insanely rich that why would they ever bother to go on a podcast?” The funny thing is it's not from the money they made from PayPal.
Ben: I mean, people got rich. People got $100 millionaire rich. Or at least like high 10’s.
David: Well, don’t forget there’s been a lot of delusion at PayPal. They’d raised, I believe, $180 million. I think that includes the capital they had raised in the IPO. There had been a merger companies, there are lots of founders. There’s no way that individually any of those people became hugely filthy rich after that acquisition.
Ben: Yeah, it was more about what a whole bunch of really smart people recognized and did after that, an opportunity that they saw because of the way that they grew PayPal. Actually, this is a good segue into what I was thinking about. PayPal sort of invented a lot of the paradigms that we see in startups today.
Ben: They were the first business to do the whole “if you invite a friend, you get free money” thing and it’s like sort of free money now like oh cool, if I invite a friend at Uber, I get $15 in my Uber account. PayPal literally gave you a dollar, five dollars. They literally gave you money. They would email your friends like “congratulations, you have free dollars.”
David: They invented viral acquisition.
David: So yeah, I was just talking about the company founding and investing part. Let’s talk now about the actual tactics that are just now commonplace. They basically invented growth hacking. So, viral user acquisition embeds. You could embed. PayPal was one of the first, if not the first, app that you could embed in other web apps. Then think about a direct company outcome progeny of PayPal was YouTube and how did YouTube succeed. It was embeds.
Ben: It’s so funny, I have a good story here. I built a website for my buddy Neils. Neils, if you’re out there listening, I named you. Where we were selling t-shirts and I was a super early web developer and I didn’t know a lot of the best ways to do an online store front and the way that we built out this t-shirt website was by generating a unique PayPal button for every skew and I just literally embedded the little PayPal form on every single t-shirt page that was a subdirectory on our site.
David: That’s awesome.
Ben: It worked. It just completely worked. I didn’t have a storefront. We weren’t using ever inventory management and it’s fine because we didn’t sell that many t-shirts. But at the end of the day, we had a working website by a bunch of PayPal button embeds. That’s how a lot of little storefronts worked for a long time. I think they obviously succeeded primarily because they were such a huge part of PayPal but even after that as they were growing their business off PayPal for a long time, I think that’s what a lot of people did. “We accept PayPal.”
David: They’re off of eBay.
Ben: Or yeah, sorry, off eBay. God, they’re so one and the same to me.
David: I know. It is hard to untangle them on your mind.
Ben: I have one other thing too.
David: Go ahead.
Ben: All right, I’ll take this one. The interesting thing about payments are something that we see in advertising today – a parallel I’m going to make between the two. We’ve been talking a lot over the past 10 episodes about the rise of Facebook and Google as ad platforms and stealing a lot of the advertising spend away from nonsocial ads, so display ads, and understanding that brand advertising in particular and online advertising as a whole as a “winner take all” type market where you really need scale before you can rival the big guys now because they’re such excellent targeting that you have to be able to choose any bucket that could be incredibly narrow, you know, tap dancing 24-year-olds in Washington named Ben. Not named Ben.
David: But Facebook could find those people.
Ben: Right, right, and have a deep enough well. So those are businesses that have a relatively high fixed cost and require massive scale to make the business actually work. Payments are sort of the same thing. I mean, PayPal really needed massive volume before they could have wide adoption and they have an incredible flywheel where every person that has a PayPal account can be a sender or a receiver of money, and it becomes comfortable using the platform. So the first time they get someone to send or receive money once, they make everyone else’s experience more valuable. So it’s a scale platform where it has razor thin margins on payments and really large fixed costs especially in those days where they’re building data centers and they need huge volumes to make it work. That’s something that they saw with eBay and they did really well.
David: That belief which may have been completely crazy and as we were talking about perhaps wouldn’t have worked had PayPal remained an independent company, but that belief that you can get to that scale to make that vision a reality.
Ben: You’d have to be insane.
David: You would have to be completely insane. You think about the startups again that we were just rattling off a bunch of names and sort of the generations that followed PayPal, the ones that became really, really big are ones that made that same bet and won. Uber – imagine before Uber if you had painted a picture of a world where there are going to be enough drivers in cars that are members of your platform and enough users, consumers of transportation on your platform in any given geographical area, not just San Francisco but like the middle of nowhere and a country not in the US that you could push a button and that driver would be right around the block and show up a minute later. You would have gone and laughed out of the room.
Ben: Yeah. It’s the same thing, I mean, you could imagine pre-users pitching PayPal and it’s like well, it’s the way for anybody to send anybody money and someone says, “What do you mean?” Like well, everyone has PayPal, everyone must be super comfortable.
David: It’s a recursive argument.
Ben: Yeah. It’s the same recursive argument that lots of people completely fail out. You hear this at every first-time startup event. Someone who goes and the only world they imagine is the one where their service is pervasive and they talk about “why doesn’t it just exist?” I don’t know if somebody ever pitched Uber but you could hear someone pitching Uber 10 years ago at a startup weekend and they say, “Well, yeah, it’s like, ‘Why doesn’t it exist where anybody can just pick you up at any given time because you just see every single person has this in their car and can give each other a ride?’” How on earth are you going to get there, and the magic of PayPal is they figured out how to get there.
David: I think this is a great segue into the other thing I wanted to talk about here about the PayPal Mafia. Again, you could make an argument. It might be the most impactful thing that they've contributed to the startup ecosystem even though for and above all the other things we’ve talked about, there’s a really, really great video on YouTube of course.
Jim Goetz who’s a partner at Sequoia, great, great venture capitalist speaking at the Business School at Stanford, which has a fond place in my heart, and he’s talking about what makes great companies that Sequoia would invest in, and that he talks about the PayPal Mafia and he says, you know, the one thing to him that really sets PayPal alumni apart from other people in the ecosystem is they learned at PayPal both willingness and ability to iterate really quickly with a product. Put a product out there that is very far from finished and iterate like mad on it based on true market feedback. He says “not BS-ing themselves about what the actual signals from the market are.” That’s how you can create a recursive platform. A recursive thesis like that is you can’t start with the end state. You got to start with a very, very small idea and then work on it bit by bit by bit based on market feedback.
Ben: Yeah. That market feedback thing is so hard where every line of code that you write or every little piece of product thinking that you do that then gets solidified in any form be it physical or design or code, it’s like a burden you carry from that point forward where the more you’ve created, the heavier it is and the less you feel agile to move away from it.
So I just have tremendous respect for people at companies like this that can write something and put it out there and understand market signals quickly and within days say that’s actually not the thing and, like, rip half of it out and put a new piece in and say that’s not the thing either. Then, just keep repositioning because I think that we just get emotionally attached to what we make and people will get really emotionally attached to their vision. If you can just keep responding, it's a really incredible and really valuable skill.
David: I think the skill is holding both of those… to borrow a phrase from my wife, she loves this phrase, “holding both of those things in your head at the same time.” One is absolute dedication and commitment to a vision of the future that you see, your recursive vision about the future. And two, an utter lack of bias or pre-determined thought on how you’re going to get there and be willing to take the random walk that you need to take of product and product market fit discovery to get there.
Ben: Yeah. That’s a challenge.
David: It is.
Ben: Time to grade it?
David: Yeah, I think we can grade it. So, this is a really interesting one to grade because one of the themes that I think has been pretty pervasive throughout the show that we’ve done is that the best acquisitions that we’ve given the highest grades to have been ones where the acquirer follows the mantra of “Leave the team alone, it’s all about the people, let them do their thing, don’t mess with the magic.” We heard that with Pixar where it was the reverse. It was like Pixar coming in and leaving the Disney people or letting Disney get back to feeling the creative magic. With Instagram, and Bungie that Ed Fries was talking about. This is the total opposite. eBay comes in and really mucks around and everybody leaves.
Ben: I wonder if that’s just characteristic of the time period. Other acquisitions that we’ve ripped apart have that characteristic too from that time period where it’s all about integration, it’s all about “Great, we like your product. Now it’s time to move to the beat of our drum.” I think it’s really only recently that companies have figured out that leave it alone thing.
David: Yeah, the “Facebook style acquisition.” There’s another great quote from David Sacks in the Tech Republic article where he’s talking about the first meeting that happened after the acquisition, the integration meeting, and the eBay team gets all the key people from PayPal together in a room and they book a three-hour meeting and they show up with a 137-page PowerPoint deck. The PayPal guys were like, “Hey, we’ve never had a three-hour meeting in our lives. What is PowerPoint?” At the end of it, David Sacks says, “Man, if we stay here, we're going to have to create a whole new department just to do PowerPoint just so that we can communicate with these guys.”
Ben: Oh, man. Talking about a product that they needed and a team that was just completely incompatible with their culture.
David: And so what’s interesting about grading this one is, like, breaks all the rules and yet creates a huge, huge amount of value for eBay, eBay shareholders, for the entire Silicon Valley startup ecosystem as a whole. I think taking all of this into account, it’s almost like, you know, I think I’m going to net out at a B+ for eBay on the acquisition. I mean, created billions and billions of dollars worth of shareholder value. But had they handled it differently, could they have realized much more value? Yes. But also if they’ve done that, we all would be so much poorer for it because of the exodus that happened, because of the PayPal mafia. We have so much else in the ecosystem.
Ben: Yeah. I mean, if I look at it this way, like when we’re talking about… so, I see you, I appreciate those things, I hear you.
David: I feel very appreciated right now.
Ben: Yeah. Okay, let’s look at this from the lens of eBay as a company, right? Was this good for eBay as a company to make this acquisition? Normally, I would try and frame this in terms of well, let’s look at Apple acquiring Authentec and being able to do touch ID sensors in this way that is additive to their existing product in a way that is of a much greater value than anything Authentec could do on their own. Something where it’s integrating into the product and creating synergies between the two products such that they can take their core product and make it a multiple of the acquisition better.
In this case, I don’t know that it added tremendously to eBay’s marketplace and actually there’s a point that Keith Rabois points out where they had visibility into eBay’s growth and they predicted that eBay’s growth was going to plateau and that they actually needed to make the sale because they were like, “we don’t have a different growth strategy yet, and people are going to be concerned. We’re a public company. People are going to be concerned about us if our…”
David: We’re solely dependent on eBay,
Ben: And their growth is plateauing. What we’ve seen, eBay is indeed a major that from 2004 they were doing $3.2 billion in net revenue. Today, they’re doing 17.9 They’ve grown, they’re doing great. But they aren’t a mega behemoth and I don’t think that their growth can be attributed to PayPal. However, we’re looking at this through the lens of a person who owned PayPal or eBay stock at the time of the acquisition. Was it good for eBay as a corporation to do this? Holy crap, absolutely!
Ben: eBay grew like a weed and it grew to be larger than their existing business. So as a company, it was a killer bet because effectively, they acquired a product that gave them an entire second business line when their initial business line wasn’t going to be the fit. This is an A+.
David: Yeah, if our projection, let’s assume it’s correct that eBay executives at the time weren’t thinking about this as a business line, weren’t thinking about it as a feature technology acquisition, then yes, maybe my B+ rating would hold. But in terms of, like, this is the actual financial outcome – massive homerun, not to mention all the ancillary benefits to the whole ecosystem as we’ve been talking about.
Ben: Yeah. The eBay acquisition was generally good for the world. It was generally good for the United States in terms of GDP.
David: What’s good for General Motors is good for America.
Ben: Ain’t that the truth?
David: Cruise acquisition coming in future episodes perhaps.
Ben: Oh, man. I hope so. Yeah. I’m trying to think of other examples where yeah, it’s almost like how we rated the Pixar. Well, no, because I actually did feedback into the Disney business to reinvigorate that and make it great again. What other examples can you think of, of a company that was flying high at the time, made an acquisition and then it turned out that company’s core product was not going to be thing for that company and then they acquired a mega giant or 2B mega giant. They certainly propelled it there. I don’t think PayPal would have done this on their own. I think that at some point like we talked about they were going to get acquired.
David: Yeah. It’s interesting. Gosh, maybe Instagram, I mean, jury is still out on that.
Ben: Yeah. Although to check in on our previous numbers on that, I think it’s yet another analyst report. I don’t think we have hard numbers on this. But it’s predicted to do $3 billion in revenue this year – I just saw a thing – on a billion dollar acquisition a couple years later. Not too shabby.
David: That was a great buy.
David: Not without its challenges though.
David: It’s interesting. We could do an episode at some point on Snapchat, on the failed acquisition of Snapchat.
Ben: Yeah, we should do that.
David: That would be a fun one.
David: We could compare and contrast Instagram and Snapchat.
Ben: Okay. But until then, you want to do the Carve Out?
David: Oh yeah, Carve Out. Let’s do it.
Ben: All right. Sweet.
David: You want to go first?
Ben: I do, I do. So, since we know you guys like listening to podcasts, I felt like I should pick a podcast and this week was an incredible episode of the Bill Simmons podcast, to follow up my recommendation to read The Ringer. He had Chris Sacca on.
David: Oh, nice. Worlds colliding.
Ben: It was so great, yeah. Because Bill’s just a killer journalist. He has a written interview with Obama. I think it was in GQ. It’s just awesome. Like, Bill, he can talk about sports, he can talk about politics, he can talk about technology and him interviewing Chris Sacca is just spectacular. I was a few minutes in and I was just completely, completely roped in. They talked about everything from Chris’ meetings with Kobe Bryant where Kobe’s investing in startups and like Chris put him through the ringer, no pun intended. Chris was like, “Okay, cool. Celebrity athlete who wants to get into investing.” There’s so much interesting stuff revealed.
I’d have to go do more research on this, but Kobe actually doesn’t sleep. Kobe reveals, I’m sure he maybe sleeps like a few hours or something, but the way they describe it is the dude, he has his day life and all night he was staying up reading and trying to learn and go through the exercises, everything that Chris gave him. So there’s this Kobe segment.
They talk about the founding of Uber and the jam sessions when they’re sitting around and how all that fell into place, talking about early days at Twitter, about bets that Chris made, about when Chris was dirt poor and then started day trading and made $4 million day trading stocks and then lost it all and then went into massive debt. It’s an awesome episode. So I’ll link in the show notes, but the Bill Simons podcast featuring Chris Sacca is excellent.
David: Excellent. I’m going to have to give that one a listen.
David: So my Carve Out for the week, caveat that I’m only about a third of the way through it, but it's a book that came out a couple years ago that had been on my reading list and I finally got around to, thanks to the magic of audio books, a book called Antifragile by Nassim Taleb.
Ben: I just finished The Black Swan.
David: Oh, nice. So this is my first Nassim Taleb book and I want to read the rest of them after this. It is excellent. What do you think of the Black Swan?
Ben: It’s good. Like a lot of books like that, I felt like the first half covered it.
Ben: But, like, really interesting. I highly recommend it also.
David: Well, what’s interesting, not having read The Black Swan yet, but a couple things about Antifragile. One, Nassim is like a bawler. He’s hilarious. He’s incredibly smart but he’s also got a giant ego and this is a guy who does not give a crap about anything.
Ben: Yeah. His ego shows through quite a bit in Black Swan, too.
David: Yeah. But what’s interesting is he actually… so the whole thesis of Antifragile is it reminded me a lot of Zero to One and fittingly for this episode, a Peter Thiel idea about the idea of secrets, that there are these things about the world that are fundamental laws that govern it, that people don’t understand or realize.
So Nassim talks about this concept of antifragility that we know about things that are fragile and for millennia people thought the opposite of fragile was robust, things that are durable and don’t break when exposed to stress. But it turns out that’s just a neutral thing. The opposite of fragile is something that gets stronger when exposed to stress. An example would be the human body to a certain extent where you exercise and you get stronger. Another example would be also within biology, the concept of vaccines where being exposed to a small amount of a toxin or a poison or a virus will then make you stronger against the virus. Anyway, if you start looking at the world this way, there are all these examples of this and then yet another example of bringing back to Nassim’s ego, he says actually information is antifragile if you think about it. He’s like, what’s the best way to get your message heard by as many people as possible? You should tell everybody it’s a secret. Then you should try and make it as controversial as possible and just try and get as many people possible to hate on you because then people are going to hear about it and it’s going to be really interesting and people are going to want to read about it. That’s how you disseminate it. If you want to make sure your information does not get disseminated, you want to be really agreeable and tell everybody it’s really important and then nobody will read you.
Ben: It's so interesting. It’s probably a very uncommon thing because we as humans… I think it’s a defense mechanism and it’s something that we use to stay alive but we don’t like it when people don’t like us.
Ben: We don’t like it when people want to lash out against us, so we’re very disincentivized to make enemies.
David: And think about even like your Carve Out, well, the PayPal guys and your Carve Out and all these people, Chris Sacca, Kobe Bryant, Bill Simmons, all the PayPal Mafia, not only did they not care when people didn’t like them, they embraced it.
Ben: Yeah. All right, everyone. Thanks for listening. If you get a chance, we’d love, love if you could rate us on iTunes. And have a great day.
David: We’ll see you next time.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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