Ben & David break down Jet.com's meteoric rise, culminating in Walmart's blockbuster $3B+ acquisition of the company just two years after its founding. Will we look back on this deal as an ‚ÄòInstagram-like' bargain or a ‚ÄòPets.com'-sized blunder? And most importantly, can *anyone* compete with Amazon going forward? We speculate wildly.
Topics covered include:
New section: Hot Takes! (thank you @cteitzel on Slack for the idea)
The Carve Out
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: Welcome to Episode 19 of Acquired, the podcast where we talk about technology acquisitions. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. Today’s episode is the big news in the last few weeks – Walmart acquiring Jet.com.
David: I think this set a new record in terms of episode requests that I got, Ben.
Ben: Yeah, if you combine email, Slack, in person, Twitter, I think I personally saw north of 10.
David: We got to give the people what they want.
Ben: It’s true. Before we dive into it, I want to do a community spotlight. We have a listener. His name is Chris Laurent. And he has an app called Nowdue, invoicing like it's the future. So Nowdue is to do super fast invoicing for teams. It’s actually a Slack app powered by Stripe. And if you’re interested in doing some invoicing for your team, you should go check him out. They’re at Nowdue.ai, which I love those .ai TLDs.
Ben: So listeners out there, let us know. Get us at Acquiredfm@gmail.com, on the website, on Twitter if you would like to be on the next community showcase, and we’d love to tell everyone what you’re up to.
David: Yup. Or on Slack. If you’re not in the Slack community, go to our website to join. Lots of good discussion from lots of people, not just Ben and me.
Ben: Acquired.fm. A breath of fresh air from David and I.
So, on to this week’s topic. David, do you want to do the acquisition history and facts?
David: As always. So, Jet.com blockbuster acquisition this month by Walmart. Over $3 billion for a company that was 2 years old but it had only been public for a year. But the story actually starts –
Ben: And not gone public but –
David: Or it had been launched publicly for a year.
Ben: Yeah, yeah.
David: But the story starts way before then actually. Back in 2005 when Marc Lore who is one of the co-founders and CEO of Jet founded another company called Quidsi which you may or may not have heard of, but you may know its main operating business which was Diapers.com.
Ben: Killer domain.
David: Killer domain name. And the Quidsi story actually starts even earlier than that when Marc started his first company which got sold to Topps, the trading card company, and he moved down here to Seattle to run this new division of Topps. When he was here in Seattle, he was thinking about going into e-commerce and starting Diapers.com. His daughter went to a private school here in Seattle that Jeff Bezos’ children just happen to go to as well.
David: And so they met at like a school picnic one day and chatted about e-commerce. Little did they know the intersections that would be to come.
Ben: Wow. So this is 2001 before he started Quidsi. Jeff was obviously, what, 6 or 7 years in full force with Amazon.
David: Yup. Sometime between 2001 and 2005 this happened.
Ben: Wow. Okay. So e-commerce was a thing. Amazon - they were not a startup anymore. This was a very real company. It’s not like they were both ideating that maybe e-commerce will be a thing together.
David: No, Amazon was a thing. Public company. And Lore was thinking about jumping into the fray. Which he did in 2005 when he started Diapers.com. And there is a great history of Diapers.com. It would make a good episode for us someday, but it’s already been covered very well in The Everything Store which is the fantastic book about Amazon. The punch line is that after a protracted negotiation during which Amazon tried to basically clone and then compete with an undercut on prices for everything, Diapers.com and all of their other Soap.com and many other properties. Amazon ended up acquiring the company in 2010 for $545 million.
Ben: Do you know why that didn’t work? It seems like Amazon would have the resources to continue to, you know, deep discount went on price and that eventually put them out of business.
David: They would. But there is an important other player in this story, which we will see comes back again the second time, that Walmart was also interested in acquiring Diapers.com.
Ben: Oh, wow.
David: And had made a bid for the company.
Ben: I see. So Amazon’s strategy maybe was working but –
David: And very defensive for them. Literally in The Everything Store, Brad Stone writes about that Bezos gave direction to his corp dev team like do not under any circumstances allow Walmart to buy this company.
Ben: Wow, yeah, super interesting.
David: Super interesting. So Amazon buys Diapers. Lore and the many employees of Quidsi go and work for Amazon. Quidsi was established in New Jersey, actually in Hoboken. So, Marc moved.
Ben: And as was Jet, right? Jet’s space –
David: As was Jet. So, Amazon much like they did with Zappos left Diapers alone. It’s still an independently operating company full owned by Amazon. Lore continues to run it for a couple of years and two years later in 2013, he leaves and he starts thinking about what he’s going to do next.
Ben: Was that on good terms? Do you know how he left?
David: Well, it’s interesting especially now that the Jet acquisition has happened. As chronicled in The Everything Store and elsewhere, the negotiations and the tactics that Amazon used in acquiring Diapers were aggressive. Lore was not a fan of Amazon and especially after having worked there.
So when he leaves in 2013 which is pretty quickly, we don’t know what the terms of his retention package were but I got to imagine it was longer than sort of two-ish years that he stayed there. He’s kind of got a chip on his shoulder and he wants to gun for Amazon and Bezos kind of with a vengeance.
Ben: Yeah, and I think he rips on when he was starting Jet or talking about the reasons behind starting Jet, he rips on Amazon’s culture a little bit. He’s talking about among the many ways that he wants to compete with Amazon on Jet being – well, I’ll leave you to tell the business strategy – but he wanted to create a place that’s not such a cutthroat culture.
David: Absolutely. I’ve got the quote right here. He gives a quote in The New York Times after he leaves Amazon and as he’s starting Jet. He says at Amazon, “I saw that it didn’t matter how you treated people. You just paid them enough so you didn’t care if you burn them out, and then you got new people and burn them out. It was an environment of very short-term thinking.”
Ben: Wow. We talk about Amazon all the time on the show and we praise them for their incredible long-term thinking.
David: Yeah, I don't think of Amazon as an environment of short-term thinking, but we’ll get to that.
So he starts Jet in the summer of 2014. The vision, the idea that he has is that Amazon obviously is very, very good at what it does. But Amazon’s core customer is not your average American. It’s wealthy individuals, upper middle class, people who actually care. They care about price but they also care a lot about convenience and selection – Amazon’s holy trinity, which we will come back to. And he thinks there’s an opportunity to compete directly with Amazon and to compete on price to be the low priced discount retailer on the internet. The model that he has for that is Costco.
Ben: Another great Seattle company.
David: Another great Seattle company. The intersections are just amazing here. So another quote that he says as he’s starting the company in this interview is he says, “There’s this huge middle class of people that are going to be spending more and more dollars online and for them, it’s going to be all about price. They’ll be willing to trade off convenience in selection versus price.”
So he has this big vision he’s going to win the core middle class of America away from Amazon. And he’s not going about this small, he goes big. So he raises a seed round from NEA, Excel, Bane, and WTI as he’s starting the company. So this is July 2014, one year away from launch, just starting the company, raises $80 million right off the bat.
Ben: Wow. Yeah. I mean anybody who’s going out and raising a seed now and knowing what valuation you’re getting, like there are a small handful of people in the world that could do a seed a like that and instill enough trust to say, “Yeah, you know, my seed venture…” you can have what, 20 to 25 percent of something for $80 million?
David: And he’s not done. He doesn’t stop there. February of 2015, we’re still months away from launch. They haven’t sold a single thing. The website isn’t live anything. He raises another $140 million. So before they even launched the company, launched the product, he’s raised $220 million.
Ben: Wow. And I remember hearing about this when it was going on and everyone that had been burned in the late ‘90s talking about oh my God, the bubble is back. This company, it doesn’t have a great plan to make revenue. They hadn’t launched their product yet.
David: Pets.com all over again.
David: Well, needless to say there was a lot of hype when they finally launched on July 21, 2015, so just over a year ago as we sit here today. When they launched, they spent a ton of that money on advertising, customer acquisition. I remember I was in New York City last fall shortly after they launched and Jet had bought out/felt like half of the subway is in New York City. And there are billboards all over the place, all over the country. They did not play small ball here.
Ben: Yeah. I think they had a pretty successful organic invite campaign too where they gave people 6 months of free membership. I think it was called the Jet Insider Program. Yeah, I have it here. And referrers were given up to, yeah, that’s it, 6 months of free site membership and they got almost 400,000 people/350,000 people that signed up for their early membership programs. So I mean that’s pretty incredible to be able to build a base of 350,000 users pre-launch.
David: Yeah, absolutely. They did it by, as you mentioned, giving away free membership for 6 months. So we mentioned a minute ago that the model for how Lore and Jet were going to compete with Amazon was they’re going to use the Costco model. So the idea was that Jet was a membership site and it cost $50 a year to be a member.
Ben: Half of Prime.
David: Yep, half of Prime. And that the company – Lore was super explicit about this – that much like Costco if you actually look at Costco’s financial statements and you take the amount of money that they make from membership fees and you look at their net income, like it’s basically the same thing. They make no money on everything they sell in the store. The only money they make is from the membership fees. And so that was what Jet was going to do.
So again, this isn’t us talking. This is straight from Lore here, a quote he says, “The bottomline is we’re basically not making a dime on any of the transactions. We’re passing it all back to the consumer.”
So they weren’t going to charge membership fees for six months. If you’re part of a Jet insider, you didn’t have to pay for six months but then there were going to charge $50 a year.
Ben: Which really is only a $25 value. For those of us who are no longer price sensitive to a membership fee like that because we’re used to paying $100 of Prime a year, like giving me $25 toward that, sure, like that’s interesting but it doesn’t seem like a huge reward and it doesn’t seem like a huge barrier to keep me away from signing up either. Like the convenience afforded by fast shipping and I guess they weren’t quite doing as fast shipping, but free shipping, it seems of course worth a Prime membership, or in this case –
David: Well, so then it comes down to like okay, so what was Jet actually doing and the whole idea, again, was that price was most important and so they had a goal that everything that you would buy on Jet would be 10 to 15 percent cheaper than you could get anywhere else online. And by that, they meant Amazon.
So they actually built a lot of tech around this and the whole idea was to incentivize customers to buy more than one thing at a time. So like the default behavior that Lore saw with Amazon and that I definitely fall under this category, I don't know if you do, Ben, too is well, once you’re a Prime member, you’re like, “Oh, I need this. I’m going to order it like right now one-off. I’m not going to wait and order a bunch of stuff.” Whenever I need something, I just order it and it comes.
Ben: Right. And they’ve slipped away from that a little bit with things like Prime Pantry or add-on items where I no longer feel like –
David: Subscribe and save, which they got from Diapers.com.
Ben: Oh, interesting. Yeah, with those kind of mechanics, I’m a little bit less confident in Amazon actually than I was, call it 3 years ago, before those things when I would just be like, “Oh, I’ll just Prime it. I’m sure it will get here and I’m sure I’ll be able to get it free in right now.” When that’s the promise for so long and then you have a couple of these things where it’s like you need to buy something else to get the free shipping, it does actually sting you a little bit.
David: It does, it does. So what Jet did, a couple of things, you had to hit minimum order amounts to get free shipping. But also as you added more items to your cart, and particular items, they would surface these items and incentivize you to do it, that were physically located in the same fulfillment center –
Ben: So it cost less.
David: So it cost less to assemble this package and you could send it all in one box. They would then drop the price on your items and your total order as you were basically doing these behaviors that they were incentivizing.
Another thing that they did and still do, I believe, is if you use a debit card instead of a credit care, you’ll get 1.5%.
Ben: Or they give you half the interchange back.
David: Yup, they give you half the interchange back. This is super interesting. If you waive your right to return anything, then they’ll give you an extra discount. If you waive your right to return certain items, they’ll give you a discount on those items.
Ben: That’s so interesting. I mean all these things are like wildly ambitious, very interesting. They’re intuitive.
David: And require a lot of technology actually.
Ben: Right, right. A lot of technology and a ton of financial modeling. I mean you have to imagine that they’re figuring out what return rates are, what it’s worth to them, if they’re going to make the tradeoff between customer maybe getting dissatisfied with something they have and blaming the Jet brand versus how much it costs them to facilitate the return and actually accept the thing back. All this is very ambitious and interesting. Maybe too short of a timeframe, it’s only been a year, but like did it work?
David: Well, interesting. So let’s remember. All of this, you know, the stated goal is all the savings that we’re going to get operationally from this, we’re going to pass back to the consumer and our starting prices are going to be so low anyway that we’re basically not making any gross margin anyway. The whole idea was the membership fee would make up for that.
Well, a couple months go by, we get to October 2015 and the other shoe drops. And for whatever reason, I got to imagine the internal data was showing that it was a flop.
Ben: And that’s what, like, 3 months after they launched.
David: Yeah, 3 months after they launched. Jet announces that they’re dropping the membership fee. So it’s now completely free, open to anyone to shop on Jet, and the prices are still going to be really low. So they basically said our only profit engine, we’re killing.
I’m reminded of the quote that people often – they don’t really anymore but they used to talk about Amazon like the equity analyst would say when they were down on Amazon, that it was a charity being run for the benefit of the American consumer. Jet literally became a charity being run for the benefit of the American consumer.
David: And you know, so Lore’s statement on this was that they decided that on some items, the data showed them that they actually didn’t need to discount 10 to 15 percent, they would only discount 4 to 5 percent and that’s how they would make money. But remember, again, the discounting 4 to 5 percent relative to Amazon which already has like incredibly low prices and can get those prices through massive scale and negotiating power with suppliers and their incredible supply chain everything.
Ben: So with all those advantages, Amazon still maintains this razor-thin profit margin.
David: Razor-thin profit margin. So the idea that you could take Amazon’s profit gross margin on items, knock it down by another 4 to 5 percent, do all the fulfillment yourself and still make money, perhaps suspect here.
But nonetheless, the very next month in November of 2015, they managed to raise another $350 million round that Fidelity leads. This time it was publicized at a $1.4 billion post money valuation.
Ben: Okay. So David, you are a venture capitalist. You get Marc Lore approaching you for this round, why would you –
David: You know, I got to imagine like if not slide one but somewhere in the pitch deck is the slide that says, “Oh yeah, our profit model, we just killed that.”
Ben: Right. So what could possibly be the thing where you’re like, you know, we painted it as a pretty negative story so far. Why would you do it?
David: Here’s why you do it. So they announce the round in November 2015, another $350 million. In December of 2015 in Q4, holidays, you know, the big moment for retail, at the end of December they announced that they now have 2 million active customers and that they did 33 million in revenue in December alone. This is for a company that only launched 6 months ago. So this is incredible, incredible growth.
Ben: So it’s growth even though at this point in history, you would have been still suspect on the unit economics of the business. It still seems like a good investment opportunity.
David: Go, go, go, Ben. I’m sure this was and is still the story that to compete with somebody like Amazon and e-commerce and in retail, you need to acquire customers and you need to make a huge splash and you need to just make this massive investment in that customer acquisition plus the infrastructure. To do that, you’re going to have to lose money for a long time. Amazon itself lost money for a long time, as we all know.
Ben: Yeah. And I wonder too is Marc Lore going and making that pitch without any hedges and saying this is a 100-year company. We’re going to be enduring. We're going to serve the middle class or is there something in there where you’re like, “Ooh, this could be a quick turnaround.” Like something like this Walmart thing could happen.
David: Yeah. Well, that was what I was going to say. Whether this was a slide in the pitch deck literally or metaphorically, we’ll never know. But I got to imagine going through all of these investor’s minds are hey, this is a get-to-scale play and if Jet can get to scale, maybe there’s some chance that they can build a sustainable standalone business here but there are a lot of people in this world who are very threatened by Amazon and who would love to have an opportunity to bring into their fold an at scale e-commerce business, of which there are basically one in the world, in the US right now which is Amazon.
Ben: Right, right.
David: So we’ll get to that in a second. So that was December 2015. May 2016, so a couple of months ago, Jet announced again that now they did 90 million in revenue in May of 2016. So they’ve tripled monthly revenue from the December holidays. And December of course is the biggest revenue month for any retailer.
Ben: So their year over year would have been way up.
David: Way, way, way. Well, it was infinite because they weren’t even launched in May of 2015.
Ben: Right, but presuming that they could compare it to a quarter.
David: The growth is incredible, no doubt about that. But what was interesting is shortly after that announcement, last month, so July 2016, Lore does another interview with Fortune. I think clearly PR was one of their customer acquisition strategies. Lore is very good at that and has always been.
But it’s interesting, this quote that he says in this interview last month, he says, “Well, this being American retail e-commerce has never been a winner-take-all market.” Which he wasn’t exactly saying it was before but he was kind of like, “Hey, Amazon. I’m coming for you. I’m going to beat you before that.” He says, “This has never been a winner-take-all market. There will be a really large #2, #3, and #4, and we can be one of those.”
So he basically said, “I give up. I can’t be #1.”
Ben: So this is a good time. I mean, a lot of times we pause and wait for tech trends until later. For new listeners we’ve got our sections coming up. Our acquisition category, what would have happened otherwise, what tech theme does this illustrate for you, then we grade the acquisition. And rather than saving this for what tech themes, you know, David, is he wrong about the future, that the economics that the internet creates can turn retail into a winner-take-all market?
David: Well, I think if you go back to our favorite analyst on this show, Ben Thompson, and the idea of aggregation theory, this kind of is the underpinning sort of ideology of the internet and internet business models is that you can take all of these industries that before the internet were by necessity fragmented and could have multiple winners because you needed physical store space in every market in town, and that led to some companies would do better in some locations and others and others. All of a sudden, there’s only storefront and it’s a website. That can lead to just this huge ability to aggregate.
You know, if you can create the best customer experience – and we’ll get back to this a lot. I want to talk about the idea of the customer experience of Amazon versus the customer experience of Jet, that the best customer experience is going to win and be a winner-take-all.
Ben: Yeah. I’m trying to look up a stat here. E-commerce has a percentage of US retail revenue. In 2012 – I’m sure it’s only a few percentage points more now – but in 2012, it was like 5 percent. Like there is so much of retail that is transacted physically that has yet to move to online.
You and I were talking about this the other day about I’m doing the dumb thing where I try and time the market and wait for a little dip in Amazon so I can buy it and then realize that short-term little gain and then hold on to it for the long while. And you’re making the obvious point that, Ben, there’s so much retail that still has to move to online. There is 10x or 100x more growth left in this company if they continue to conquer the way that they are.
I do wonder as all this, you know, the 90 percent of retail that’s left physically as it moves to online, it is that Marc Lore comment. Is history going to disprove that, right? Maybe it will be a winner-take-all market because if you vertically integrate and have all of the distribution centers –
David: And the best customer experience.
Ben: And the best customer experience, yeah, and you have all that under one roof like Amazon or maybe what Jet could be, maybe retail is a winner-take-all in the future.
David: Well, I think we should talk a lot more about that. We’ll just wrap up real quick acquisition history and facts because we’re at the end here. So, August 8 last week, as we were recording this, bombshell announcement: Walmart acquires Jet for $3.3 billion. Three billion in cash and 300 million in stock retention incentives for employees.
So, a couple quick things on this. One, Marc Lore is going to continue to run Jet. It will be a standalone property taking the Amazon model here like Zappos and like Diapers. But he’s also going to run Walmart.com. And they have a pretty significant lockup on him. So it’s been reported that an undisclosed but huge portion of his financial outcome from this deal, both in the stock incentives that were the $300 million and I think also a big part of what he would have earned from the cashupfront is going to be subject to him staying at Walmart for 5 years.
David: Which is quite long compared to traditional lockups in tech acquisitions.
Ben: Right, right. And he owned a tremendous amount of this company still, something like a quarter or a third even after all this money.
David: Even after all that money raised, yeah. Don’t know exactly because we don’t know the valuations on the early rounds but he definitely owned a lot.
Super interesting. So much of the press, both the press and the actual statements from Walmart about this deal are clearly a lot is about market.
Ben: Yeah. The fact that they’re putting in the acquisition announcement that he’s going to run Walmart.com, it's like obviously you don’t pay $3.3 billion for a person. But they really wanted Marc Lore.
David: Well, we’ll get into that next in acquisition category. But to come back to this idea of is there going to be a really large #2, #3, #4 in US retail e-commerce. Man, it is really hard for me to imagine that.
Ben: Yeah, I think right now I was trying to do some research the other day on who is the #2 to Amazon right now, like is there a meaningful second large e-commerce site. What it comes down to is that there are category by category.
I was talking to a friend who used to work at Amazon and he was saying that in electronics there is obviously like your Best Buy’s of the world, that dominated online in that category. Still generally way behind Amazon, but there is no massive horizontal platform like Amazon is that gives you a strong #2.
David: Well, let’s continue this discussion in tech themes. But let’s do category first. So, this is a tough one. Where are you going to put it, Ben?
Ben: So I sort of have like a little flowchart here. I don’t believe that Walmart will independently operate Jet.com forever. I think that they take the learnings from that and roll it into their business. They could do something really insane and bet the farm on Jet that they actually keep Jet alive and pour all the Walmart.com resources into that. But I don’t think they’ll do it. I think what ends up happening is they run Jet as a standalone thing for a few more years, they take the learnings from it. Maybe even they take the entire model and rebrand Jet.com as Walmart.com and keep that entire model as the way to do Walmart e-commerce. But if they permanently kept it alive, I would have said business line but since I have low confidence in that, it’s a people and a technology acquisition.
I think it's actually more the people that know how to build the technology. I think they’ve probably built a tremendous amount of interesting technology now but it's really the fact that other than WalmartLabs who built the mobile app, but that’s much less sophisticated, doesn’t have in their DNA a strong technology background. I think with buying such a large group of people who are running such a fast-growing business. It’s like can we overcome this tipping point of making this actually a place for technologists to go like Amazon is rather than what you usually see in these scenarios of buying a smaller company and those people are just a trip at some point.
It’s like is Jet a big enough buy that we actually can tip the scales and say, “You know what, you are a sophisticated developer and architect that can…”
David: Or product person.
Ben: Whatever, yeah, that is interested in building the future of this stuff. This is the most interesting place to be.
David: Yup. No question there, that part of it. As I was thinking about this, I was going through our standard rubric of categories. I kind of went down the list and I’m like, “Hmm.” Okay, well, people, there’s definitely a big aspect of that in Lore and the other people at Jet. Technology also, exactly as you were saying, a big aspect of that to this deal. Product, I don’t think there’s really a lot of product here because I mean Jet was a retail platform, not a product itself. So, maybe not that one as much. Business line, yup, they’re adding the Jet.com business line. Then asset, too, the category we added last time with Waze, very much.
So in the press release that Walmart puts out here, they make sure like I think the second bullet that they call out about the rationale is that Jet has a growing customer base of urban and millennial customers.
Ben: Boy, that doesn’t sound like Walmart’s base.
David: Yeah. Who does not shop at Walmart? Urban and millennial customers. So there’s definitely an asset buy here and the customer base, I think you’re right though. At the core like the two biggest reasons are the people and the technology. But it kind of like could fit in to multiple buckets here.
Ben: Yeah, I agree. It’s funny as you say that the millennial generation and the urban dwellers are more of the Jet base and that’s so obviously not Walmart. I saw a couple comparisons on a couple other podcasts I listen to and then in Stratechery, to Walmart being this generation’s Sears.
Ben: Kind of fading into irrelevancy because the factors that made them big are not aligned with the current generation. You see this incredible toward urbanization and in a very meta way, Amazon setting the trend for what does a modern urban campus look like rather than being out in the suburbs and industrial parks. Jet just caters to that demographic and plays on that trend so much better than Walmart’s existing business.
David: So do we think that this means that we’re going to see biodomes in Hoboken?
Ben: Nailed it. That’s exactly what I mean. For those of you not in Seattle, Amazon is building these super crazy – is it biospheres?
David: Biospheres, yeah.
Ben: Yeah. Obviously biodome is the…
David: Yeah. Totally sure.
Ben: It’s like an indoor Central Park type thing for Amazon employees and people.
David: I think it’s going to be open to the public.
Ben: Oh really?
David: Right in downtown Seattle, yeah.
Ben: That’s awesome.
David: Yeah, right near in the middle of Amazon’s campus.
Ben: Obviously, we’re huge fans of Amazon here so I’m really trying to take off my “Amazon’s going to take over the world” hat when looking at this thing because I think more and more, even over the past year with Amazon’s tremendous growth and just having a lot more faith in their long-term plan, I just start evaluating things as are they really going to compete with Amazon? I think that’s a pretty fair assessment but in looking at Jet –
David: They’re like the iterations of Microsoft to like, you know, in the ‘90s. You know, any company that was trying to raise venture capital. The first question would be like, “Well, what are you going to do when Microsoft starts competing with you?”
Ben: And then Google.
David: The Google App and Facebook.
Ben: So this is like a great allegory. So, mobile ended Microsoft or at least the old Microsoft way. Like what will be thing that pushes Amazon into irrelevancy?
David: Yeah. Great question. I think this is like obviously, you know, self-admittedly we're both huge Amazon fan boys here but I don’t think it's Jet. I think it’s something and I think there’s also a good chance that –
Ben: You mean it wasn’t the Mac?
David: Yeah. I think there’s a good chance that whatever that is comes from Amazon itself, you know. They’re making big investments into drones with Prime Air, like that could be hugely disruptive because that change the economics of delivery and fulfillment. It could be voice that they’re doing with Alexa because that changes the customer experience of how you order. It could be 3D printing with like products that you’re buying don’t get made at a factory anymore. Maybe they get made at your house but maybe they get made locally and then just last mile delivery to you. Amazon’s investing in that too. Like it’s hard to see what the – maybe virtual reality, like I don’t know.
Ben: Yeah, it’s interesting. The other lens to look at that through is maybe – We’re just mixing tech themes, all three here in this episode. But one of the things that is talked about with why Apple nailed mobile is because Apple skipped a generation and lost the previous war. So it's like who’s sitting out this one and will be like way behind and gasping their last breath to come up with something truly innovative that unseats Amazon.
David: I’ve been thinking about this too. There’s a great article that we’ll link to in the show notes. A series of articles that have come out this week on Apple, interviews with the senior team.
Ben: They’re doing a ton of PR now.
David: They must be trying hard.
Ben: Getting ready for the September 9.
David: Yup, yup. But there’s a really good one with Tim Cook and he kind of talks about this a little bit and I love this because in tech, it’s so easy for us to always be thinking what’s the next thing. He talks about this, the interview where they ask him iPhone growth is slowing, it actually was down last quarter. Like what’s next after mobile? Is it a car? Is it AR? Tim makes this great point. He’s like, mobile is the greatest market that technology has ever seen, and we are still so early in it. Like every person on the planet is going to have a smartphone, and half of them do already.
Ben: But so many people that never had computers than smartphones.
David: Exactly. Like you can’t even compare like yeah, okay, let’s look at the auto industry, it’s way smaller than the phone industry. His point is that he says mobile still has so many amazing years of growth ahead of it. To use an Amazon phrase, it’s day one still, 10 years into the smartphone. I think Amazon is kind of the same thing. That’s their phrase – it’s day one. E-commerce is day one. There’s still so much ahead of it.
David: With 5% of US retail. Like there’s so much ahead of it.
Ben: Yeah. I was going to refute the Tim Cook thing because 2.5 billion people or 3 billlion people or something have smartphones, so there’s 2x to 3x more growth left in it.
David: Well, his point wasn’t so much that. It was like think about all of the corners of your life that your smartphone is going to be a critical part of in the future that it isn’t today. Like Uber, great example. Who would have thought the smartphone would have been your taxi a couple years ago, and now it is. But is the smartphone your doctor today? No. Will it be in 5 or 10 years? Maybe.
David: Whatever. Was the smartphone how you bought stuff off Amazon five years ago? No. Is it how you buy stuff on Amazon now? Yes.
Ben: Yeah, interesting. You make a great point on the retail thing. It’s cheesy but it really is day one. People overwhelmingly still don’t buy their stuff online.
David: I mean, I think of course there are things, waves that will come along that could disrupt Amazon, but it's also like Bezos has architected that company so well that they’re out at the front of every wave I can see at least.
All right, let’s get into what would have happened otherwise.
David: Well, I can tell you one thing that would not have happened. Jeff would not have sold Amazon under any circumstances. I mean, I can’t imagine Lore working for Jeff again.
Ben: Okay, so that’s not a possibility. So the Walmart thing falls through. Let’s say Walmart is just not willing to pay the price tag. Is it like to target or one of the other sort of bigger retailers –
David: Or Google.
Ben: Why a technology company, like why a Google?
David: Well, Google’s been experimenting in many ways over the last couple of years with trying to compete with Amazon in different ways. There’s Google Shopping Express.
Ben: Which has never really been surfaced.
David: Never taken off but they sunk a ton of money into that. And a whole bunch of initiatives, I don’t think any of which have really worked, but that they’re working on. So you can imagine that, I mean, because I don’t know if they still are, but for a long time Amazon was the #1 advertiser on Google. They spend more money on AdWords than anyone else in the world.
Ben: Oh, man. I totally believe that because it’s amazing when you search for a product now, how your organic search result and your paid search result are both for that product on Amazon.
David: Like neither Google nor Amazon are happy about that. Amazon is aggressively trying to do everything they can to reduce that dependency.
Ben: Right. It’s like Amazon’s paying the Google Text for traffic.
David: Yeah, exactly. And Google is like, “Oh man, that’s a huge opportunity,” and like that’s the biggest part of our business like how can we just do that directly.
Ben: Yeah. Oh man, this is really an interesting fact. So I’ve been using smile.amazon.com for a long time. They basically take the affiliate fee that you would be giving to whoever referred you, like clicking from the wire cutter or something and donate that to the charity of your choice. I was like, “That’s so interesting.” I always wondered what’s the motive for Amazon to do that. They basically are trying to give you a strong enough incentive to bookmark it so that you hit Amazon as direct traffic instead of going through Google and paying that customer acquisition text.
David: Because even though they’ll then pay that affiliate fee on everything you buy, they won’t be paying the AdWord text to Google.
Ben: Yup. It’s like we’d rather donate this money than give it to Google.
David: Yeah, seriously, interesting. Okay, so I’m going to think somebody else buys this company, like they were not going to be able to continue to raise the amount of money that they would need.
Ben: No. Which is so interesting that – I mean Amazon did.
David: But Amazon did it in the public markets.
Ben: And Amazon did it when there was no Amazon to compete with.
David: Yeah, right. They built that business over a very long period of time and they did it financed by the public markets, neither of which Jet had the luxury of doing. They had to do it super fast and they had to do it from private market investors.
Ben: Yeah. They definitely get picked up because investors have put a ton of money into this thing. It’s not going to zero, like this company is going to get picked up at some point for some kind of favorable outcome.
David: Yeah. You got to imagine that that was a huge part of the investment thesis for all the VCs and the mutual funds that invested in Jet.
Ben: You start to wonder like a few months ago, if you’re Marc Lore, do you start getting investor pressure to be looking around.
David: It’s clear you’re burning tons of capital. The growth is there, you’re building a customer base but you’ve explicitly told the market you have no profit engine and then you've explicitly told the market that you no longer think you can beat Amazon. Something’s got to happen.
Ben: Yeah. Another thing that was going through my head is okay, so like why is this – We had Taylor Barada on last week. He was talking about the acquisition that he thinks or the acquisitions that he thinks go best are the ones were the founder of the company to be acquired is excited to get their hands on the assets and resources of the larger company to make their original vision fulfilled and more successful. What are Walmart’s assets that Marc Lore would be happy to get his hands on to make that dream come to fruition? Why is that a good place to land for Jet?
David: Well, I think it’s a couple things. One, a lot of money. Walmart has way more money than Jet would ever be able to raise.
Ben: So yeah, that’s an interesting thing that like if it really is true that they’re going to let Jet continue to be its own thing. I mean, it’s a tall order to hold Walmart to their word of continuing to pour money into this thing. We don’t know what promises were made but this thing needs a ton of capital to grow. Walmart’s effectively the best private investor or maybe the best since they didn’t have access to the public markets and definitely couldn’t have IPO’d. It’s like hey, this is actually a great place if they’re committed to it, fulfill our mission and just pour a ton of money into growing.
David: I think that’s #2 which was Doug Mcmillon, the CEO of Walmart, you know, well, at least if you listen to the interviews after the acquisition and the press release, clearly has a man crush on Marc Lore. Doug has said Marc is basically going to have Carte Blanche to do what he needs to do to make this a successful business and all the resources he needs.
Then I think the third asset that if I’m Marc I’m excited about is the customer base of Walmart, like the vision of Jet originally was to serve the middle class Americans that are price conscious, and that’s Walmart’s customer base.
Ben: Yeah, that’s true. Then before we move on, there was one other thing I was thinking is it’s really difficult to compete with Amazon now merely because of how razor think their margins are. Amazon famously, your margin is my opportunity. It’s a Jeff Bezos quote from a long time ago when they were starting Amazon. And he was saying that about Walmart, you know, that they were making, what, 3, 4 or 5 percent of profit margin on each sale. Amazon makes in the neighborhood of 1 or less. Amazon was growing up in this world where there was opportunity to compete on price there. Jet had a really hard time obviously competing with Amazon price since there just wasn’t much margin left.
Do you know of any historical precedent where it was already raised to the bottom, one company became dominant because they were incredibly cheap on razor thin margins, like how were they upended? Because presumably you have to compete with them on some other access or some new technology comes around and upend them.
David: I don’t know. It’s hard to imagine. I think about like Microsoft’s or traditionally the whole “your margin is my opportunity” quote applies to high margin businesses. Microsoft’s problem was they made so much money on Windows that they couldn’t transition to a world or transition fast enough in the last generation to a world where the operating system is commoditized by the browser. But if you already are operating in a world where you know you’re a commodity, it’s super hard to get disrupted.
Ben: Yeah, and that goes right into my tech theme. This is such a classic innovator’s dilemma.
Ben: For 20 years now, Walmart has watched and their biggest fear materialized where Amazon just grows and becomes this mega behemoth and starts stealing their business. But they can’t seem to compete because what that would involve is cannibalizing their incredible business and building a super low margin business. That might be a long-term strategy. It might be the necessary long-term strategy to stay alive, but they’re a publicly traded company. How do you tell your shareholders the next 10 years are going to be pretty rough going because we’re undercutting ourselves and building this thing that makes way less money for a long time.
David: Super hard. In a minute we're going to grade this but man, it’s hard for Walmart out there right now. On the one hand, they spent a lot of money for something that I think at least Ben and I feel like is still going to lose to Amazon, like Walmart is still going to lose and Jet’s still going to lose. But they spent $3.3 billion, like that’s not a lot of money to Walmart. So you know, it's a shot - it's a better shot than they’d have on their own.
Ben: Right, right. I was thinking about that in the lens of like how do I want to evaluate this. It definitely puts them in a more favorable position than they were, but unfortunately, I think we do evaluate on the lens of is this actually worth that much money. Where that falls flat and I think what my real position is, is you kind of have to do an expected value calculation and figure out like what do you think the chances that this thing actually succeeds are?
David: Jet will return in profit dollars more than $3.3 billion.
Ben: Yeah, and like taking a 20-year time horizon. I mean, this is like a potentially trillion dollar…
David: I mean there is a non-zero chance that Jet can either beat Amazon or become a meaningful #2. We could be wrong.
Ben: Right. Let’s say this becomes a trillion dollar business. If there’s a 1% chance that it succeeds –
David: Expected value is still –
Ben: It’s 10 billion, right? Great, 3x.
David: Exactly, exactly. This is the art of being an investor versus the science. Like what are these probabilities?
Ben: Yeah. Assigning 1% and assigning a trillion are super arbitrary. The magical nature of the whole thing is it's binary. Either it’s really going to work and it’s going to be company saving, which we're both saying is the very unlikely.
David: But it could happen.
Ben: Yeah, or it’s definitely not going to work. And we know for a fact or let’s like say that it was the far more likely outcome if they didn’t acquire Jet is that Walmart just was going to totally lose, like they could not have competed with Amazon.
David: And back to the people thing, like man, $3.3 billion is an expensive acquihire, but like who would Walmart be able to recruit to go be a senior leader at Walmart, who would see them through, you know, guide them through this last stand that actually really knew how to do e-commerce and do it from the best and do it from the inside of Amazon. Like nobody.
Ben: Yeah, and if you’re recruited to be an exec, you have this uphill battle of recruiting all the people that you know are talented to come work at Walmart with you. This way, you get to bring a world-class team.
Ben: Even if you’re rearranging the deck chairs in the Titanic.
David: I feel like we’re bleeding into conclusion which we’ll get to real quick. But two tech themes I wanted to mention quickly. One, we’ve touched on a bunch but I just think this is such like in terms of handicapping Jet’s chances for success, I so totally believe in Aggregation Theory and Ben Thompson – Ben Thompson’s Aggregation Theory and the idea that on the internet, best customer experience wins. This is where I think the logic of Jet was flawed which is that, oh, there’s a segment of customers that care about price more than anything else and they don’t care about the other two parts of the Amazon holy trinity of retail which is price, convenience, selection on the internet. I think that’s wrong. I think everybody cares about all those. And Amazon can offer all three to everybody – to lower class people, to middle class people, to upper class people. Like who wants to think that they don’t deserve great convenience and great selection? Nobody. So I think, again, I could be wrong but I think the logic behind Jet was flawed in that all three are important to everybody. So that’s one.
Two, I also think like – we’ve been really hard on Jet on this episode – but it also is a little bit of the faster horse thing to me, too. We're talking about what’s going to actually disrupt Amazon. I don’t think it’s Jet. Jet is a faster horse. What will disrupt Amazon is drones, you know, or 3D printing or virtual reality.
Ben: Right, and it’s so interesting to look at Walmart acquiring Jet. It’s like, “Okay, cool. Jet can be competitive on price much like Walmart was always competitive on price and their business model was to make a little margin.” Amazon has this different business model where they've created this incredible flywheel where they make a small margin on third party sellers for using the platform. Oh yeah, and then they also charge those third party sellers that use fulfillment by Amazon for leasing space in their warehouses. They’ve created totally different –
David: And running their websites on AWS.
Ben: Right, right. They’ve created this totally different business model that’s not making a couple pennies on every transaction. It’s like having a percentage of every piece of the backend and the logistics leading up to that transaction. I think they’re playing a different game.
David: Whereas Jet fundamentally was playing the retail business model.
David: Okay. Conclusion.
Ben: D. It’s not an F because Walmart had to do something.
David: Yeah. I’m going to go with C for the reason that I was saying a minute ago which is like they had to do something and this, I think, was the best that they could do. Again, they weren’t going to hire, like, what search firm in the world is going to take on that job of hey, the JD says build Amazon within Walmart. Nobody who’s actually capable of that is going to take that job.
Ben: Yeah. So you think this is just as good as YouTube.
David: Okay, okay. C minus.
Ben: Our rating system is all slidey and –
David: We're all over the place. Okay, that’s what we got for Jet. Hopefully, you enjoyed it. This was a lot of fun doing.
Ben: Got a couple sections.
David: A couple sections to wrap up quickly here. Followups. Ben, did you see the new Star Wars trailer during the Olympics?
Ben: I did.
David: Lucasfilm followup alert.
Ben: My God. So my spoiler alert, and let’s give about 5 seconds of me talking.
David: Spoiler for the trailer.
Ben: Still, there are dedicated people who don’t want to watch the trailers. My favorite tweet of the whole thing. So obviously there’s this incredible moment at the end where you get about a half second where you see Darth Vader. And it’s like, ah! It’s amazing, right? And I don’t know how much we want to get into this on the show, but Twitter’s become this place that is not necessarily the greatest place to hang out all the time for all people. I’m going to look up at the actual tweet. It’s from Craig Hockenberry, the developer of Twitterific. “Everyone’s worked up about seeing Darth Vader for half a second. Seeing a strong female protagonist for the other 2:15 is more important.”
David: Yeah, love that.
Ben: It was awesome.
David: Mic drop.
Ben: I know. I saw that right after I saw the trailer and I’m thinking, “Oh. I and the rest of America and the world are all worked about Darth.” There’s this incredible shift going on in the world where the most anticipated movie of this year has an amazing strong female lead.
David: Yeah, as did the previous Star Wars movie.
David: Disney just continues to be a stellar steward of Lucasfilm and Star Wars and like, “Man, two Star Wars films in two years.” Then we're going to get three in three years. Awesome.
Ben: We’re so amped up about this trailer.
David: With strong female protagonist.
Ben: Right, and we’ve never met any of these characters. Except for that little quick clip of Darth Vader. These are people that exist in the universe that we’re invested in, but we aren’t invested in a single one of these characters. Tremendous job to Disney, as usual.
David: Okay, a new section that we’re adding. This will be very quick but we got several requests for this, is Hot Takes!
Ben: Yeah, thanks for throwing this out in Slack as an idea.
David: Yeah. There have been a ton of M&A transactions happening recently. It’s like they’re coming hot and heavy.
Ben: We should do an episode on like why is that trend happening.
David: What is going on in the market, yeah, we could do some fun stuff. So, four that we have today. The idea here is we’re going to do 30 seconds or less quick takes on these deals.
Number one, Verizon acquiring Yahoo. I feel like we just did that episode so we don’t have to do that.
Ben: I saw just more great tweets about that Yahoo is going to be like the fabric that holds all of Verizon’s AOL assets together.
Ben: I have no idea what that means.
David: That’s like random startup generator.
Ben: Right, right.
David: That you have a history in, Ben.
Ben: Oh, God. Oh, yeah.
David: We won’t get into that here. Okay. Number two, Lyft turns down acquisition offer from GM reportedly.
Ben: It better have been really low. To me, I don’t know if there’s a strong place for a second player here. I think that right sharing lends itself to a winner-take-all dynamic because density is so important.
David: Customer experience.
David: If I wait two minutes for an Uber versus 10 minutes for a lift, I’m opening up Uber every time.
Ben: I remain bullish. I tried to start a company a few years called Red Ride that was a ride sharing aggregator. I remain bullish on aggregating all the other options, but I don’t think there is a way that you can be almost exactly like Uber but slightly worse without a different value prop.
David: That’s never been a winning value prop. I’m going to be exactly like X, but I’m going to be slightly worse.
David: Okay, close to home. Microsoft acquired local Seattle startup, Beam.
Ben: I’m super curious to see what they’re going to do with it. I mean, we don’t know how big the deal was. Beam was an incredibly fast-growing Twitch-like service that enabled interactivity and a lot of features that weren’t –
David: So that you could actually play games or you could –
David: You could influence things that were happening in the game while somebody else was playing.
Ben: Great job to that company for building something that caught on so fast. Tech stars and all their other folks.
David: Super young and incredibly talented founders. Big congrats to everybody there.
Ben: Yeah. To me, they’re going to meld into whatever is part of that broader gaming strategy right now. But I don’t think that they’re going to bet on Beam being this distribution vehicle.
David: Well, it’s clearly not Twitch – I mean, Twitch is a juggernaut – but will be great as part of Microsoft. Okay, final one. Monster.com getting acquired by Randstad.
Ben: Oh, how the mighty have fallen.
Ben: It’s so funny thinking about like early days of LinkedIn when that was getting started, that Monster was the thing with the Super Bowl commercials. Monster was the place that before I was thinking about –
David: I think the deal size was a little over $400 million, something like that.
Ben: So it’s, what, less than a 50th the size of the LinkedIn deal.
Ben: The trend there, let’s call what it is, network effects are so powerful. A flat site like Monster is just never going to compete with a site that has all the right network effects and incentives that LinkedIn does.
David: Network effects. They are a thing.
Ben: We should just reign in the podcast network effects.
David: That’s what we should do. Aggregation Theory/network effects flywheel.
David: Boom. We don’t have to do any more episodes. Okay. Carve Out, what you got, Ben?
Ben: All right. So, another podcast for me. It is a previous Carve Out that I had was a talk at Google by Michael Mauboussin.
David: Oh, so good.
Ben: Yeah. Incredible. And he has this great book on Untangling Skill and Luck: The Success Equation. He has a podcast episode where he is on the Masters in Business podcast. It is a Bloomberg News publication and really, really good. He talks about a lot of the same things but applies it more to fund management about luck versus skill. He talks about a lot of the things that we all know but get caught up in the glitz and glamour of what company is hyper growth right now and he kind of brings it home and makes you realize investing is more about identifying mispriced assets and places where you have an information mismatch. Then, using that information to your advantage. Everyone is very, very focused on will Amazon go up, so I’m going to put money in Amazon, but how there’s all these other strategies around using information to your advantage to identify and bet on mispriced assets.
David: Oh, man. You’ve set my heart aflutter. I thought you were going to say that Michael was starting a podcast of his own and that would have been like the most amazing thing I’ve heard all month.
Ben: I wish.
David: Sadly, no. But Michael, if you’re listening, you got to get on here. But just to add on to that really quickly, he also did release about a 20-30 page piece this month or last two with sort of 10 top eternal truths of investing, and it’s so good. He is just a treasure.
Ben: Are we both following Bill Gurley on Twitter?
David: I think we are.
Ben: I think that’s both of our source.
David: Yeah, I think that’s both of our source. I have a non Bill Gurley Carve Out though. Mine is actually Strava.
David: Which is an app for iPhone and Android, designed for working out, for bicycling, for running, for swimming and it is so fun. I bet a lot of our listeners are already on it, but Ben and I went for a long, at times ill-fated but really fun bike ride this weekend. We both use Strava to track our ride and the app is so well done back to customer experience. It's the little things. We didn’t have to tell Strava that we were biking together. But at the end of it, because it knew that it was tracking us, our rides and that it was 90% plus together, it joined our rides together and then to all of our friends who are following us on the app, like it was Ben and David rode together and your friends give you kudos. All of the little segments there –
Ben: The leader boards.
David: The leader boards, it’s so well done and it makes working out and exercising and the outdoors, which I love to do anyway, just that much more fun.
Ben: And it makes you feel like you’re part of a community which is super cool, too.
David: Their marketing and brand is just so on point.
Ben: If you like to bike or run, just go watch all of their videos that they've produced.
David: It will make you literally go out the door and start running.
Ben: Yeah, it’s awesome. All right, that’s it. If you aren’t subscribed and you’d like to hear more, you can subscribe now from your favorite podcast client and if you feel so inclined, we’d love a review on iTunes or a tweet or a post on Facebook. So, thank you so much and have a great day everyone.
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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