Ben and David complete the Disney acquisition trilogy, covering the "house that Mickey built"'s 2009 acquisition of Marvel Entertainment. Will our own superheroes save the day for shareholders, or perish at the hands of villainous corporate raiders? Tune in to find out!
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The Carve Out:
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: All right, listeners. To start the show today, we are going to play a little game of Two Truths and a Lie. Today’s episode will be covering the Marvel acquisition by Disney, and we are going to throw out the Two Truths and a Lie right now, and we will tell you which one is a lie at the end of acquisition history and facts. So, get ready to predict.
Number one: For a brief stretch ending in an internal Time Warner investigation, the president of DC Comics acquired a large position in Marvel stock.
Number two: Famed corporate raider and comic book villain, Carl Icahn, once made a play to gain control of Marvel from bankruptcy.
Number three: Marvel owned Fleer, the baseball card company, and was affected in a huge way by the 1994 Major League baseball strike.
Which is the lie? You be the judge.
Welcome back to Episode 26 of Acquired, the podcast about technology acquisitions. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. Today’s episode is Disney’s 2009 acquisition of Marvel. It really completes the saga for us here at Acquired where our first episode was the Disney acquisition of Pixar, then our sixth episode was Disney’s acquisition of Lucasfilm. And all three of these, I believe, will have pretty similar tech themes, and David, I think we’ll really be able to kind of understand Disney’s strategy and what their portfolio looks like these days.
David: Yeah, this will… I feel like I always say this, but this will be a fun one.
Ben: Yeah, no kidding. And again, kind of a fun one here going into the holidays. It’s a nice one to tie up the year.
David: Totally. Speaking of Disney’s triumvirate of IP acquisitions, I am pretty excited about Rogue One.
Ben: Yeah, I thought you’d bring that up so I re-watched the trailer right before we started recording.
David: Awesome. I can’t wait.
Ben: Me neither. For listeners, if you’re wondering, I’m not sure if it actually will sound any different but this is the first time David and I are recording remotely. David’s in California right now.
David: In the heart of Silicon Valley.
Ben: Indeed. All right, well, we don’t really have too much before the show. You want us to dive right in?
David: Yeah, let’s jump in. So, this, I can’t remember. We’ve done so many of these episodes now, but this might be the earliest “back in time” that we’re starting our acquisition history and facts.
Ben: Oh, yeah, I think so.
David: Yeah, I think it is. We are going back to 1939, almost – what is it, almost 80 years ago when a fellow named Martin Goodman founded a company that he called Timely Publications in New York City. Very timely. Goodman was a pulp magazine publisher and he wanted to get on the gravy train of the fast burgeoning comic book industry that was starting to take on and so, he started Timely Publications as part of his publishing empire. And the first comic book that Timely published was called Marvel Comics #1 which came out in October 1939, and it included the Human Torch and the Sub-Mariner, which would be Marvel comic book heroes for a long time to come.
Ben: Yeah, the Sub-Mariner is a little bit more of a deep one.
David: I see what you’re doing there.
Ben: It’s pretty cool that the very first issue was called Marvel Comics. I think that through a crazy history that we’re about to hear of all sorts of different ownership structure is in consolidations, and unbundling and re-bundling, keeps the same name.
David: Yeah. Well, interesting though they didn’t actually change the company to Marvel Comics until 1961.
David: So, 22 years later. But the very first comic book they published was called Marvel Comics. And apparently, it was a big success. It sold almost a million companies which I think is a lot for a company, especially a lot for a comic book in 1939. But the company, Timely, would go on to do quite well, create many of the iconic comic book superheroes and villains that we all know and think of today. Captain America was the first really big one that they created in 1941, which was, well, I guess World War II was going on at that point in time. But the US either hadn’t entered yet or was just about to enter World War II.
The Fantastic Four, Spider-Man, the X-Men, Ironman, Thor, the whole… many, many others. I love superheroes but I’m not a huge comic book aficionado so as like a casual comic book fan, like everybody I know kind of except Superman and Batman came from Marvel.
Ben: Yeah. And like Wonder Woman.
David: Yeah. Wonder Woman, too. That was also DC Comics.
Ben: It’s pretty much the whole crew.
David: Yeah. It’s like DC had the big Superman, Batman, Wonder Woman, and then everything else’s is Marvel. And so they go on to create many of these characters. Then in 1961, like we said, they actually changed the name of the company to Marvel Comics.
Also in 1961, the editor of Marvel who was a man named Stan Lee, who actually started at the company as an office assistant, he was apparently Martin Goodman’s wife’s cousin, and started at the company in the early days as an office assistant and became sort of the spiritual head of the direction of Marvel and the comics.
Ben: He became very briefly actually the president of the studio, right?
David: Yup, yup.
Ben: It’s like 1 or 2 years in there.
David: Yeah. A towering figure in Marvel history. He decides to kind of push the company in a new direction in 1961 and that was to make comics that were aimed at slightly older audiences, so not just young children. And the first of those was the Fantastic Four, which they launched in November 1961; and was the first time that comic book heroes were sort of, you know, they’ve always been like the Superman, sort of perfect image of masculinity often and heroism, and the Fantastic Four were sort of like they squabble with each other and they were kind of anti-heroes in a way.
Ben: Right. More human.
David: Much more. Even though they had superhuman powers, much more human than the Superman of the DC franchise, and that really kind of set that tone. And Marvel became much more… it really sort of expanded the market for what they were doing and what comic books as a whole, as an industry was. And that was their namesake. And so, you know, Spider-Man was sort of like the quintessential teenaged angsty, you know, teenage angsty superhero.
Ben: And oh, boy do we ever see that in Spider-Man 2.
David: Oh, man, yeah.
Ben: The Sam Raimi one with Tobey Maguire. I actually remember that one scene where he was like emo. He got his hair dyed black and it’s like over one eye, and yeah, almost felt like jumping the shark already even though I didn’t really think it jumped the shark until Spider-Man 3.
David: Yeah. Totally. He was ahead of his time.
So, that’s a big success for Marvel and then later in the ‘60s, in 1968, the first Marvel acquisition, change of control happens. When Goodman decides to sell out and he sells the company to the Perfect Film & Chemical Corporation, which was later renamed Cadence Industries, and Marvel then became one of their subsidiaries or underneath one of their subsidiaries called the Magazine Management Co.
Ben: Very generic.
David: Yeah, very generic.
Ben: Honestly, when I was reading through some of this, it felt like a laundry list of incredibly generic conglomerate names.
David: I know, totally. Well, I guess that’s the thing when you’re looking at a company that goes back like almost 80 years.
Ben: Right, right.
David: And in a fun twist of foreshadowing in the 1970’s when Marvel is owned by Cadence, they actually strike a licensing deal with Lucasfilm and they publish the Star Wars comic books in the ‘70s and ‘80s.
Ben: Wow, that’s wild. Because to me, we’ve got a trilogy going on here. And Pixar was actually owned by Lucasfilm in the early days, and Lucasfilm and Marvel had a licensing agreement in the early days. It’s kind of amazing they all ended up under one roof and had this history along the way.
David: Yeah. If only Steve Jobs were somehow involved.
Ben: That’s right.
David: That would have been fun. So, listeners, you know that Steve Jobs was not involved in Marvel. And so, in 1986, Marvel changes hands again, and Cadence sells the company to New World Entertainment, a media company. And then, New World undergoes some struggles and ends up selling it again shortly later to the billionaire, Ronald Perelman in 1989 for $82.5 million. And in another fun bit of foreshadowing of what’s to come, Perelman gives a quote at the time, he says, “It being Marvel is a ‘mini Disney’ in terms of intellectual property. Disney’s got much more highly recognized characters and softer characters, whereas our characters are termed ‘action heroes’. But at Marvel, we are now in the business of the creation and marketing of characters.”
Ben: Boy does that sound familiar.
David: Sounds super familiar. Hmm. So, Perelman is pretty ambitious and he shortly there afterwards actually ends up taking Marvel public and it becomes a public company, and then he starts expanding. And so he took it public in 1991 and then in 1992, they actually buy the sports trading card company, Fleer, in 1992. And then in 1993, Marvel acquires slightly less than half of a company called ToyBiz which was a toy company that they also had a licensing deal with to create action figures for all of the Marvel superheroes and villains.
Ben: It’s really interesting they keep vertically integrating and then unbundling, and vertically integrating and then unbundling. It’s interesting how they kind of fluidly move throughout partnerships and ownership of their core asset being the characters and then moving it out of publishing, distribution, and merchandising and all these different --
David: Adjacent or in the case of baseball cards, not so adjacent businesses.
Ben: Yeah, I would love to see the prospectus on that pickup.
David: Yeah, what the rationale was. That was in the middle of the baseball card bubble, which we will come back to again in one sec. But, ToyBiz also will be important in the future. So they don’t buy all of ToyBiz. They just buy slightly less than half a share of the company. And so things go along and then a couple years later in kind of ’95 and ’96 timeframe, things aren’t looking so good for Marvel. So they’ve expanded a lot. The core comic book business, actually there was a big bubble in comic books in the mid ‘90s which, doing the research for the show I kind of like vaguely remember.
But even more so in 1994, Major League baseball went on strike and this was, like, a huge thing and people thought this was the death of baseball -- and it wasn’t, happily, for baseball -- but it was definitely the beginning of the death of the baseball card industry. Fleer suffered huge losses when this happened.
Ben: I remember that. So I’m an Indians fan, grew up in Cleveland. That was the first year Jacobs field was open and they didn’t get a full season in there.
David: Oh wow, I didn’t realize that. Man, yeah. I remember that strike so vividly. I remember, you know, and obviously being a Seattle podcast, so it’s a huge – even I didn’t live in Seattle at the time, huge Ken Griffey Jr. fan. And, I think I remember he was on pace to shatter the homerun record that year and then it was so much shortened by the strike.
Ben: I’m pretty sure you’re right because I remember the Indians were really good too and we were on the Word Series the next year, and sort of growing up I always thought, well, it’s weird that the Indians have this new ballpark in ’94, and I think we actually played in ’95 in the ALCS, so the division series was when we played the Mariners and Griffey was obviously instrumental in that. But I remember thinking, like, how did we have a new ballpark in ’94, getting to the World Series in ’95, and it didn’t really occur to me until later in the ‘90s, like, “Oh, duh, there was no playoffs in ’94.” Can you imagine if that happened with the NFL now, like, oh yeah, there’s no--
David: No Superbowl? Yeah, totally. It was terrible and I was such a huge baseball fan growing up, and it was really a black mark on the sport. So, Marvel’s not doing so good. People are speculating, the company is in trouble, maybe they’ll end up filing for bankruptcy.
Ben: Do you know why there was a comic book bubble? Other than the whole Fleer thing, what were the externalities creating the struggle for Marvel?
David: I don’t know. I didn’t do enough research on this. I wonder if it was related to just the whole baseball card bubble which was probably even bigger of a bubble. I mean, I was a huge baseball card collector as were so many of my friends at that point in time, and still in my parents’ basement are boxes and boxes full of baseball cards that are now worthless.
Ben: Yeah, me too.
David: That the market just got flooded. I wonder if a similar dynamic was playing out in the comic book industry.
Ben: I could see that.
David: Yeah. So there’s all this speculation about the future of Marvel, and comic book villain, as Ben referred to him in the intro, Carl Icahn takes not notice and he and his firm start buying up some of the debt that Marvel had with public company – Even with private companies if you have debt that often trades, other people, not the people who loaned you the money, can then sell the debt to other people and folks like Carl Icahn, this was a big part of the playbook is they buy debt in companies that they think are troubled and they’re hoping that the company ends up filing for bankruptcy and then in court, as debtors, they can end up taking control of the company. The not-so-charitable term for this in the industry is ‘loan to own’.
Ben: Or comic book villain.
David: Yeah, or being a comic book villain. And this all starts playing out in the press and then at the end of 1996 in December, Marvel does end up filing for bankruptcy and so this all goes to court. And in early 1997, the court rules that Carl Icahn can indeed take control of the company, and he does. So Carl Icahn, comic book villain, is now head of Marvel.
Ben: It honestly sounds like a Lex Luthor move.
David: It totally does. The only thing that would make this better is if Carl Icahn were also CEO of DC Comics.
Ben: That’s true. But alas, this is probably a good time to – Our listeners are – I’m sure they figured out by now Carl Icahn is true, the Fleer thing is true. The CEO of DC owning a large number of shares in Marvel is false.
David: That is false. So, Carl Icahn now has controlled Marvel, but there’s just one problem. Carl Icahn did not own all the debt. They’re actually big Wall Street banks that had also loaned Marvel a lot of money. And they still wanted their money back. So, the court case wasn’t over and the company still needed to officially reorganize and exit bankruptcy.
So this is where ToyBiz ends up coming back into the picture, this toy action figure company. And turns out it was owned by this guy named Isaac Perlmutter who was an Israeli-American. And he ends up proposing a new plan to the creditors of Marvel that involves ToyBiz putting up money and paying back the creditors and then taking control of the company away from the Carl Icahn. And the creditors and the courts actually decided to go along with this plan.
So control of Marvel gets rested away from the villain. It’s like the comic book happy ending and the super hero, Isaac Perlmutter, comes in to save the day. And Isaac actually still to this day is CEO of Marvel.
Ben: Oh, it’s a great story.
David: Even post acquisition.
Ben: All right. So what happens to ToyBiz then? How does that…
David: So ToyBiz gets folded into Marvel, I believe, and becomes part of the combined company.
Ben: So then at this point Marvel owns the IP to the characters and has a merchandising division to actually sell the toys themselves.
David: Yup. I believe that’s right. But it's not a Disney scale consumer products division. So, in the meantime something even more important for the future of Marvel happens and that’s -- I believe for a long time they’ve been making various types of films and movies about the franchises. But, films based on Marvel franchises actually start to kind of catch on with the public and become pretty big movies. And it actually starts -- I did not realize this -- in 1997 that year when Men in Black comes out. Men in Black apparently was a Marvel franchise. I had no idea.
Ben: No way! Because I knew they were comic books but I always assumed it was one of those like after-the-movie comics.
David: No, it was a Marvel franchise. And God, I watched that movie so many times when I was a kid. Will Smith and Tommy Lee Jones? It was great.
Ben: Absolutely. Heroes.
David: So, the first Men in Black comes out in 1997.
Ben: And this was before Marvel Studios, right? This was Marvel IP --
David: Yes. Exactly. Marvel was licensing their IP to Big Movie Studios, to Fox, to Sony, to Time Warner who were making these movies. Big budget movies.
Blade, 1998. And then the first really big one, X-Men in the year 2000. Spider Man in 2002. So again, Marvel’s not making these movies themselves but obviously it's noticing that collectively these movies are making billions of dollars.
Ben: Really starting to take off, yeah. And it’s interesting to think about like there had been superhero movies for decades. I mean, we had a whole franchise of Batman movies.
David: Superman movies.
Ben: That’s right, yeah. Christopher Reeve – who can forget? It’s not like we were new to this but in the world today of like, you know, or even 2009, Iron Man grows $580 million within Marvel Studios. It wasn’t that scale yet. It wasn’t like every single blockbuster at the box office is going to be a superhero film. So it’s interesting to think about like what changed that all of a sudden caused these superhero movies to become more and more of a sure thing for the studios to make.
David: Yeah. I don’t know. And it also kind of coincided— Well, I think the Superman and the Batman movies were always, at least I remember, kind of growing up thinking about it like, “oh yeah, I remember the Batman movies when I was a kid.” But I think it was just those two were like the big franchises, the DC franchises. And DC, I believe not always, but for certainly through all of these decades was owned by Time Warner and still is. So they were part of a big major media company and had the resources to make these big budget movies. Whereas Marvel, I don’t think ever did until this era. And so you see these superhero franchises that had obviously huge followings but weren’t the mainstream to the extent that Superman and Batman were, and now get these big film slates.
I think the other thing that was happening is, is this is sort of the dawn—and I don’t know how much one led to the other—sort of the dawn of like “sequelitis” in Hollywood. And superhero movies of course, franchises lend themselves so well to sequels.
Ben: Yup, very true. I mean, ever since 1939, every single one of these comic book franchises has issue after issue after issue.
David: Yup, they’re serials. So it's perfect in a world where Hollywood needs dependable franchises to make sequels, what better place to look to than comic books?
Ben: Yup, yup.
David: So in 2005, after a few of these huge successful movies based on Marvel IP have come out from other studios, Marvel actually takes a really ambitious step to start Marvel Studios to make movies themselves. And so they raise $525 million in debt in a credit facility from Merrill Lynch. Ironically, like right before Merrill Lynch went bankrupt in the recession. But they get a film financing vehicle from Merrill and create really the first kind of major independent Hollywood studio since kind of the Dreamworks era. This was a pretty big deal.
Ben: Yeah. And it’s interesting to think that this was something they just sort of started and ultimately became like very quickly, the largest part of their business.
David: Absolutely, yes. And also interesting, sort of when they announced this, this was in 2005-2006 when they were getting this set up, they announced that the plan was that they were going to release individual franchises – Iron Man and The Hulk, which were the first two movies that they end up releasing, create these franchises. And then they were going to tie them altogether into a crossover film. So, which obviously they did under Disney.
Ben: The Avengers.
David: Yes, exactly. But that was the plan all along and interesting that Disney really has been hands-off and let them operate that plan.
Ben: Yeah. So in making this move and starting the studio, they had already licensed out so many of their characters to other studios to make films and distribute, and so when you think about --
David: And really their top tier characters.
Ben: Right, right. So I’ll list the characters that were no longer eligible for Marvel to make their own films around. Spider Man, The Fantastic Four: Silver Surfer, Wolverine, the rest of the X-Men, Deadpool—yeah, there’s others but when you think about like wow, okay, so all those are off limits and what they’ve got is sort of like the second tier at the time, like we don’t think of them now because they’re huge, gigantic blockbuster wins, but like Thor, Hulk, Iron Man, like that’s who they’re left to work with and then that’s what they create the studio around.
David: Yup. Totally. And Iron Man, that was really the best that they had available and that was the first film that they made and it came out in early 2008 and it ended up being tour de force for Robert Downey Jr. I remember seeing it in theaters. Such a great movie, the original Iron Man.
Ben: Absolutely. Actually the year before, I think that was ’09 and in 2008 they had The Hulk which was about half of what that film grossed.
David: They actually both came out in 2008. They made them concurrently. Iron Man actually came out a couple months before Hulk, I believe, at least according to Wikipedia, and which is always right. And yeah, Iron Man made $585 million at the box office, almost $600 million which is compared to films like the Avengers and Iron Man 3,and Frozen, and other Disney movies, and certainly The Force Awakens that make a billion or even close to $2 billion, that doesn’t sound like a lot but at the time that was a huge amount even though it was only a few years ago.
Ben: That’s the beginning of an era.
David: Really the beginning of the Superhero blockbuster.
Ben: That’s right. And it sort of signals to any potential buyer of Marvel stock like there’s a new way to value this company and it’s based on these numbers and it has nothing to do with any of the other lines of business they’re in.
David: Yeah. So, as you mentioned, The Hulk comes out shortly thereafter and isn’t the huge success that Iron Man is, but it’s a pretty successful movie. It makes just under $300 million and is very successful and kind of proves that audiences are interested in this kind of content and will come out even for non-top tier characters if you can make good movies.
David: So the next year in 2009, I believe they were intended to be 5 films on the slate that Marvel did with Merrill Lynch, but before any of the following ones can come out, August 31, 2009, blockbuster deal. Bob Iger and Walt Disney Company announced that they’re going to acquire Marvel for $4.2 billion, which was quite a lot when you think back to when Perlman bought Disney, granted it was in the late ‘80s but it was --
Ben: At a bankruptcy core.
David: No, no, Perlman bought it in the late ‘80s from New World Entertainment. It was less than $100 million. So, here we are sort of 20 years later and we’re talking $4.2 billion.
Ben: And it’s interesting that there was not a single new piece of intellectual property that mattered between those years. All those characters had already been created and it was really all about a new way to leverage that same intellectual property that made it, what, 40 plus times more valuable over that span of time.
David: Yeah. Super interesting. I mean, it really was the films.
Ben: Yeah, yeah. For listeners out there, a 29% premium was what was paid for Marvel above what it was currently trading at. So, while there was some scrutiny like, “oh my God, that’s a huge 4.24 billion,” that’s a huge ridiculous acquisition, it’s not that much more than what the public markets were valuing it at. And it actually is pretty much in line with other public company acquisitions that we’ve covered on this show.
David: And another thing that’s important to think about this deal, that I think other folks who’ve written about it now and talked about it, it kind of was a context of a little bit, this was in the middle of the recession. And so this was like perfect timing by Iger and Disney to buy Marvel because people were worried at this point -- and we’re talking about box office numbers a minute ago – they were certainly depressed by the facts that we’re in the middle of the recession and people didn’t have nearly as much disposable income as they were used to having earlier in the decade.
Ben: That’s right. For even more perspective, it was just over half the price that they paid 3 years before for Pixar. So if you kind of look at this trend, they hadn’t yet acquired Lucasfilm but let’s simplify Disney to a content and distribution company, and they’re basically out buying content, you know, part 2 of their second big pickup that they made here. You know, they signaled that they were going to do this before. This was Iger’s strategy and it clearly had been working with Pixar.
David: I mean, the Pixar, famously, Bob Iger’s first board meeting as CEO which was I think like his second day on the job, he proposed to the board that he wanted to buy Pixar, and this was clearly how he kind of set the tone for his tenure as CEO and it’s certainly hard to argue with his execution across the three of these companies.
Ben: Right, right. And if you’re Disney and you’re looking around and it’s 2005, all the valuable content that you don’t own, some of it is in Universal and some of it’s like there’s little pieces and pockets elsewhere, but the three other big powerhouses are Lucasfilm, Pixar, and Marvel. Went in over, what, how many years – 2006 to 2012, so over six years rolled them all up.
David: Well, you know, also in keeping with the theme of the show or half the theme of the show now in acquisitions, Iger took over as CEO of Disney right after there had been this hostile takeover attempt of Disney that actually Comcast, right before Iger became CEO, launched a hostile takeover attempt to try and buy Disney and of course later, 5 or 6 years later, they would end up acquiring NBC. But this was like, I’d have to imagine that living through that, the Disney board and Bob Iger and kind of entering his tenure thinking about seeing consolidation in the media industry coming, and very actively deciding to be a “consolidator” as opposed to a “consolidatee” and looking around to see what they can buy.
Ben: Yeah. And you look at what that aggressive strategy helped them do, I mean who was competing with Disney in 2005 and who’s getting close to competing with them now. I think that just totally worked.
David: And interestingly, Iger actually said in kind of the “press” at the time of the Marvel deal. He said, “Marvel’s brand and its treasure trove of content will now benefit from our extraordinary reach. We pay the price that reflects the value they’ve created and the value we can create as one company. It’s a full price, but a fair price.” Absolutely, you know, we talked about this in the Pixar episode and especially in the Lucasfilm episode. But Disney’s core competency and what they have that the other media companies don’t have is that flywheel that Walt Disney drew back in the early days of the company, which is the ability to take great IP franchises like Star Wars, like Pixar, like Marvel and pump them through the flywheel and realize much more value out of it than they could on their own.
Ben: That’s right. And old-school Disney was creating it but new-school Disney has pretty efficiently figured out how to bring in content they don’t create into that flywheel too. I think the fourth piece of the stool that we haven’t talked about yet because it wasn’t an acquisition, is the tremendous growth of the ESPN business inside of Disney. And I think the four of those businesses together really account for a lot of the growth and the dramatic change in share price between then and today.
David: Yeah. And it’s interesting too. I hadn’t thought about ESPN in this context but you’re bringing it up and in the context of the flywheel–
Ben: Well, I guess actually Disney was an acquisition. It was just a long time ago.
David: Yeah, ESPN. It was. A pretty complicated history. That might be a fun show to do sometime.
David: ESPN has a super interesting corporate history. But the core ESPN business, I think in a lot of ways, I mean, it was totally the golden egg for many, many years for Disney but I think it's much more challenged today than it was a few years ago with cord-cutting and linear television watching being much less of a thing. Obviously, Sports Center is still popular among many people but I used to watch Sports Center everyday, probably multiple times a day and I haven’t watch it in years now, even though I still watch clips on Snapchat.
But you see this strategy and especially around film with ESPN too now with 30 for 30 and some of the investments they’re making there. I think about the OJ documentary and how great and ambitions that was.
Ben: You’re totally getting into my tech themes.
David: All right, we’ll stop now.
Ben: Well, it's probably a good time. Do you want to move on to acquisition category?
David: Yeah, let’s do but first just to wrap up quickly on the aftermath of the acquisition. So as we mentioned, Perlmutter remains the CEO of the company. The company stays in New York. So it’s a fully autonomous subsidiary within Disney and, like we said, basically they’ve just continued to execute on the plan that they drew up in 2005 when they launched Marvel Studios.
Ben: And producing dramatically more, like their scale now. I mean, they had 5 or 6 in the pipeline when they were acquired. You look at the pace of new Marvel movies coming out and new Marvel movies planned through the next few years, like they’re not letting up.
David: There’s much more value to be realized from the company in the future but even since the acquisition in 2009, the Marvel movies have generated almost $9 billion in box office revenue which is crazy. Now that doesn’t necessarily equal– It certainly doesn’t equal profits, and profits for movies are harder to get to than pure revenue. We can get that data–
Ben: I think Marvel estimated profit margins, at least in the first 8 films released – I actually pulled the stat – under Disney were about a 23% profit margin.
David: Okay. So you call roughly sort of 2 billion-ish or slightly more than 2 billion in profit so far from the movies, so that’s half the purchase price right there and that’s just the box office. Not the home video, not the merchandising, not the theme parks – all that stuff.
Ben: Totally. I grabbed another stat. I think this is from, yeah, a Fortune article in 2015. One analyst said, “By the time it was finished with The Avengers, Iron Man 3, Captain America, and Thor sequels, Disney probably paid for the acquisition of the entire company. So I think it’s pretty quick payback period there. And I think looking at that 22% profit margin and you look at the price tag of production now on these films, pretty expensive to make these huge blockbusters. 200 million? 150 million?
David: Yeah. Well, we should delay some of this discussion until we render our final grade.
Ben: All right.
David: Let’s jump into category. So as a reminder, Pixar which was our very first episode on this show, we said it was a business line; and then Lucasfilm, we said it was a profit. So, what is Marvel?
Ben: So I am going to foreshadow my tech themes and my conclusion a little bit here. But I think it was two things. One is a business line. They bought the business line of making the films, they were able to scale that. We talked about kind of our paying back the acquisition in a short-ish amount of time, the studio itself. But, ultimately they have this asset in perpetuity of the characters and unlike, in my opinion, the reason why we didn’t call – well, we didn’t have asset yet in this categorization for Pixar, but Pixar’s sequels don’t hold up as well as the serialization that comic book characters lend themselves to. So unlike a lot of sequels which fatigue very often, there’s these few in the world, the James Bonds on the world that don’t get tired because they’re able to kind of keep reinventing it or the stories are okay being formulaic, so you kind of can keep experiencing the same tight plotline over and over again.
Superheroes let themselves do that and the intellectual property that I’m calling separate from the business line, the intellectual property that is these characters are, you know, they’re a true asset in perpetuity.
David: Interesting. Huh, foreshadowing one of my tech themes a little bit too but I was going to be lazy on this one and say oh yeah, totally a product just like Lucasfilm. I think Lucasfilm the sort of juice that gets pumped through the pipeline of the flywheel and I thought that this is too, I still think it is. But I think it is an interesting on the serializability of superheroes and the assets of superheroes versus a Pixar which, as great as Pixar is, and –
Ben: I’m not excited for another Toy Story.
David: Yeah, exactly. It’s kind of a harder business in a lot of ways because you’re betting on the capability of the team to keep producing new, original, great stuff.
Ben: Right. It’s like your assets depreciate faster.
David: I mean, they do these sequels with Pixar but that’s not the core of what it is. It’s like you have to keep generating new– keep pushing the rock up the hill each time.
Ben: Right. Actually it’s funny if you look at the– I was about to make the point that it is more expensive to create a Pixar film because you don’t have the same reusability that you do from the nth superhero film. It actually is, the profit margin on Pixar films are higher. So, to kind of combat the point I just made, 23% profit margins for Marvel, 27% profit margins for Pixar. And, you know, render firms and illustrators are expensive but not as expensive as flying helicopters into buildings.
David: Well, note that Pixar pays actors a lot too for their voice, but I would imagine probably in aggregate in terms of money paid to actors, Pixar movies, I would have to imagine would probably be less than a Marvel movie.
Ben: Yeah, I would think.
David: Interesting. Yeah, I like the asset categorization. I mean, I think it is definitely also juice to pump through Disney’s flywheel.
David: But it is a different kind of asset, Ben. Certainly, Pixar and I think in a lot of ways Star Ways, too. Star Wars is kind of like– Tellingly I called it Star Wars. Lucasfilm.
Ben: You can just call it Star Wars.
David: Yeah, but it is Star Wars, right? Whereas Marvel is many of these franchises.
Ben: Right. Oh, yeah. That’s a great point. It’s like if you look at the $4 billion price tag for Lucasfilm and the $4.2 billion price tag for Marvel, like think how many more characters. It’s like 800+ characters or I think 500+ at the time of acquisition in the Marvel universe, and maybe 50 of which are recognizable by the American public and you look at Star Wars, and I don’t think Lucasfilm was sort of valuing themselves based on all those deep characters and what we’re seeing with the Disney powerhouses, they’re sort of trying to make the Star Wars universe more serializable and more kind of disparate with all these different stories that they’re trying to tell that aren’t with our favorite characters and I’ll be really interested to see not how Rogue One does because I think that there’s going to be– There’s so much pent-up demand for Star Wars that, like, I want to see how the third or the fourth non-core Star Wars story does. And if Disney will be successful in kind of creating the sort of serial blockbuster out of Lucasfilm characters the same way they’ve been able to with Marvel characters.
David: Yes. It’s interesting to think about these three acquisitions which are obviously all fall within the same broad theme for Disney. But on that kind of spectrum from Pixar where it's so much about the people and the creative process and creating individual new creative works to then kind of—Lucasfilm sort of in the middle where it’s about the one franchise of Star Wars and the cadence around that is, well, before the acquisition was very long cycles between any sort of new Star Wars content that would come out and it much faster.
Ben: Right. Decades.
David: Yup. And Lucasfilm is sort of about the people, you know, I mean, obviously it was George Lucas and some great leadership at Lucasfilm but also about the franchise. And then you got Marvel at the other end of the spectrum which has had great business leadership especially under Isaac Perlmutter. But, you know, all of the talent that comes into making the movies and even the artists of the comic books, like it’s all third parties. It’s very different from Pixar.
Ben: Yeah. Great point.
David: Interesting. All right, should we move on to what would have happened otherwise.
Ben: What would have happened otherwise, yeah. So, I think Marvel was going to get acquired. We’re in an era of consolidation where distribution was buying content, and I don’t know who else it would have been– 20th Century Fox, Sony. It seems like actually there’s a lot of places they could have landed. It’s kind of shocking to me that with the Pixar pickup in 2006 that someone else didn’t see this coming and try to make a play for it sooner. Maybe other people, other studios or I guess other–
David: Well, I wonder if the other studios maybe were a little bit lazy and they’re thinking because they were kind of having their cake and eating it too in that they were getting Marvel movies and Spider Man and X-Men, without having to actually buy the company and it was only when Marvel started making movies on their own that it became a really valuable company as itself.
Ben: Yeah, that’s true. And it really hadn’t been long since Marvel Studios was around. The shocking thing is, like, how did no one else– I mean, oh actually here’s kind of an interesting question. If you’re 20th Century Fox or if you are Sony Pictures, and let’s say you can see the future and know that Disney was going to do this, do you try to do it sooner. Like, did people (A) not think Disney was going to do it or (B) not care that Disney was going to do it?
David: Yeah. Well, here’s an interesting thing that we haven’t talked about yet so far but on the surface, this actually wasn’t the most natural fit with Disney, which actually I think is one of the reasons why Bob Iger and Disney really wanted to do this acquisition. But Disney was always kind of like princesses and animated movies, and then Pixar which definitely fit into that mold and in terms of their strategy with children, super gender stereotypes here but I think this is the way a lot of – at least historically a lot of people at Disney had thought about this and then the media industry, that Disney owned the little girls, but they didn’t– And little boys too but they didn’t have as–
Ben: To a much lesser extent.
David: To a much lesser extent and that this was Disney’s play for little boys, too. I mean, what’s more attractive to little boys than superheroes, in total old-school gender stereotyped ways, speaking as a massive Frozen fan myself.
Ben: Right, right. You know, I still haven’t seen it.
David: Oh, you got to change that, it’s so good.
Ben: I know. As an admitted Pixar fanboy, I really should. Not that it’s Pixar but, you know, to see how that’s entered the rest of the Disney umbrella.
David: Yeah. And it’s interesting to think too, I can’t imagine this had that much impact on Perlmutter and Marvel because they were much more business executives than sort of founder creative types. But, Iger and Disney have developed this reputation now with these three acquisitions as like excellent towards of franchises, kind of like the Warren Buffets of creative content in business, you know.
Ben: Right. In the Pixar animation or I think it was the Pixar… no, in the Lucasfilm acquisition, we compared it to Facebook that Disney was really good at leaving their sort of disparate brands that they acquired on their own.
David: Leaving creative direction, yeah. Which again, a little bit was why on the surface it was a little wow, Disney buying Marvel. Like, Marvel is much edgier than Disney but they’ve let it be totally separate. But in the Lucasfilm acquisition, George Lucas said to Bob Iger before he sold it like, “If I’m going to sell it, I would only sell this to you and to Disney.” And Steve Jobs, too. Like it’s hard to imagine Pixar and Jobs selling to anybody except Disney.
Ben: Right. So two other questions here then for you that I would post. One, is there a fourth? Like will we see Disney make a play for another large piece of content and I’ve been sort of racking my brain to think who that could be, or who is the content that we don’t think of as the big content yet, as the up-and-comer. And then two, while you’re sort of noodling on that, I generalize this to combined distribution content company buying more content and pumping it through their distribution. Do we see that in other verticals? Like, are we seeing that in tech outside of entertainment or any other forms of content being bought by distribution plus content companies?
David: Interesting questions. Well, on the second, I mean, to a certain extent I think we see it a little bit with Facebook and Instagram. I mean, it’s very different. I think Instagram would have grown hugely on its own. But no question that on the ad sales side of the house, being able to just plug in Facebook ad sales into Instagram is hugely valuable there.
On the first question, I’m not close enough to have a super informed opinion on that front but one thing that just popped into my mind especially because the company is struggling a bit now, what about Nintendo?
Ben: Boy, you’re right. That that is like another huge treasure trove of IP that as we saw with Pokemon Go, I mean, you take an existing piece of technology or relatively existing with Niantic and slap highly valuable IP like Nintendo is on top of it. You can create something that the world goes crazy for. We can debate on how lasting that is but…
David: Certainly, the IP that Nintendo has in Mario and Zelda, I mean, they’re in a lot of ways– like the parallels to Marvel are very similar. You've got lesser known stuff like Kid Icarus and then you've got Pokemon, obviously, which is super well know. Man, if all of that IP were liberated from the challenged business model of gaming console hardware sales, yeah, what could you do with it.
Ben: And this is interesting, like almost all of this, probably excluding Pixar but at this point Pixar was kind of an older company too, like what IP is super valuable and a major part of the American consciousness and new, because all of this is like, you know, buying the Star Wars stuff from ’77 and buying the Marvel stuff from the ‘40s and ‘50s, and buying Nintendo from the ‘80s, like where is 2010’s Mario and does that exist in the era of the internet and shortened attention spans and social media where individuals are their own content creators and content is short-lived.
David: Yeah. Well, maybe it lives on Facebook or Snapchat.
Ben: It’s funny and all the rules of maybe Disney buying Twitter, yeah, and then that sort of fell through probably because of pricing issues, like none of these platforms owned the IP. There’s shared licenses between Twitter and the originator of the content, but it’s hard to think of new intellectual property that everyone cares about. Everyone cares about their little filter bubble of content.
David: Or like Twitch too, right? All the big entertainment franchises of the last five years certainly, I think they’re apps. They’re not IP themselves, they’re platforms.
Ben: Yeah, exactly. It’s like all the major value in the recent stuff is the platform on which massively distributed democratized IP is created and distributed, not actually being content powerhouse. Actually, we’re seeing this with Netflix, right? Netflix, Amazon – they have the distribution and we’re previously licensing the content and now we’re creating content in-house, and that’s a pretty good allegory for sort of question #2 there of who else is doing this these days outside of Disney. And I guess Netflix isn’t necessarily buying up other companies that have content but we are seeing heavy investment by the people that have the pipes in creating their own content.
David: Well, actually there are plenty of IP franchises out there being created and greatr ones– I should have thought of this. Jenny and I, with my parents over Thanksgiving weekend went to see Fantastic Beasts and Where to Find Them, which we loved.
Ben: Harry Potter.
David: Yeah, Harry Potter of course.
Ben: Totally, and that’s the last couple of decades or decade and a half.
David: Yeah. Or at least younger than some of these other franchises that Disney went by.
Ben: Yeah, maybe that’s not fair.
David: But also, that was really created not pre-internet but certainly pre-social media. And the first Harry Potter, I don’t think JK Rowling or Harry could have peered into the future and seen the world that we live in today.
Ben: Yeah, absolutely not.
David: In fact, Ben and I both got iPhone 7’s recently and one of the– I don’t use it a ton but just one of the sort of delightful features on it that I enjoyed discovering is the live photos, you know, the Harry Potter photos.
Ben: Right. For those of us who are on the off cycle, I guess the on cycle and didn’t have the 6, I just discovered live photos too and you’re like, “Whoa! These are weird when I send them to people,” and they give too much context.
David: They’re pictures that move, yeah. Totally.
All right, should we move into tech themes?
Ben: Yeah, totally. So, I’ve got one that’s based on a stat. So, of the top 10 grossing films in 1981, seven of them were original content. Raiders of the Lost Ark, Arthur, Stripes, Cannonball Run, Chariots of Fire, Four Seasons, Time Bandits. You've got one that’s an adaptation on Golden Pond; and then you have two sequels - Superman 2 and For Your Eyes Only.
Fast forward to 2011, so three decades later, I’ll read you the top 10 grossing films. Harry Potter 8, Transformers 3, Twilight Saga 4, Hangover Part 2, Pirates of the Caribbean 4, Fast Five, Cars 2, Rise of the Planet of the Apes, Thor, Captain America. So that is 8 sequels, 2 adaptations, and 0 original pieces of content.
David: Yeah, all of them franchises.
Ben: And it’s fascinating to see the shift of the playground that is the movie studio, the movie theater, all of Hollywood as a feature film production. The creativity and originality, it’s not happening there anymore. It’s happening elsewhere. And we’re in this era right now simultaneously of a great TV renaissance. Every season there’s brilliant dramas on with Hollywood acclaimed actors and best in class writing. You know, there was Mad Men, there was the Sopranos, like we’re leading up to this – and I’ll save, there’s one that I’m watching that’s my carveout that I don’t want to mention yet. But like, all of the experimentation has moved to cheaper things on TV or YouTube or social media. And Hollywood is the way to go in and make a billion dollars off of sure things because if you’re going to go pour a couple hundred million in, you want to get big, big money out and you’re not willing to take a chance.
David: Yeah. It’s interesting, I think the question for me that that begs and I’ve been thinking about, I was starting to do the research and as we’ve been doing the episode, for all the justifiable admiration, deserved admiration that I think we’re keeping on Marvel and Disney here, I think there is one really key existential risk, and that’s if and when the pushback to this dynamic comes from the public, how many sequel – and people have been asking this for years, and so maybe it will never come. But how many sequels can we take, how long our superhero movie is going to be in vogue? Is this just a very extended fad cycle that we’ve been living in? Like in 10, 20, 30 years will we look back on this and feel like, “Man, that was like leisure suits. Remember the superhero movie days?” I just wonder, I don’t know. I don’t have a good answer to it.
Ben: I guess it’s interesting like if this is like a permanent thing, what changed in the world, like what piece of technology or what societal norm shift or something changed that made it so that we were– Well, maybe it’s this. Maybe we’re actually capable of creating something that resonates so strongly with people’s nostalgia and were actually capable of creating multiple billions of dollars of revenue on a single film, therefore we’re going to spend all the money to produce that thing, therefore we’re not going to take chances.
David: And producing those films cost hundreds of millions of dollars.
Ben: Right. So it’s like maybe the technology got good enough both in distribution and production where it was possible to spend that much money on making a film and it was possible to earn that much from instant global distribution that we actually are seeing it come to fruition and it was only technology limited before.
David: Yeah. And the flywheel of Disney of consumer products and theme parks. When you’re investing in an IP as something, as an entity like Disney, like that is a huge investment. And they do take risks and have failed on stuff like what was that one… they had a couple live action movies that were total flops right around the time that they bought Marvel. Tomorrowland was one of them.
Ben: Which is interesting. They’re taking big risks but they’re flopping.
David: Yeah, right. But you can’t afford to have too many of those flops.
Ben: Right. And I wonder if you get a few of those that are big risks that are flopping and then you just get scared away from doing it. And you start pushing. You’re effectively prototyping down into cheaper distribution mediums.
David: It’s interesting though, I mean, like where– You know, as you said, there’s so much innovation and a renaissance going on in the television format right now. Is there or will there be something similar in the film format? I mean, obviously there’s independent film and there’s lots of innovation going on. But, not at the kind of mass audience scale that something like Netflix and Amazon has allowed risk to be taken in television and still have the ability, a channel to distribute that to a mass audience.
Ben: Yeah. It’s interesting. I think sort of the same thing has happened with music where there’s a psychological thing where we love the things that other people love and we all love having the same darling and the same heroes and like the same sort of music feels good to us that feels good to the other people around us. And with global distribution happening so quickly and so cheaply, you have the ability to achieve much more sameness and have much more people agree on what the best thing is. We like to think that we have independent taste but a lot of the time, we’re sort of just looking to hear from people like, “Oh, what’s the best? Who’s the Taylor Swift right now?” And that’s why we’re getting so many fewer… except for like the Beatles, there was never like the Beyonce or the Taylor Swift. They were much more distributed and there were many more people that could make it big. And now there’s this echelon of people that you can count on one hand who are like these super phenomena. I think the same thing is sort of happening in movies.
David: This totally leads super well into my tech theme, which is something I’ve been thinking about. I’ve been reading this great book that came out last year, I think, or a couple years ago, called Sapiens by this guy, Yuval Noah Harari. It’s a great book and it’s about– It’s sort of a biological time history of home sapiens and how our species came to take over the world basically even there were – there are no longer but there were – other species of the genus homo; Neanderthals and many others. But homo sapiens sort of “won” and you could argue now are destroying the planet but certainly have taken over the planet.
What actually differentiates us from other homo species and from the rest of the animal kingdom, and he argues that the primary thing is our ability to create and believe in fictions, he calls them, which are like– A reality is like there is a lion over there, run! But a fiction is like, there is a company and there is a story but we are– And the internet is a fiction. It’s not that it’s not real. It’s very real but it’s not something that any other species could comprehend.
So that kind of makes me think about IP and exactly what we’re just talking about, like as the internet has spread communication instantly and globally, are we seeing these major blockbuster franchises just continue to consolidate because of the power of these fictions.
Ben: Yeah. It’s a great point.
David: Heavy stuff for Marvel.
Ben: True that.
David: I highly recommend the book. Not my carveout for the week because I’m not done with it yet, but great book.
Ben: Cool. You want to grade it?
David: Let’s do it.
Ben: So an interesting stat that I found when I was looking through all this. If you look at the first 8 films from Marvel post acquisition and the first 8 from Pixar post acquisition, Marvel made about $6 billion gross. Pixar made about four and a half. Cost of creating them are fairly similar. The box office profit from Marvel is about $1.2 billion versus $600 million. So there’s like this interesting thing where Marvel does phenomenally better at the box office. But over the long term, Marvel’s home video sales are about $400 million and Pixar’s are $1.6 billion.
And there’s an interesting thing that happens where with Pixar films, people get attached to that one character and that one storyline and they just continue to watch and buy that film forever. And, when you look at the Marvel movies, even just me thinking about like, what would I rather watch? Toy Story 3, which even though that’s a sequel that has its own storyline that I can remember and I’m emotionally attached to, or do I care about owning or even buying and watching again on a streaming service or from Amazon like Iron Man 2. And you can sort of see that these serialization films don’t have lasting value or nearly as much as the Pixar ones do.
So I went back and listened, and I have an A, not an A+ for Pixar. And I think that it’s fair for me to say Disney, great acquisition, almost a necessary one. We’d be sitting here and saying like, “You are fools not to buy Marvel.” But it’s an A- to me. It’s not as good as the Pixar acquisition. I think the characters are brilliant IP for a long time. I think they’ve basically already recouped the cost of that $4 billion outlay. And we’ll see what they can do with the character intellectual property. Because unlike Pixar that those already created assets on a shelf will just keep creating value for them with the assets that they have from Marvel, from these characters and this intellectual property, they’re going to have to keep pouring cash in to get cash out.
David: Yup. I think we found that same infographic that I had it copied in my notes and I was looking at it too. Yes, it’s interesting too to think about our grading benchmark throughout the life of this show.
Ben: What, you mean Instagram?
David: Well, no. I was going to tell you the evolution of our benchmark. I think Instagram is still one of, if not the top on the benchmark but I keep thinking about to NeXT and I don’t think you can argue that that’s not the greatest acquisition of all time. When you create a trillion dollars of value to top that. But also makes me think a little bit about like as much as we love IP and these fictions and what I was just talking about, in media, in movies and these franchises, the value that you can create in technology is so much more, like the leverage is so much higher that you can get from the media industry or really any other industry. This is why technology companies are so valuable. Thirteen people on Instagram can create many, many billions of value. You can’t make Iron Man 3 with 13 people, or the Iron Man theme park.
Ben: And reiterating something we talked about last episode. Last quarter, Facebook’s operating margin went from 32 percent to 45 percent on the incredibly large revenues that they have as a mature company like technology. That is why technology companies are worth so much and you just can’t pull a lever to make the 23 percent profit margin from these Marvel films into something 1.5x that.
David: Yup. Of course there’s a dark side to that too as we also talked about on the Facebook episode. You don’t create nearly as many jobs when you’re pulling that technology lever. But anyway, we’re getting off-track here.
I agree on A- and I think about in terms of lasting impact to Disney and sustainable value creation within Disney and thinking about these three companies that they acquired – Pixar, Marvel, Lucasfilm. I think in a lot of ways there is the most risks to the future value of Marvel and it’s in, you know, will superhero– Because it’s a portfolio of superhero franchises, will superhero franchises continue to be as popular? I think so they’ve been popular for a hundred years but how popular will they be? You’re totally indexed to that. Lucasfilm is all about Star Wars. And Star Wars, you could argue you have even more risk index to that. However, you could probably also argue it is one of, if not the single most beloved franchise in the entire world of all time. So, they were buying something very specific there.
But then Pixar really was, you know, they were buying a process and– both a people and a process that they’ve applied to their whole film and creative business. So I think for both the reasons you said, Ben, and those reasons, I think Pixar needs to be rated higher than Marvel in this Disney trilogy. So I’m going to go A- for Marvel.
Ben: Cool, cool. Follow-ups?
David: One real quick follow-up. Spectacles have launched and people think they’re cool. Snap Inc.
Ben: People do. If any listeners have them, we’d love to hear your comments in Slack or email us at Acquiredfm@gmail.com.
David: We haven’t made it to a vending machine yet.
Ben: No, no. And my God, Evan Spiegel is a product marketing genius. I think launching them in, what, a custom vending machine in LA and then not going away, and of course selling out immediately and having a huge line, and then popping one up. Where was the one in the kind of like Great Plains area? Tulsa, I think. And then on the Grand Canyon. And once people are saying, “Where is it going to be next?” Then having a store in New York City that just has the vending machine in the back of the store. Like, I just wonder what’s next. Maybe there’s even something before this show goes live but –
David: Spectacles in space?
Ben: Yeah. Like doing everything right. You could totally see other companies being like okay, we have to work with retailers to make sure there’s enough of these things available. It’s totally just like demand generation at its finest and brand building, and also the fact that from all accounts the product is right and has a good use case, and people enjoy using it and say it’s good. Talk about controlling the message and really giving people confidence that they’re on to something when they’re about to go on this IPO roadshow.
David: Yeah. Super cool. I can’t wait to try them. All right, hot takes. This is less of a hot take and more of a congratulation to friends. But Hightower announced very recently, if not today as we’re recording this, which is a startup in New York with lots of Seattle roots, that they are merging with VTS in a deal valued at $300 million.
Ben: Yeah, huge congratulations to Donald DeSantis and that whole team. Really cool story. Startup Weekend guys got together. Actually developed as a team at a Startup Weekend, moved to New York when that was very clear that to be in commercial real estate, they should be in New York City. Really just nailed product market fit quickly, built a great team. And, you know, this is not the end. It’s a reported estimated $300 million merger with their competitor. And the Wall Street Journal article that we’ll link to likens it kind of to the Zillow-Trulia merger. Awesome, awesome, awesome to see it happen for that company.
David: Yeah. And great to have Startup Weekends play as an organization and events, such a huge role in Ben and my lives and careers. And whether it’s Rover.com getting started at Startup Weekend or Ben– well, leading indirectly to us meeting and our careers–
Ben: Yeah, and even PSL.
David: Even PSL and Madrona.
Ben: I’ve got a really gushing blog post about how awesome Startup Weekend is on my blog at some point if anybody actually wants to check that out. Should we move on to carveouts?
David: All right, carveouts.
Ben: Cool. So, there’s going to be some people who are like, “I knew this is what we was going to say,” earlier on when I was hinting at this. But I am so into Westworld. It’s an HBO show based on a Michael Crichton book which then got turned into a movie in the ‘70s with Yul Brenner as a cowboy. And I don’t want to say too much about it now but if you like the concept of where is AI and robotics going and you like really high production value entertainment, it's created by JJ Abrams and Jonathan Nolan who of course worked on all the recent Batman films and the Prestige and, yeah, a bunch of great films. You got to watch it. It’s so good. And I just signed up for HBO now and it’s trivially cheap and you get a month free. So, highly recommend it.
David: Technology and superheroes, all in one.
David: My carveout for the week, real quick, I don’t think I’ve done this before on this show, but I should have because I love it. Super cool app called Overdrive which is a way to digitally through an app and through your Kindle connect with your local library and borrow e-books and audiobooks from your local library, and then read them on your Kindle or on your smartphone and listen to the audio books for free with your library membership. I actually had started using this a few years ago, kind of forgot about it and picked it up again earlier this year, and it’s just like we’re moving that little bit of friction to– you know, not that e-books are very expensive but audiobooks are. I’m reading four or five times as many books as I used to because of it. So, highly recommend it. Go sign up at your local library. Support your libraries and use Overdrive.
Ben: True that. All right, that’s all we’ve got. If you aren’t subscribed and you want to hear more, you can subscribe from your favorite podcast client now. If you’re a long-time listener or even if you just picked us up and you really like us, we don’t ask for much but we would really, really love if you’d share about us on Twitter, share about us on Facebook, leave a review. It’s how we grow the show and it’s how we can reach more people and do more things. So, thank you so much for being a listener and we will hear you next time.
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. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.
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:
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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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