Ben & David chat with Brian Schultz, the Managing Director of Strategic Investments & Corporate Development at Microsoft, about Microsoft's approach to M&A, investing, and partnering with startups — and his journey from acquirer to acquiree and back again!
Topics covered include:
The Carve Out:
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: Welcome to Episode 27 of Acquired, the show about technology acquisitions and IPOs. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. Today’s episode is a discussion about M&A at Microsoft with Brian Schultz.
David: Brian is the Managing Director and Head of Strategic Investments at Microsoft. And Brian actually started at Microsoft in 1999 in Corp Dev and then left for a little detour into the startup world in the mid 2000’s. He left and co-founded Ontela here in Seattle which was ultimately acquired by Photobucket. And he did that with Dan Shapiro who’s now the co-founder and CEO of Glowforge here in town. Shoutout to Dan. After that, he came back to big tech and to M&A, to Microsoft, and has been back in Corp Dev and now running Strategic Investments ever since but remains very active in the Seattle startup scene and has been a friend to us and many others here. So, welcome, Brian and thanks for joining us.
Brian: Thanks for having me.
David: We are super excited, you know. We’ve had Taylor Barada from Adobe on who runs Adobe’s Corp Dev. But super excited to talk to you about kind of bridging this world between kind of the big technologies and running corp dev there and strategic investments, but actually having gone and founded a startup yourself, what’s your perspective? What kind of brought you back into Microsoft after tasting the startup world?
Brian: Right. Well, there’s I think a whole bunch of different ways to look at it. I think the one thing that I certainly believe is that it actually has made me a better corp dev person by far, having been on the other side, if you will. Talk about empathy.
David: Empathy for your customer.
Brian: Yeah, and having had to raise money and deal with these discussions that happen between strategic investors and acquirers.
David: With money and sell their company.
Brian: All these things. As a CFO and COO of a startup having been on the other side, both on the investing and acquiring side, I also, I think, I hope avoided a lot of pitfalls and kept my cap table clean and knew a lot of things that I should be doing that I think a lot of folks can get trapped in. And so, I think having the diverse set of experiences is a great thing and I wish more folks in Microsoft and other big companies as well as in startups had that “empathy” to be able to reach across the aisle. And of course, now we’re getting into politics, I didn’t mean to do that. But, going back –
David: Was there an election this year?
Brian: I don’t know what you’re talking about.
Ben: I blocked it all out.
Brian: Blocked. Completely blocked. You know, one good example is in a startup of course, you have trouble getting people to call you back. You want to do partnerships, you want to do fundraising, whatever it is, you’re just out there trying to make yourself known and actually do things. Whereas in the big company, you almost have the opposite problem, where you have too many people you have to deal with.
And so, thinking specifically about M&A, I acquired a company few years ago that was about 25 people. I remember looking at the conference call set up on my computer and it said “you have 28 people on the call.” To do the acquisition of 25 people, I was talking to 28 people.
David: Was that just in internal Microsoft?
Brian: Just an internal call. If you think about all the business owners plus their lawyers in and outside of the company and it’s a big effort now, you know, of course that doesn’t quite scale and so even doing an acquisition of LinkedIn, you don’t necessarily have a much bigger team on the inside.
David: With 10,000 people.
Brian: Exactly. Definitely not, hopefully not.
Ben: So you’re the head of strategic investments. To give a little bit of context to our listeners, can you explain what that looks like organizationally inside of Microsoft and what the process looks like when you’re acquiring a company? Do you find the company and bring it in, or does a business owner find the company and then loop you in to start the actual formal process? How does that look?
Brian: The corporate development team within Microsoft sits under the CFO and we manage Microsoft’s balance sheet activities, and so if you think about acquisitions, investments, divestitures and joint ventures, when we do these partnership activities as it relates to the balance sheet, that’s where corporate development gets involved.
How we find companies or find our targets and have these discussions, really it’s a mix although it’s typically driven by our business groups in terms of finding the companies, and that is because our product teams, they know their markets much better than we do and certainly at Microsoft we have such a broad based business in so many different areas. It would be really difficult for the central team to be all-knowing, right? You need to give space.
Well, yeah, I mean you guys obviously have these extensive maps of different spaces and it’s constantly evolving. You have new players coming onboard and in any given little micro area, you might have 10, 15, 100 companies, right? And so if you think about that at the Microsoft scale CrossOver products, you’d be looking at a really complex diagram and so it’s really impossible for a central team to keep up with all that. So we really rely on the business groups to think about what’s in their space as they think about their roadmaps.
Most of the M&A, I mean, obviously the headlines go to LinkedIn and the large size acquisitions we do, but most of our acquisitions tend to be much smaller and are really driven by those product roadmaps in terms of where there are holes and what they need to fill and where they’re going. So those are really just square up the center of where the product teams are thinking.
David: Yeah. I’m curious to kind of go back to the fact that you have kind of actually been a founder in a startup and a successful one that raised money and then was acquired, then did M&A Microsoft before, and then came back to do it again. How did it change your perspective? Are there particularly things that you’re more acute aware of now or that you think about differently than before? Because when you joined before, you’ve been an investment banking analyst, right? Many folks who come into M&A roles at companies have been, which speaking from experience myself, that’s pretty far from actually being a founder of a startup. So, how did that perspective change?
Brian: Well, you know, when I got to Microsoft, even when I was doing investment banking I was thinking you’re almost too removed from what’s actually happening on the ground in terms of doing something. You’re kind of advising and moving things around the chessboard but you’re not actually doing anything, producing anything.
David: You’re not building the chess pieces.
Brian: Exactly. So investment banking, that’s why I joined Microsoft because I thought I really want to get into an operating role in a company, and that seemed like a good path to do it. This was back in 1999 at the height of the dot-com boom where everything was kind of going a little crazy and my thought at the time was this is going to end somewhat soon most likely and I want to go get myself positioned in a place where I could actually still have a job in a year and actually learn something from it.
So that’s where that Microsoft shop seemed really appealing and I’d never been to Seattle and hadn’t really thought too much about coming here to do that, but it worked out nicely. We were super active in those early days and then I got here and did a lot of fun things and actually helped create an internal startup at the time. I was advising the Windows and our kind of infrastructure teams, Enterprise teams on security, storage management, and those types of systems. And we started the security business group back then, so I joined that team.
David: Oh, cool. Is that what became Windows Defender?
Brian: Eventually became Defender and a whole bunch of other things. One of the first things we did was acquire at the time anti-spyware and antivirus technologies and roll those in along some stuff that we built. So I joined this startup group and realized, “hey, I really like this startup thing,” but doing it within Microsoft was not quite what I had in mind. I saw the pros and cons of that and thought it would be really great to go and actually do it for real.
So actually there was a company I co-founded before Ontela which was at the time known as Djinnisys and then became Plectix Biosystems. It was a Microsoft cofounder that I met and we went out and raised money for that company, and then I left that company after about a year after we got it funded and joined up with Dan and Charles where we founded Ontela.
So, you know, kind of that pathway and what I realized was kind of taking the business knowledge and the corp dev knowledge as a general finance and business strategy thinking, and work with some really great technical and product folks was a really nice combination. So that was kind of that role that I took on as kind of founder and then evolving into CFO and COO.
David: I’m curious. You’re kind of getting into your specific role which I assume probably takes much, if not most of your time these days in the investment side. How does that function at Microsoft? And Microsoft just relaunched Microsoft Ventures which is early-stage investing, kind of more traditional VC-type stuff. You do later stage, larger checks, right?
Brian: Yeah. That’s actually probably gone through more of a significant evolution than the core M&A role has in those three epochs. So, kind of in that dot-com timeframe, Microsoft was very active as an investor and in those days every company was going public a year after they were founded.
David: The Series B round was your IPO.
Brian: Pretty much. What was commonly accepted as one requirement of your IPO, it wasn’t revenue but it was actually having a strategic investor. So kind of the name brands of your investors lent a lot strength to your IPO and without anything else.
David: When the number one VC question was, what are you going to do when your Microsoft enters your space, right?
Brian: That’s right. Cisco, Microsoft, kind of the big companies at the time were investing a lot in a lot of different startups. We were also investing. It was a really interesting time in terms of influence and how the world was going to play out, and so we were investing in undersea fiber cables, satellite companies and cable companies and telcos and DSL companies, you name it. So we really were spending a lot of money – and that didn’t end so well. We didn’t really get the strategic return. Of course, from a Microsoft perspective, despite having a nice balance sheet, our investors aren’t investing enough as an investor. They’re investing enough as an operating company who’s delivering revenues and profits to our shareholders.
So even if you take a billion dollars over a balance sheet and turn it into 2 billion, 3 billion, 5 billion, it doesn’t really impact your stock price in the same way as doubling or tripling revenue and profit. So we the reason to do it was really strategic reasons of how are you going to take those investments and turn that into leverage plays on increasing revenue and profit for the company. That didn’t really happen. So we really stopped doing it for the most part throughout the 2000s.
I think one notable exception was our investment in Facebook back in 2007. So what we did do is we said where it’s really, really deeply strategic, we’ll go out and we’ll do an investment. That’s what we did in Facebook’s case. But otherwise, we weren’t really doing this kind of “hey, we’ll put some money in our balance sheet. We’re a partner,” and why not kind of.
David: Just a quick sidebar. The Facebook investment, at the time the world thought you guys were crazy, right?
Brian: Yeah. They thought we’re nuts.
David: It was a $15 billion valuation, I believe.
Brian: That’s right. I think the last round had been done at $5 billion, so we took it up to 15. And yeah, they certainly ridiculed us at the time. Obviously in hindsight, that did okay.
David: It turned out pretty well, yeah.
Ben: I remember when I was there, that began– Or this was after the investment but there was a lot of integrations. The companies were very friendly with each other. When Windows Phone was kind of doing a lot of things differently than iOS and Android were doing and kind of like integrating across networks, there was a lot of kind of proprietary first-party type integration with Facebook in that context and providing Bing back to them for mapping things. There was a very tight integration there. I can totally see what you’re talking about on the strategic side.
Brian: Yeah. It was exactly that case where we could really deeply align with a partner and do the investment, create this whole win-win scenario. I think coming back to investments, they’re often talked about as kind of either/or. You can acquire us or you can invest in us. I don’t really think they operate that way as really substitutable goods because as a minority –
David: Completely different.
David: Speaking as a shareholder in lots of startups.
Brian: Yeah, exactly.
David: It’s really different if you create an exit for the company versus just put more money into the company.
Brian: That’s absolutely right and if you think of it again coming back to the strategic angle of it, if we own 5 percent, 2 percent, 10 percent, even 20 percent, even with the board seat of any given startup, we really don’t have any control. We don’t really have really anything. Yes, we have some equity and that’s obviously nice but again, that’s not really what we’re here for. We’re here to be part of –
David: Wall Street isn’t evaluating the Microsoft share price based on how good you are as an investor.
Brian: That’s absolutely correct.
Ben: That’s fascinating. Taking a step back for our listeners and thinking about how we normally evaluate companies on these episodes, being an LP or let’s you’re a venture capital firm and you have LPs, the pressure on you and the expectation is very different than being an operating company with shareholders. The shareholders are looking for multiples that come from your operations and your ability to execute core business activities in a sustainable way. When LPs are in a fund, they’re in it for 10 years, they’re looking for 3 times or so the capital that they put in, hopefully more.
But really, it's like can you guys sustainably make these investments? I think as an operating company, to your point it doesn’t move the share price. It’s not that kind of business.
Brian: That’s right. From an employee perspective, I mean, take this all the way down to the individual practitioners at any given corporate fund and again, for any of you who are talking to different corporate investors, ask them how they get compensated. Most likely if it’s your typical corporate VC and it's a balance sheet activity, they’re employees of the company and their compensation is going to come in shares and bonuses and salary from the operations of that company. It’s not coming from whether or not you succeed, whereas obviously a VC investor is in a different place.
That’s why I think you have to be really careful in this world of strategic investing and coming back to why we do it.
David: With all that context and having done it in the past and realized it didn’t work, what’s the philosophy this time around?
Brian: When you say it doesn’t work, I think you have to be careful in terms of work to do what. So if your objective is these really deep strategic tie-ups and/or return on your capital or both, I think it's kind of hard to do both at the same time. You think about setting valuation and being a difficult investor, sometimes you have to have hard conversations as an investor with your companies and you think about obviously the hardest one that a board might have to do which is changing out a CEO.
As a partner, as a strategic investor, we’re not good at that. We certainly don’t want to ever have to turn to our partner and say, “By the way, you, you founder or CEO, you’re not right for this company anymore as an investor.”
David: There’s a whole set of difficult conversations that come along with being an investor in companies but one in particular I’m thinking about is, “hey, now is actually the right time to sell the company.”
Brian: To sell the company, to fold the company.
David: And if you’re a potential acquirer as well, then…
Brian: That’s right. So there’s a lot of conflict there and it’s why I think if you want to do strategic investing the right way, you have to be really clear on what your objectives are and why you’re doing it or you create lots of conflict, and in many cases, that can backfire. Certainly something we want to be very cognizant of is our reputation among investors, among founders and technologists as we never we want to damage our reputation as a good partner, as a good technology company in order to achieve those investment returns because obviously that’s penny wise and pound foolish for us.
Ben: So would you say the effort is more around creating strategic partnerships through investment rather than investment to generate returns?
Brian: It’s the way we’ve scoped it and there’s actually two components to this. One of them is relatively new which as of earlier this year we created Microsoft Ventures which is an early-stage venture effort. So Microsoft Ventures is out there looking for companies that are in generally our strategic partnership ecosystem and they’re looking to establish those relationships starting with that equity check and developing a relationship. So they’re out there looking on dot-com, if you’re using a crab’s (?) analogy.
So the fact is that the early-stage, kind of your seed, your A type stage investment, it’s hard to be a meaningful strategic partner to Microsoft because of our scale. It’s really hard to do. Now you can be a potentially really interesting strategic partner. So that’s what Microsoft Ventures is there to do, which is to create those relationships and those opportunities and be in those conversations around how we can add value to companies. In some cases, it’s going to come with that equity check and then a partnership. In some cases, come just from the partnership but they’re there to have those conversations.
On my side of the house, it’s almost the opposite where I’m leaning into companies that are already Microsoft partners and that are deep, meaningful ones. We’re calling 5 to 10 of them a year, and it’s really more of an endorsement, an ecosystem leverage and tightening that relationship as opposed to trying to find new and interesting partnership opportunities. So that’s why I’m more of a growth investor, if you will, because these companies tend to be a little bigger, a little more mature.
David: Are these companies like for instance that might be selling through the Microsoft Salesforce, on the Enterprise side already?
Brian: Yes. So we typically look– And obviously we have lots of partners. Those partnerships come in, you know– When I look at strategic investment, really three criteria at its core. One is on the partnership side, is there a really interesting technology product integration between the two companies that makes this really interesting.
Then the second piece, is there some sort of go-to market, sales, marketing motion that makes the combination of the partnership powerful. Where I find really interesting components of both because there are plenty of companies that have one or the other, but when you find a really impactful combination of those two things, that’s where it gets more interesting as a strategic investment. And then the last part or the third part is, is it a good investment. Just like any growth investor will monitor a portfolio based on expected returns and make financially sound investments in those meaningful partners.
David: I’d have to imagine as much as Wall Street won’t reward you for being a great investor, Amy Hood, Microsoft CEO might punish you for being a bad investor.
Brian: Yeah, exactly. So that’s again why we tend not to do this in a hugely active way. Again, I’m not out there spreading billions of dollars of our balance sheet money around because that really just creates a huge liability and so we do it where it’s meaningful, where it makes sense, and where we think we’re going to get a reasonable financial return in this space. So over the last two years since we’ve started doing this in a programmatic way, we’ve done about 16 investments, investing about $250 million on this side of the house, on the growth side. Microsoft Ventures has a separate portfolio they’re managing.
Ben: That’s a great transition. We want to move into talking about the state of the M&A market right now at large. You talking about a number of deals is a great segue into why have we seen so much deal activity this year, both large and small.
David: And the largest of which being, obviously, you guys.
Brian: Right. Those again, as we look at M&A, they are different and we’re always looking for great opportunities for us to grow. So the question of those large companies, we’re always evaluating everything, right? The thing with the large companies, they tend not to be suddenly found opportunities. We know about LinkedIn, we know they’re there. We know where all these large companies are. We know who they are. And so, those are always being evaluated and obviously when something happens, whether something flips between day 1 and day 2 where we decide “okay, now it’s the time to acquire Skype”, “now is the time to acquire LinkedIn.” There’s a whole bunch of things that go into that.
And in terms of you’re asking about the trends right now, I wouldn’t say that there’s anything on our side of the house that makes this a better time or more exciting time to acquire. It’s almost on the opposite side where it might be a really good time to sell. So there’s a lot more companies that are trying to market themselves in that way. And if you think about the technology cycle and kind of how things get funded and how technology moves in waves and how startups get funded, there are certainly a lot of companies that are coming to be a no man’s land in terms of their growth relative to the last round, relative to their ability to raise more money and really kind of reach escape velocity into independent land, if you will. So I think there’s a lot of companies that are certainly looking to sell.
Ben: Do you think that’s motivating? Let’s zoom out from Microsoft and look at the industry at large. That’s motivating why so many deals are getting done because companies are so much better at marketing themselves as a great pickup?
Brian: I don’t know if they’re better at marketing themselves but they need to. They need to be, right? If your next funding round isn’t going to come, you've got to do something. You either got to fund through cash flow or you got to fund through investment and if you can’t raise your revenues enough relative to your burn and if you can’t raise investment, then you really have one choice.
David: The thing is, one has happened here and the other –
Brian: Right. Fair point. I’m talking about the companies actually have something, right? So, there will be a price for companies that actually have something.
David: I’m curious on that front. The fact of life in startups is unfortunately more companies than not end up in that situation where they’ve built something, they’ve built a product, it’s getting usage, they have revenue. But it’s either not going to get to a scale where they can cover the burn and thus the company faces the prospect of going out of business or we see this plenty of times too. The business grows to a certain scale, it becomes profitable but then the growth just stalls. You realize you’re not going to get to a point where you could be a standalone independent company. I’m curious for you guys like you probably see these companies many times a week. How do you think about whether they make sense, whether an asset like that makes sense for you?
Brian: It goes back to what I mentioned earlier in terms of who’s driving that decision. Again, companies are different here, right? And so we are typically a product-driven company when it comes to M&A, when it comes to our business generally. And so, we’re not out there looking to assemble in kind of a business conglomerate sense, an amalgamation of random software companies. So you could certainly have that kind of business where you go out and find interesting software companies that then you can through synergies of overhead and sales and other things can make good money at. We’re not really in that game. We’re here to grow our franchises and our products and really be a leading technology company.
So we’re looking really at our technology roadmap and saying where things need to fit in which is probably why we’re less of that opportunistic buyer that’s out there kind of just buying companies that have fallen. Fallen angels, if you will. Now there’s still plenty of fallen angels that are interesting to us but those two things are different.
David: The roadmap.
Brian: Yes, it’s really to the roadmap. So where those two things intersect, where you have a fallen angel that’s on a roadmap but that’s where things get exciting for us. And the other piece of that, again from a Microsoft perspective is we’re typically not looking to acquire businesses. We are typically looking to acquire teams and products and technologies. Again, thinking about that roadmap piece where holes are on the roadmap, we sell the office suite and so where things can plug into that, that’s great but if we’re acquiring a business, oftentimes that’s incompatible with selling as the suite. So in some cases actually having a large salesforce and a large business could be actually value destructive relative to how we think about things. So there’s plenty of companies that are great but because they have such infrastructure and such money that it actually takes it out of our ability to really find any interesting intersection of deal value relatively to what they need and want to sell for.
Ben: Wow. That’s fascinating to think about the conflicts there because listeners of this show who have kind of listened to our more classic analyze-a-single-acquisition episodes, we remember that we analyze whether an acquisition was technology, product, business line, people, asset, or other. We’ve got these kinds of categories. It’s interesting to think about if it’s a business line, that can’t be incompatible with the existing business line of the acquirer if the acquirer is not looking to create a conglomerate of like separate and potentially even competitive businesses under the same management structure.
So for you guys, when we did the LinkedIn episode, we were looking at, you know, it was like an 8x multiple of revenue that LinkedIn was acquire for. And we were like, well, you know, it’s actually a pretty good business on its own. Even if there aren’t a lot of synergies and integrations and it’s interesting to think about like you sort of pushing back on that notion of no, we don’t just buy businesses because they’re good businesses and we hope to cash flow them for the long-term, it’s actually a strategic integration and they have to be compatible with our existing business.
Brian: That’s right. Obviously and that’s one of the reasons that you look at the larger businesses we buy like Yammer or Mojang on the Minecraft side or like a LinkedIn. To make those deals work, you’re generally not going to destroy their business. So if you have enough critical mass and it makes sense on the strategic side it’s a different game too. So all these things do fit together and every deal is different. But I’m just saying on the whole when we’re thinking about these things, those are some of the things we think about and consider is, how does that business play, as you said, with our existing businesses. Is that something that we value or something that we don’t? Or in some cases, something that actually is a cost to us.
David: Kind of tying together both of these topics on growth and sort of the roadmap and strategic imperative for Microsoft, at the opposite end of the spectrum, a trend that’s emerged or reemerged in 2016 and I’m curious to your take on and whether you talk to these guys, is the appearance of private equity in the software market and sort of the PE-led buyouts of software companies. In many ways that’s the exact opposite of what you’re talking about. That is, in some cases, an attempt to create a conglomerate of multiple software companies together. But in other cases just, “hey, we’re going to take this private solely for its own business line.” Why do think we’ve seen that emerge? Because traditionally PE has shied far away from technology. These are typically not cashflow positive companies, you can’t put debt on them. What’s changed?
Brian: I think that has changed. I think there are a lot of now mature software companies that have legacy businesses where you have nice cashflow. If you think about your typical technology companies, business where a lot of money goes to R&D because they’re always trying to grow and chase the next generation, if you strip all that cost, in some cases you can have a really nice profitable business because the marginal cost of producing and selling software is relatively low. Or I should say the cost of selling, it could be high. But where you find that right model where if you strip out a lot of cost from the business and you think you have this pretty solid revenue stream from customers that even if you don’t invest, it’s just going to fade out over time. You can actually have some really nice traditional-looking LBOs.
So we’ve certainly seen that. Those aren’t always so exciting to us, but we actually have co-invested with some private equity firms and a few of these, take privates or LBOs or resettlings, and the one that was announced is Informatica where Permira bought them. We invested in that. What’s actually exciting about that one is there’s a component of that business that is legacy but there’s also a really good growth component to it which is why it gets us excited and the opportunity to really go deep in a partnership with them was what got us excited about the partnership and the investment and kind of on the quarter to quarter basis sitting under a public company street mentality of managing that, it’s often hard for them to really make the hard decisions both the cuts as well as the investments that they need to make to kind of modernize that company. So in many cases it’s better suited in a kind of private equity-based format. So that can actually be really interesting and really exciting, and there is certainly a lot of those businesses that are out there.
Ben: I just want to highlight real quick for our listeners – because I’ll admit, I just Googled it – LBO is a leveraged buyout.
Brian: Oh, sorry.
Ben: No problem at all. It’s interesting. We’ve got a good mix of kind of like product and engineering types that listen to the show as well as people that are kind of much more versed in the corporate development and financial world.
David: I tend to perhaps over index on being a recovering investment banker myself, I just imagine everybody knows these things. But, yeah. The reason we’re talking about this is it’s only been very recently that private equity firms and LBOs have really started paying attention to tech. Brian, for really the reasons that you were saying that the industry has matured, but typically these firms would buy like Heinz ketchup, the types of things that Berkshire Hathaway would buy.
Brian: Exactly. Before Warren Buffett went away.
Brian: Actually, back when I was an investment banker, that Silver Lake which I think was the first true traditional private equity tech-focused firm was formed and I remember meeting with them thinking how odd. Really these two models are somewhat incompatible but certainly over time and being the first, they’re able to create a really nice business to go and take that traditional private equity model into tech and now there a whole bunch of other folks that play in that space as well.
Ben: Yeah. Thinking in quite short order, I forget maybe two years, they 3X’d Skype before selling it to Microsoft. Pretty wild.
Brian: That’s right.
David: Which obviously then that was a tech buyout that you played on the other side.
Brian: Yup. That’s right.
Ben: This is actually a pretty good segue. So on the Skype episode we talked a lot about the implications of having a lot of cash overseas and that Skype was actually a great way to deploy some of that capital because it would have a pretty heavy tax burden when attempting to repatriate it. So the question for you is, are potentially changing corporate and foreign tax structures on your mind as you think about large deals?
Brian: Yeah. We’re certainly always cognizant of the regulatory regimes and tax regimes. Most of these larger acquisitions have a large and complex international component to it. Which means we’re dealing with that anyway. Even the kind of more operating internal level of any given company. I mean, if you look at Skype, if you look at LinkedIn, if you look at a whole bunch, they all have pretty complex operations that you've got to think about. Skype, of course, happened to be domiciled not in the US and so certainly a nice benefit that we were certainly aware of. But these things are always changing and if you think about from the Microsoft overall planning perspective of how we manage those environments, it really has to sit within our overall management.
Again, these things get really complex in terms of where IP lives. Apple and others have been in the news a lot lately in terms of how they do those transfers of tech and how that creates or avoids or distributes their taxes in different ways. And so, again it’s a very complex issue that we certainly pay a lot of attention to.
Again, I wouldn’t say that going back to why we do M&A in the first place, we certainly aren’t financial engineers as a business. So we’re always looking out for the right strategic thing and if that deal happens to be Skype that’s based outside of the US or if that deal happens to be LinkedIn that’s based here in the US, we go do the right deal assuming we can come up with the right terms and structures that makes the deal work. So we’re not out there to be financial engineers. That’s certainly a part of what we have to do, just given the complexity of operations of these companies.
David: I was always amazed when I worked in banking like how many tax lawyers we had running around on every deal.
Brian: Certainly, part of those 28 people I discussed earlier.
Ben: In thinking about sort of the two different functions, there is M&A activity when Microsoft acquires companies and then there’s strategic investment activity which is what we’ve been talking a lot about on this episode where you choose to deploy capital to someone for strategic reasons. Do you have any good examples of investments that Microsoft has made in the last few years that ended up becoming product integrations or like success stories for a business or some payoff with that strategic alignment?
Brian: Payoff in terms of?
Ben: Maybe like you made the strategic investment and then there was something in the product in the ensuing years either on the Microsoft side or on that company side that took advantage of the sort of strategic alignment between the companies.
Brian: Yeah, sure. We can look at a couple of examples in the recent past that I’ve been involved with. If you look at, say, Foursquare, we made an investment in Foursquare and we’ve developed a great partnership around their data and data asset that feeds into Cortana.
Ben: Oh, interesting.
David: Very cool.
Brian: That’s pretty cool. If you look at DocuSign –
Ben: What does that look like with Foursquare? Is that like when people ask Cortana about what’s a good place to eat and it surfaces recommendations from Foursquare data?
Brian: Foursquare is one of the sets of data that we leveraged in that case, yeah. We certainly have a lot of our own data as well. We pull data from multiple sources but Foursquare has a great set of data on location.
David: Foursquare data gets used in all sorts of location use cases that aren’t even related to, you know, and user recommendations.
Brian: We were kind of a prototype for them doing that kind of deal and now they’ve basically created a whole business out of licensing that data to others which is part of our investment thesis in that company.
If you look at DocuSign, we had a different example but we’ve had a great partnership with them going back many years in terms of how you could utilize electronic signatures in Office 365. There’s some good selling and marketing motions that go along with that as well that go in both directions and we participated in their last private round as well long after the partnership itself had come to be.
Then if you look at a more recent one which is Mesosphere, the container space, and we’re doing a whole bunch of interesting things both with them and the other container players. We really like that partnership as well both on the technical and go-to market side.
Ben: Do you ever see any sort of conflicts arise where you want to be horizontal and participate with everyone kind of let’s just say it’s all the container players in a very democratic and open way and yet you have the strategic bet that you’ve placed on one of them?
Brian: We certainly do. I mean, it obviously depends on the space in terms of how democratic you want to be, if you will. But again, we’re first and foremost technology partners and the commercial deals will speak for themselves. So if we’re going to go and do some sort of exclusive or semi-exclusive whether it would be kind of implied or purposeful exclusivity in any given area, the commercial partnership and how we do that and talk about it will mention that.
Investment is, again, a separate deal. So one good example there would be if you look at a company called Cloudflare that we invested in, doing what they do, they need to be and want to be kind of a neutral party. To do that and to hammer it home, it was actually an interesting approach by that CEO founder to use his investment round as a way to reinforce that message of neutrality. So he got Baidu, us, Qualcomm, and Google all to co-invest together in the same round.
Ben: Very interesting.
Brian: So you can use these investments as tools and again given the right commercial partnership, we certainly had no qualms with those guys as investors.
David: Maybe a good time to jump to on that front whether– We discussed with Taylor at Adobe when we chatted with him a few months ago kind of what the right way was for startups to build a relationship over time with potential acquirers. He really stressed the importance of that it is a relationship. Don’t expect that you’re just going to call up a potential acquirer one day and have a deal done by the next week. But I’m curious on the investing front for you guys, obviously different companies have different policies on this and approaches to strategic investments. But what’s the best way for an earlier mid-stage company start building that relationship with Microsoft?
Brian: I think piling on with the Adobe guys on that, it is amusing or unamusing sometimes where we’ll get these calls saying, “we have a term sheet on hand from X, would you like to also put in a bid? Let us know within the next week,” to be acquired. It’s generally not very productive and it is indeed a relationship. And the thing to think about as a startup founder is, getting acquired is almost like going through a hiring exercise and you do have to develop a relationship and trust, and essentially the acquiring entity is indeed making a hiring decision on the company as well as the specific people. So if you don’t have a relationship in place, it’s really hard to speed that through in a rapid way. So it's always a good idea to be developing those relationships with potential acquirers well in advance and it leads into what I will say on the investing side which is certainly the strategic investing side for me, all those roads lead through a partnership anyway. So you need to have that dialogue with us on the partnership side with the product teams.
David: With the business unit.
Brian: Yeah, with the business units and the product teams to get those partnerships in place long before I could potentially invest. So that’s really the best way to do it and I’m always happy to help get folks set up with the right folks in Microsoft if they don’t have a path in otherwise. But that’s really what has to start and certainly then as those conversations are going to then have a separate parallel of relationship development with my team is certainly not a bad thing. But again, first and foremost we’re a technology partner and the investing thing is really secondary to everything we do. So, if there’s limited resources at any given side, I wouldn’t bother with me, that’s for me to say. But, you know, and really focus on those strong relationships on the product level. It’s also more leveraged for them. I mean, if they can get a situation where there’s cross-selling motions, I mean, Microsoft field and sales team, it's just really powerful and I’ve certainly seen a lot of startups get a lot of leverage from that. If you can make that work, that’s really impactful to a small company.
David: It’s funny. Anybody who’s in the startup world knows it always just happens to work out that any time that you’re very close to a major milestone whether cementing a partnership with somebody like a Microsoft or a sales milestone, also just happens to be when you’re running out of money. Founders are tearing their hair out trying to balance the deal with them.
Brian: I just really don’t mean to make light of it that is really a difficult challenge and I’ve obviously been there. So one philosophy though going back again to our investing approach, we’re not looking to make companies or make rounds except in those really rare cases like the Facebook investment. So we tend not to lead rounds and we tend to just put a little bit of money in. Again, we’re not looking to be the primary funding source here at any given round or deal with a company.
So we’re not your typical investor. We’re not going to jump in and save a company if they’re running out of money. And so we’re the wrong folks to rely on on that basis anyway. So, the relationship can certainly be very helpful and both on the M&A front and the investment front for us to have a dialogue. It’s always a good thing but if the running out of money thing is something that you’re trying to avoid, I’m not usually a good call.
Ben: Well, jumping back over to the M&A side of the house, one of the theses of this show when we first set out was to figure out what makes acquisitions successful and selfishly so that David and I can really understand how to build companies that will become successfully acquired and will fit into another business or more recently, will actually have a successful IPO process.
David: We realized that we were selling ourselves short, our ambition short.
Ben: Right, right. In that vein, I’m very curious how on the M&A side of the house at Microsoft do you judge acquisitions and do you decide if this worked out well and we’re glad that we did this 5-10 years later.
Brian: We certainly do. It’s a really hard thing to do. Of course, the challenge there is that the destination is often changing as you’re going through the process and certainly in tech 2-5 years hindsight-wise things look a lot different than they did initially.
Ben: Yeah. Maybe 10 is the wrong number.
Brian: So it’s really difficult to think about how to judge an acquisition and whether it's successful or not, on any really rigorous way in tech. That said, we certainly try. So with any given acquisition, we’ll have a set of agreed judgment milestones, metrics and various criteria which usually include retention. Are all the folks or some folks of the acquired companies still here, 6 months, 1 year, 2 years later? Are they happy? Have we shipped X,Y and Z product and feature or have we done A, B and C integration? The revenue targets or profit targets, are there some sort of accelerated either schedules or unit volumes for some product or feature we have? Pick your set of things that form the basis for why we want to do a deal. We lay that all out and we cement that in, and then we do track that. Then the owner, someone in Microsoft owns that, someone in the product teams owns that, that team. And signed up for either that revenue or those features or retention or whatever it is. So we certainly do judge those over time.
That’s I think the closest we can get. And again, even with that, we have to be cognizant of how things shift and change, and often that person might not be the same person who’s managing them, those acquired employees 6, 12, 24 months later.
Ben: Are there any that you think went particularly well in the last 5 years that are worth saying like, “wow, the one went really phenomenally!”
Brian: Yeah, I think there certainly are. One thing I think that’s fun to watch is our changing approach to these things. I think in a lot of companies and certainly in Microsoft, it used to be a case where let’s say you’re the product team for Outlook and you’re trying to ship a mobile client and it’s not going so well, and you get management buy-off to go buy a mobile client. In this case, maybe Acompli, let’s just say as an example. Then you bring those folks into the company and now that startup that you just acquired is reporting to the same people who were failing before. That usually ended up being a recipe for just not– Let’s just say that the acquired companies are more excited to be in that position and let’s say that the managing folks there essentially went and continued to try and do the same thing but now with just new people.
So, that usually didn’t end well, surprisingly. So I think with Acompli and with other companies we’ve acquired recently, we’ve done that differently and we’ve taken those folks and empowered them and assuming they’ve been successful, we’ve continued to expand their scope and give them more and more. So, I think you’re seeing the benefit of that approach with Outlook Mobile in iOS and how that’s worked. So, I think that’s a case where I think we’re pretty excited and you can say the same thing for I think a lot of the other companies we’ve acquired recently.
David: It’s interesting. I always love thinking about what those, you know, as the organization matures, the corp dev organization matures or from my world as a VC firm grows and sees many cycles and as individuals within those organizations grow, you star to learn these VCs are all about pattern matching but you get these sort of senses that develop in kind of informal roles. What’s really interesting is when you decide to break the rules. But I’m thinking about one that actually would be relevant to my Carve Out, in VC that you learn pretty quickly is it’s really hard to build a big company if you’re not targeting a big market. I make that mistake, Madrona makes that mistake. Even other great VC firms make that mistake all the time. Then you’re always reminded like, “God, why did I do that?”
But for you and for Microsoft now, for decades having been able to practice the craft of M&A and I think about VC as the same way, you definitely get these roles that kind evolve like oh yeah, maybe we shouldn’t if we’re buying a product to replace one that’s failing, we probably shouldn’t have them report to people who are not successfully shipping the current product.
Brian: That’s right.
Ben: One final note before we move into Follow-Ups, Hot Takes, and Carve Outs. Are there any other people or companies who you admire that you think do corporate development or strategic investing really well?
Brian: That’s a good question. I think you see lots of different models if we’re talking about just the investing side. Google has taken the approach of creating a separate fund and a whole separate team and creating those walls and trying to create a real VC. I think that’s certainly one way to go and the market will judge over time if they’re doing a good job with that or not and they’re essentially out there competing with any other VC for dollars. That can take away some of the strategic components to it too and so there’s all sorts of views on the spectrum.
Corporate VC has gotten I think really hot for some reason over the last number of years and just about everyone. I was reading today, I think it was Tyson Foods, the folks that make chicken. They now have a VC looking at new protein replacement opportunities. So, Sesame Street has a VC. Pretty much everyone has a VC these days.
David: Yeah, I’ve been amazed. It’s been so much talked about in the last couple of years, but you drive around in Silicon Valley and you see all the auto companies have their Silicon Valley centers now.
Brian: Yeah, absolutely. I did a deal recently with GE and Caterpillar and others. Everybody is getting into the game and I think that’s going to be interesting to watch over time. So to kind of flip your question, I think there’s a lot of folks who I’m not sure if they’re doing it right and we’ll have to see. Again, going back to why these folks are setting it up and what they think they’re going to get out of it and as a former startup founder, certainly at the early stage, you certainly have to be careful about tying your wagon to really anyone because you want to maintain optionality at the early stage if you can. So that’s a hard thing to balance against the corporate entities and keeping them on it. We already talked about in terms of their incentives which is really for their company and their equity versus a traditional investor who is really looking to you to make a gain. Those incentives are very different and that manifests itself in the board room, that manifests itself in shareholder votes and following rounds and all sorts of things that I think folks are going to have to be careful of.
So I think there’s a whole bunch of folks who are out there doing a good job. Qualcomm Ventures certainly does and I think Google has a pretty good reputation, the sales force is very active and we’ve invest with them before. So I’ve been very impressed with a lot of the teams I’ve seen in corporate VC and again, I think we’ll have to see how the whole space shapes out.
David: Indeed. Should we do Follow-Ups and Hot Takes?
Ben: Yeah, let’s do it.
David: We’ve got some fun ones. I realized we were negligent last episode on the Marvel episode and didn’t discuss, I believe, we discussed Snap Inc.’s Spectacles launch and initial very positive reviews. I can’t wait to try them. But we did not discuss the elephant in the room which is –
David: News that they are rumored to be preparing to file for an IPO.
Ben: Yeah. Really interesting to think about. They’re a younger company than Uber and a lot of these other kind of like super unicorns. And in true Snapchat fashion, just not necessarily going with the trend. They just continually think of themselves as a different company or different type of company than a lot of these other big private companies of their generation. So I think there are reasons why it makes more sense for Snapchat to be IPO-ing and companies like Uber to be waiting. Uber in China I think is kind of the big reason they’re waiting but with Snapchat, I continue to be impressed and I’ll buy at any price.
David: Note to self. Do not give money to Ben.
Ben: Yeah. Don’t take my investment advice.
David: Also really interesting with Snapchat – one, kind of as we talked about on the Facebook IP show and then afterward as well. I think it’s great to see a company that is four years old but clearly has achieved scale and is in the process of building a meaningful revenue business and eventually hopefully profits as well. Take this step and do this.
Ben: They’ve achieved domestic scale. I’m very curious to see how they do internationally as they really start to expand there. Because I think we keep seeing Instagram copy a lot of Snapchat’s functionality and if you’re already an avid Snapchat user, you often are not really compelled by the Instagram features. You’re like kind of I already have my network, my habits. But then if you think about these people that are in countries where Snapchat hasn’t gotten big yet and now the sort of question is will Snapchat ever get big in those countries since Instagram kind of has a lot of that functionality now and they already use Instagram all the time. I’m still bullish because this is one of those sort of seed company bets where you just say “I wouldn’t bet against that person” and, like, I have a lot of faith in their ability to figure that out and that’s what I feel about Evan Spiegel and the kind of leadership at Snapchat. But I think it’s important to note a risk that they’ve achieved domestic scale and we’ll see how they do.
David: It will be a very interesting S1 to read no matter what.
Ben: Yeah. The risk of the business section is going to be awesome.
David: I’m curious, I don’t think Microsoft is a shareholder in Snap Inc. but Google Alphabet is as are several other strategic companies. I’m kind of curious, Brian, like when you guys have had investments that then go public, what do you guys do with the stock?
Brian: Yeah. Depends on the situation and we generally don’t comment on what we do with it. This goes back to the whole question around how and why we’re doing strategic investing is, selling a partner is usually a really difficult thing to do. So we generally just don’t talk about these things and so people will ask, “Hey. Facebook, have you sold your stock?” and we just don’t answer. It’s for good reason which is assuming around the threshold of course for–
David: Yup. Then you don’t have to report.
Brian: Yeah. Then there’s really no benefit whatsoever to talk about how and what we’re doing with those stakes.
David: It’s interesting. Something that I didn’t realize even until I had been working in venture for quite a number of years, but I think most people don’t realize about the VC ecosystem, it’s actually kind of the same thing. When companies go public, it’s not like there’s a magic moment and like we sell all our shares. Oftentimes we can’t even if we wanted to. So you have VC firms that are holding shares of companies that went public long ago and figuring out. It’s actually a big, it ends up being a meaningful kind of strategic discussion within VC firms for each investment.
Brian: Yeah, when is the right time to sell.
David: When is the right time to sell and we also have the complication we can distribute the shares directly to our investors. So we can just give them the shares rather than selling on the open market. So that’s another lever we can pull. We can hold, we can sell, or we can give the shares away or give the shares back to our LPs.
Ben: Is that LP decided or is that decided by the management of the VC firm?
David: Decided by the management of the VC firm.
David: So the risk of the sort of LP argument, typically they want us to distribute as fast as possible because like, “hey, that’s our investment, we invested in you. These are shares. They’re now liquid on public currency. We have people that manage public stocks. You should give them to us.”
David: The tension though is if we do that and we think there’s a meaningful chance that they might just sell those shares, then that can be detrimental to the company if a whole slug of shares comes on the market at once, that can depress the share price. So that’s a complicated situation.
David: Hot Take. This is just today as we’re recording this. Amazon announced Amazon Go. We got to talk about this.
Ben: Yeah. So, Amazon Go is a driverless drive-thru store.
David: Autonomous AI. It is all of these things. It’s a grocery store here in Seattle that you walk into and there are scanners and sort of turnstile-like things when you walk into the store. You scan the Amazon Go app on your phone and then it identifies you. Then once you’re in the door, you just pick up anything that you want to buy. You put it in whatever. You hold it, you put it in your backpack, you put it in your purse and you just walk out of the store. No checkout aisle, no cashiers, no nothing. Just automatically tracks what you picked up and you pay for it through the app automatically.
Ben: I don’t know if this will work but I love– It’s impossible to overstate how much I love Amazon’s muscle for experimentation and ability to do tens or hundreds of these sorts of things at once. It’s interesting. I’d love to know how big the team was that pulled this off. I’m willing to bet it’s a lot smaller than you’d think.
David: What’s also interesting, well we don’t know, but one of the cool things about how Amazon works is there are these small teams within the company that are focused on innovative projects that they’re doing. There’s a good chance this might be completely separate from the Amazon bookstore which is in U Village here. Certainly, it's a very different model of the store. Super cool. Love to see this innovation. I can’t wait. It will be open to the public in early 2017. I can’t wait to go try it.
Ben: Brian, what’s your take? Are you going to check it out?
Brian: I’m excited to go buy stuff and walk out and then see what happens.
Ben: Just feeling like I’m shoplifting but it being totally legit.
Brian: Exactly. This is going to create all sorts of consternation for shoplifters. How they’re going to get around this is going to be an interesting question.
David: Yeah. I wonder into the product and the model for this how much they thought about that. I mean, shoplifting is like a meaningful cost to retail stores and grocery stores. This solves that problem.
Brian: Maybe. Obviously if they have technology that solves that problem generally, in theory everybody who does retail is going to want to buy it. You have lots of companies, or I shouldn’t say lots of companies, but a few companies around that have anti-theft and anti-shoplifting technologies. I did some work actually as an investment banker for a company called Sensormatic back in the day which has some of those and they have some that you put in clothes and you try and walk out, there’s an ink splash across the clothes to ruin them just like you find with bank robbers, they put on those ink things and explode. Others, they just make the thing go beep. But obviously, shoplifters have ways to –
David: Would still prevail. Came through an official intelligence though.
Brian: That’s the same question with tech that Amazon is using here as to how they think this is going to work.
David: All right. Carve Outs.
Ben: Yeah. So mine is for years now, maybe even a decade, OK Go has been producing really incredible music videos and up-leveling their game, every single one. So, for anybody that remembers, probably 10 years ago, the treadmills video where it went totally viral and they shot at themselves in their backyard and there’s people dancing and they just choreographed. The band members having a choreographed dance on treadmills. They up leveled their game over and over and over again and maybe a year or two ago they did this incredible drone shop one where it was the first music video that I saw that really took advantage of “oh my God, what if we have this slowly rising drone go into the sky,” and you can see patterns formed by thousands of people on the ground all wearing different things. They’ve up leveled their game again.
So their new video for The One Moment, the entire video is shot in a super high framerate camera and –
David: Snapchat Spectacles? No.
Ben: It’s not. But it’s exploding paint and bullets going through things and it’s all –
David: So it’s like The Matrix?
Ben: It takes place in 4 seconds, the whole music video but it’s all super slowed down. So you have like three minutes of super high frame rate footage and it all actually lines up with the words they’re singing and the music. It’s really, really cool.
David: That’s really cool. I got to watch that. Mine, which I alluded to earlier on the show, is UC Berkeley. I just found out about this recently and read it. They do this really cool oral history, this program that does oral histories with people that have been instrumental in kind of development of the Bay Area. One of the aspects is business in the Bay Area and they have Don Valentine who was the founder of Sequioa. And he founded Sequioa in the early ‘70s. He was at Fairchild Semiconductor. He was not part of the Traitorous Eight. I believe it was the Traitorous Eight left, where was it, but the founded Fairchild and then he went to National Semiconductor and then he founded Sequioa. But this was the birth of Silicon Valley.
Anyway, there’s this great kind of 75-page, it’s all a transcript of hours of interviews with Don and it’s fantastic just to hear him talk about that history, of the early days in the Valley, and the semiconductor industry, but also the philosophy behind Sequioa, how it started, how they evolved their thinking process about things and they’re still among the best in the business and how they’ve evolved over the years. Really cool. We’ll link to it in the notes.
David: Brian, we know you've got one too.
Brian: Yes, I do. I find this particularly in light of everything that’s going on right now in terms of the election is an article that Om Malik published in The New Yorker about a week ago called “Silicon Valley Has an Empathy Vacuum.” I think it’s just a really interesting thought piece for all of us just to think about what we do affects everything and everyone else and whether or not there’s more we could or should be doing, or less that we could or should be doing relative to that. And that’s relative to job displacement, relative to kind of changes in society that our technology can foster such as how we’re impacting journalism, how we’re impacting culture and communities and all sorts of things. So it’s really interesting.
David: Yeah, it’s a great piece and certainly something Ben and I in this show have been thinking about a lot over the last month or so is, you know, lots of questions to be asked but I don’t think we should as a tech industry continue to operate just in ignorance of even trying to think about the broader impact of what we’re doing especially as we head into this age of artificial intelligence and all of the great things that are going to come from that and all of the social challenges as well. So, it’s a great piece by Om.
Ben: To just pile on, I recommend everyone read it for sure. Something we have struggled with, I think David and I and a lot of other people that I’ve talked to in the last few weeks and even before the election, we celebrate a lot of the things that technology does. Growth to hyper scale, being in shock and awe –
David: Instagram having 13 employees when it was acquired.
Ben: In shock and awe of the model, actually originally kind of created by Microsoft of incredibly high fixed cost, but then oh my God, you can sell licenses to this software with zero marginal cost to the world at gigantic enormous scale, and now with the internet making that even more accelerated. Yes, generally in the long-term more jobs are created after one or two generations of a gap by an advanced technology, but as an industry, we really do over celebrate these gains in the short-term and really do not come up with solutions for all the people that are disenfranchised because of it. I think that this piece is really great. I think we’re about to have a self-driving truck, a huge change. And if anybody looks at that, that graphic that was floating around the internet about a year ago of truck driving is like the top job in 20 states.
David: Yeah, including California.
Ben: Including California. Like, Otto acquired by Uber has just completed successful self-driving truck trips. It just doesn’t feel like it will be too long now before –
David: You can’t ignore the consequences.
Ben: No, no. I know I’m rambling a little bit on this but it really…
David: We’re glad you brought it up, Brian.
David: All right, with that…
Ben: Should we bring it home?
Ben: Awesome. Well, Brian, thank you so much. To our listeners out there, if you aren’t subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you've been a long-time listener of the show or maybe you’re a new listener and you just want to help us out, we would love, love, love a review on iTunes or a tweet or a share on Facebook, or any way that you can help grow the show. So, thank you so much Thanks for listening.
David: Thanks to Brian and 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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