Acquired dives into the legendary acquisition of Ben Horowitz & Marc Andreessen's "second act" software company Opsware, from a perspective never before heard—HP's side of the story! Our heroes are joined by Michel Feaster, who led both the acquisition for HP and then the Opsware product as part of the integrated company afterward under Ben Horowitz. Today the tables have turned: Michel is the Co-Founder and CEO of Seattle-based startup Usermind, and Ben Horowitz sits on her board on behalf of A16Z. This episode is not one to miss!
Topics covered include:
The Carve Out:
Ben:So we also grade acquisitions. David and I will each give it a grade and our guest can opt to either grade or not, especially since you were part of it.
Michel:I'm happy to grade.
Ben:Yeah? All right. [music] Welcome back to Episode 42 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.
David:I'm David Rosenthal.
Ben:And we are your hosts. Today we are covering the 2007 acquisition of Opsware by HP. We have with us a fantastic guest, Michel Feaster. So David will give Michel’s full bio in a minute but I want to say I'm personally very, very excited to have Michel with us. A lot of people know the story of the deal from the Opsware side as told in Ben Horowitz’s The Hard Thing About Hard Things. So Michel was the director of products for the division that purchased Opsware and is going to share the story from the HP side of that acquisition today.
So David, can you tell us a little bit about Michel’s background?
David:Yeah. So Michel today is the cofounder and CEO of Usermind which is a unified customer engagement hub based in Seattle and that she founded in 2013. But as Ben was alluding to, a decade ago before Usermind, Michel was working at the opposite end of the tech spectrum from a startup. She was the Director of Product for a division of Hewlett-Packard’s enterprise software business where she led the acquisition of Ben Horowitz and Marc Andreessen’s legendary company Opsware for $1.6 billion. And most fun, flash forward to today, and the tables have turned. Ben Horowitz is now on her board at Usermind on behalf of Andreesen Horowitz, his venture capital firm. And we are honored to have Michel on the show to cover this deal. So thank you for joining us.
Michel:Thanks for having me guys. Really excited.
Ben:And we appreciate it. So before we dive in, we want to mention to new listeners of the show we have got a Slack and we are over 800 strong. That is at Acquired.fm, on the sidebar you can join us in the Slack and talk all things M&A, tech news and any time there is something pretty exciting that happens like the Whole Foods acquisitions, that’s when it really shines and there’s lots of great speculation in there.
Second is, we love reviews. So you can help us grow the show by leaving a review on Apple Podcasts, that's what we call it now, and tell your friends.
Our sponsor for this episode is Perkins Coie, the Counsel to Great Companies. We have with us on the phone today, Buddy Arnheim. Buddy is a partner in the Perkins Coie corporate practice focusing on the representation of emerging growth companies, venture capital funds, and other early-stage investors. Buddy is based in Palo Alto and has been the first counsel on companies you have may recognize such as OpenTable, Trulia, Hotel Tonight, and Cloudera. His team at Perkins represents over 450 VC-backed companies. So Buddy, what’s something that listeners of the show may not know about Perkins Coie?
Buddy Anaheim:Folks that have worked with Perkins Coie probably know this. Folks that haven’t come across Perkins Coie may think of us as the Pacific Northwest firm that incorporated Boeing. But we’ve grown quite a bit since those days. We have about 1100 lawyers throughout the United States. We were named the go-to big law firm for Silicon Valley entrepreneurs by JDJournal in 2017 and we’ve been one of the Fortune Magazine’s 100 Best Companies to work for for the last 15 consecutive years.
Ben:Pretty impressive. If you want to learn more about Perkins Coie or reach out to them, you can click the link in the show notes or in the Slack. David, do you want to take us through the acquisition history and facts?
David:Yeah, as always. So as Ben alluded to, we’re going to try and focus mostly on the HP side of the story with Michel because much ink has been spilled about the Opsware side and if you haven’t heard about Opsware, we totally recommend reading The Hard Thing About Hard Things by Ben. It is such a great book. There is also a really great sort of period piece that Wired did in August 2000 right before the tech bubble burst. All about the company and about Ben and Marc Andreessen and this being Marc’s sort of second act after Netscape. So we’ll link to that in the show notes and that provides a really good full history of Opsware.
But to sort of the stage I'm going to take sort of 5 minutes and do a quick truncated history just so we’re all on the same page and can then dive in with Michel about how HP viewed things.
So the company that ultimately became Opsware was founded as a different company called Loudcloud and it was started in September 1999 by four people: Marc Andreessen who had been the cofounder and CTO of Netscape and was famously the Internet’s Golden Boy on the cover of Time Magazine among many other press outlets. And Ben Horowitz who was the CEO of Loudcloud and Ben had been a PM for Marc at Netscape. And two other folks – Tim Howes who was the CTO of Netscape’s server division and he was a total expert in sort of internet infrastructure and plumbing. He created LDAP (lightweight directory access protocol) which if you use any sort of internal company directory service or log-on service these days. It’s probably based on that. Pretty amazing. Then the fourth person was a guy named Sik Rhee and Sik I believe had briefly been part of Netscape. But when Netscape got acquired by AOL, he was CTO of the ecommerce platform division within AOL. So that was the division and this becomes important for Loudcloud that when companies back in the day did deals with AOL to be part of the sort of walled garden and sell things via ecommerce through AOL, they needed to spin up sort of microsites to do that quickly and Rhee was kind of in charge of helping them helping Nike or whatnot do that at AOL.
So the idea for what Loudcloud would be, it actually comes from Sik Rhee, and the idea was basically that it would be AWS before AWS. It was going to be an infrastructure as a service product. The idea was that just like these companies who didn’t have software developers or internet infrastructure teams like Nike or L.L. Bean or whomever needed to spin up website to sell on AOL, they would also need to do that on the broader internet. And why would they go build their own teams to do this, they should just use a service to do the infrastructure for them.
Ben:David, that was both the human power as a service as well as the actual servers as a service, right?
David:Well, I think it was mostly the servers as a service because remember, the idea of the cloud doesn’t really exist in these days. If you wanted to build a website, the first thing you had to do was go buy a bunch of servers and stick them in the closet somewhere. So that's what Loudcloud was sort of designed to be – your virtual servers.
Michel:By the way that is why they partnered with EDS. So later there is a big transaction I did with those guys and that was for the manned service offerings. So Opsware sold AWS Element and they partnered with EDS to provide a full managed service, and that will be a chapter in the later Element story.
David:To come. But there’s this great Marc Andreessen quote from the first press briefing that they do about the company and there’s so much buzz around this company before they even launched because these are obviously sort of early, the first generation of tech celebrities and this is their second act. And the quote from Marc is that “It’s like providing the electric power grid and companies can plug in.” I just thought this was so awesome because we’ll also link in the show notes when Jeff Bezos launches AWS later in the mid-2000s, he goes and he talks at Y Combinator and he uses this exact analogy for AWS. I didn’t realize this. I don’t know if Jeff realized this, if he came up with it independently or not, but he is literally using the same analogy the Andreesen used when he was launching Loudcloud.
Ben:Wow. And so Michel, I mean we’ll get into this in tech themes but clearly AWS, a huge successful business right now. Loudcloud, not a huge successful business then. Obviously, timing is the issue but what was it about the timing?
Michel:Look at the readiness of the internet for enterprise cloud adoption. And the reason, to me, Bezos is so successful today is, one, development is so much more pervasive. So the number of people who could leverage AWS has exploded. Number two, the costs of starting a company has gone to zero, so the number of targets who would be leveraging something like AWS is so much greater now. And three, I think security and privacy have evolved enough that companies are actually willing to bill. So the number of kind of target enterprises, your deal size, all of these elements around kind of go to market have finally matured to where AWS is not an idea, it’s a business.
David:There’s another really big of this which is that the whole concept of server virtualization didn’t really exist yet. Like, it sort of existed. The company VMware which listeners may or may not be familiar with but it’s one of the largest enterprise software and infrastructure companies in the world. It’s majority-owned by EMC these days. What they do, they had created a product that was just starting to take off around this time but wasn’t widely used that essentially let you take physical server machines and slice them up into multiple virtual machines. So one box could serve multiple customers essentially, and that was a big key for making something like AWS work because without that, you needed essentially a separate box for everybody. And that was not yet a paradigm that existed in these days.
Ben:Yeah. It feels like that would hamstring Amazon these days. I don’t know.
Michel:Well, now we’re onto containers, right. That whole technology has emerged. By the way, on our side when we were doing the deal, virtualization is a key reason why HP needed to buy Opsware. So it’s not really just about do you need virtualization to be able to run an effective AWS offering. It’s what problem does that create in IT. So one of the central reasons to me for Opsware’s growth is that as virtualization exploded in the IT infrastructure, the old human way of managing servers and networks and storage couldn’t scale. So one of the single biggest reasons for their success was the exponential growth and complexity that virtualization drove in IT. So if you look at Opsware, as it went from Loudcloud later to become Opsware, its growth from whatever 4-10 million to 80 or 100 million at its exit, virtualization was the technology that drove the majority of their market opportunity, and it was a big factor in our belief that we need to be and own the technology, that this was a key control point in the future of how IT was going to work.
David:Yeah. Well, we’ll come right back to that. But in the meantime, this isn’t really what Loudcloud is trying to do. They’re trying to be AWS and there’s so much hype. And we’ll just run through really quickly sort of the corporate timeline and fortunately, Ben Horowitz himself made a nice little truncated version in a blog post that we’ll also link to in the show notes, but this is ‘90s bubble era internet at its finest.
So November 1999, before launching the product, Loudcloud raises $21 million at a $45 million pre-money valuation, and Andy Rachleff at Benchmark led that round. January 2000, so just a couple months later, they raise another $45 million in debt from Morgan Stanley, of all places. They haven’t even launched a product yet. A few months after that, June of 2000, they raised $120 million at a $700 million pre-money valuation. And then things start to go a little rocky but nonetheless, the company sort of perseveres, they do end up going public in March of 2001. They list on the NASDAQ. They raise another $160 million but the valuation goes down from the last private round. Echoes of this happening again today. So they have about a $480 million market cap and then the whole world just blows up the tech world and all of the customers for Loudcloud were these Pets.com era startups and they just go out of business. So there’s essentially no business left for Loudcloud, for the AWS managed service product.
So in August of 2002, as Michel was alluding to, they sell that business to EDS which is Ross Perot’s software company.
Ben:And what does EDS stand for? Is it Electronic Data Service?
David:Systems. I think it's Electronic Data Systems. They sell that for just over $60 million. But that's the whole business. Like there is no other business within the company and Ben writes about this at length in the book. But what they do have is this technology, this sort of internal tool that they’d created called Opsware. And Tim Howes, the guy who invented LDAP, previously at Netscape, he had created this tool within Loudcloud that was basically an automated way to provision and then deploy and manage all the servers that they had in their data centers. They sort of this idea that like, “okay, Loudcloud isn’t working at all. Let’s get rid of it.” We have this tool, we use it. We think it’s great. Maybe other customers who have big data centers would want to use this. So they essentially completely pivot as a public company after the tech bubble burst and they start down this journey to build an enterprise software company selling data center technology.
Ben:Michel’s shaking her head over there.
Ben:What’s going through your head right now?
Michel:That's an almost impossible task. I obviously got to know Ben much later in his life but it’s hard enough to build. So think about how hard it is to build shrink wrap software that you’re going to sell and install at a customer when you know you’re going to do it. And this is before SaaS, right? So his stuff was all on-prem and they had to take basically take tooling that was built for internal ops people to manage customer environments and turn it into a shrink wrap product. So you just think about like feasibility of stuff you would build for like internal use versus the UI for customers and the level of complexity you tolerate. So just the amount of heroic effort that it must have taken to get that product to be a real product, I think pretty huge.
On the flip side, if you think about it, they built something that was ahead of its time because their business was so complex. To my earlier point as enterprises start to adopt virtualization, they start needing something that looks very much like what they built for their own internal management. So is it crazy or genius? I don’t know. And I can’t even imagine doing that public, like that would be incredibly hard as a pivot if you’re a private, venture-backed company. Never mind you’re on the stock exchange.
David:Just for context – oh, go ahead, Ben.
Ben:We’ll get into tech themes later but thinking about my job all day and working on an early stage idea and doing customer validation, you have to always find a proxy for your customer and figure out would someone use this, is this feature useful, try and get inside their head and be an intuit what the customer might want. But Michel you said on the flip side, like they were there own customer and they were yours ahead so they were kind of building something that was going to be valuable a few years in the future once all the dust settled with absolute perfect information on what the necessary components of the thing were.
Michel:The perfect scenario there is they had the persona 100 percent right. They were building tooling for server admins who were needing to manage environments at scale with multiple applications in there. That's the way IT began to look five years after they started selling that software. So you’re dead right. Probably their biggest advantage was they were ahead in kind of the kind of software operation they were building and they had the person a thousand percent dialed in because they had lived that pain all day every day trying to run that service offering. So with that challenges came huge advantages that they were able to parlay into an incredible software company.
David:I'm wondering given that you both saw this when you acquired the company from the outside but now, you’re a founder and a CEO of an enterprise company. When you founded Usermind in 2013, how long did it take you and how long did you work on building the product before you felt that it was ready to shift for customers? You knew the customer persona when you started, but just so we have context and our listeners have context, like how hard is this task?
Michel:Oh, it's really hard. We spent four months interviewing. So for me just to think about and define the persona, the use cases, the product, four months of interviews, probably three hundred interviews just to kind of get to set requirements. Then we went through multiple iterations. It probably took us 2 ½ years to go from an alpha or prototype alpha beta to launch the software publicly and begin selling it. And look, necessity is the mother of invention so they had to do what they were doing or fail, and I'm sure that gritty determination was another big part of that later success. But that's a pretty hard turn to make, to take that software and figure out how to package it up. I would imagine a lot of their challenges were UI related, where how do we now expose this tremendous tooling and IP into an application that users can use who are not Opsware employees.
And oddly enough, by the way, I never really talked to Ben about that part of their history. I never spent a lot of time talking about this particular moment in time.
David:Well, what’s funny is you’d imagine, I think if I went through this, I’d probably never want to talk about it again. But Ben went and wrote a whole book about it.
Michel:Yeah, and thank God. I feel like he’s the first... not investor but first CEO who essentially exposed the myth that it’s all perfect all the time and kind of gave I think CEOs and leaders permission to talk about all of the hard things that really make or what he calls the struggle. I remember when I was going to found and he told me “your hardest challenge is going to be managing your own psychology.” And he’s dead right. To me, his book gives people permission to talk about what that’s really like.
Ben:Yeah. I never attributed to that but you’re right, the last few years it just seemed like the climate of okayness to talk about these things has dramatically increased.
Michel:Yeah. I think he was a big part of it. I wasn’t an entrepreneur. Ben is the person who changed my life and kind of got me out of Mercury and into startups. But I think at least in my mind that permission from someone like him to talk about the truth, it's a great gift
David:You mentioned Mercury. Just for context for our listeners. So, the way you came to HP was you had been at Mercury Interactive, which HP had acquired shortly before the Opsware acquisition.
Michel:Yeah. Sad day.
David:Sad day when HP acquired Mercury?
Michel:Yeah. I love mercury. All acquisitions are hard on all sides.
David:So what was Mercury and how did you come there and what ended up being the fit that you saw between what Opsware became and Mercury?
Michel:Well, so one, I was at Mercury for almost eight years. I was originally in the pre-sales organization and for people who don’t know, it’s like technical sales. You’re going out installing software and you’re kind of the technical half of the selling motion. I'm in an enterprise software company. I joined Mercury, probably about 200 people or 250 employees and I stayed through 3000 through almost a billion in revenue, so it was an incredible experience.
Ben:Wow. I bet.
Michel:Really amazing. I spent half my time there in the field in New England and in fact, started out really just POC-ing and selling technology. I was very blessed. As the company scaled, I ended up owning more strategic accounts from a technical pre-sales perspective. So when you’re selling to GE or Fidelity, they’ll say “No. We want a three-year roadmap with Mercury. We want to talk about how to partner strategically.” So I started to work very closely with a product organization and eventually moved out to California and took my first product role. I was very blessed. I was the second product manager of a product called LoadRunner which when I took over that product was already a $250 million business. It had 65 percent market share. Customers loved it, the product worked. So I learned product management or how to think about product strategy taking over like an incredibly successful business and so I was given such freedom to put it in tele sales, put it in partners, innovate on the product. And I can’t imagine a better school of product management. I rotated around. I basically managed all pieces of the testing business. And then when we got acquired by HP, my boss called me and said, “Hey, there’s this really broken business.” So this is now the time when virtualization is just exploding in the enterprise. Opsware probably is the market leader and data center automation competing with BladeLogic at IBM. HP had a business.
David:This is kind of 5 years after the pivot. Or in 2007 now, virtualization is finally a thing.
Michel:It is. And when you look at that, what that really means is that all these kind of human methods, the manual ways of now automating data center management end to end start to break down essentially. You can’t scale human beings indefinitely. So there’s this incredible froth and excitement over this automation market and HP had acquired a couple of companies. They acquired a company called Radia. They had acquired a company which did kind of like Opsware server automation but they did client desktop management as well. And they acquired a storage product called AppIQ. But really, after spending probably $100 million, having 200 engineers on this problem, we’re fifth in the market. So you’ve all said to me, my boss (the head of products at Mercury) said, “Hey, there’s a lot of heat in the sales organization about this. Customers want a solution from HP and we’re losing a lot of deals. You’re kind of my glass breaker. You want to go in there and figure it out and it will be a great opportunity for you, a great exposure.” So that's kind of how I got in a position where I needed to think through a strategy which ultimately led to acquiring Opsware.
Ben:I might be skipping ahead here a little bit and then David can take us back but this is a perfect tee-up for how did you do that build versus buy? How did you do that calculation? How was that done in a company like that?
Michel:It was kind of interesting. So I took over and agreed to do it, took over the business and two weeks later we had this – I don’t even know what we call it, a quarterly business review (QBR) and I'm supposed to be updating the Head of Software, Tom Hogan, and Deb, and kind of all the execs of software on our strategy. I just took over. Like, I don’t know what strategy is. So I just kind of went back to first principles. So to me, first principles are what our users want do and what’s happening in the market. So I kind of interviewed everybody in the team and I talked with the analyst and I got some basic data. And the math to me was incredibly clear. So when I looked at it, we had 200 engineers on something where we were generating whatever, 20 million in revenue. We’re fifth in the market and when I looked at the first 3 players, so to me, there’s either emerging markets or consolidating markets and it’s important to know what market you’re in. When I looked at that, I thought, “Well, gosh.” Between Opsware (market leader), Blade Logic (second player), IBM who had done an acquisition, 80 percent of the market is in the hands of three vendors. Well, that's not an emerging market. That’s a consolidating market.
So that's kind of question 1 is where are we at in the market evolution. And question 2 is who are we as a company. There are companies who can disrupt a market that’s consolidated. Mercury could have done it if we wanted to. But my point of view is that HP at the time and still by the way and probably is, is a channel company. And what they really have is just like IBM as an incredible channel and what they’re great at is selling good software to companies who trust them and delivering it. What they’re not good at is building new things from scratch. So the second part of my calculus was Sun Tzu says if you know yourself and you know the enemy, you’ll be victorious in a thousand battles.
David:We’re big fans of Sun Tzu on this podcast.
Michel:I'm a huge fan. So my second rationale was in a consolidated market, there is no path for a company like HP to build its way to victory. So you’re only left with buy or exit the market.
Ben:And you think if it was in an emerging market, then HP would have had a chance at building their own but still typically worse than a startup.
Michel:It would have been almost impossible for that to happen but yes, I mean in theory, we could have had a chance and you probably would have taken a different strategy in that context, right? So I actually was given a very simple problem. There was nothing really complex about answering that question. There’s more to it but that's essentially the math. Even more if you looked at it in the context of the whole portfolio, why would you invest so much engineering for so little return? Because the other part about software which we all understand in valuation is that the only players that make any money are the #1 or #2 player in the market. So even if there was a path for HP to become from 5 to 4, or take out IBM in 5 to 3, profitability goes to the winner. And so you lose money indefinitely on a software business unless you become the dominant player and then you make insane profit. To me, if there’s no path to #1 or #2 for you based on who you are, that's really what you need to look at to buy a solution.
So that was really – I think I presented five slides, it was very concrete. I also, by the way, spent a bunch of time interviewing sales people and trying to understand how important this was, meaning how often was it coming up in deals, what was the channel relevance. Because the other piece of it is if we did a deal, can we monetize? Are we talking to the people who’d buy it? Do we feel like we could have gotten that money that went to Opsware, IBM. And the was maybe the last piece of the calculus was the channel fit was very high. So HP at the time had many brands, Openview being one of the most famous ones that we were selling to the operations teams. So we had a very experienced channel selling to the same buyer that would be buying Opsware or buying BladeLogic. When you really step back and look at that math, it’s pretty obvious that it has to be an M&A scenario or you should shut the business down. So that was phase one.
Ben:But you probably did enough calculus on what does this market look like in 5 or 10 years where it was like we can’t afford to not play in this market.
Michel:Yeah, I mean that's all the obvious math. I guess that was implied in my head. I think probably if that didn’t make sense, HP wouldn’t have already been in this space, so maybe that's why I didn’t reference it.
David:This was the future of the data center, right? I mean virtualization is now, I mean, I don’t know that there’s any data center probably in the world that doesn’t at least have some degree of virtualization now.
Michel:Oh, yeah. And oh by the way, now it’s become containerization. So if you have won this battle, in theory you have a very strategic control point. So to me that goes to the now you’re in the second question which is, okay, if it’s either go buy the winner or shut your business down, you’ve asked the next question which is, is this strategic land? Do we have to own this land? Is it a strategic control point to owning the future disruption of the enterprise or is it strategic to my buyer the point where if I don’t have this, I undermine other businesses?
David:And the buyer being the end customer here that you’re selling to, right?
Michel:This IT operations person, yeah. And so you guys have already made the argument. It’s pretty clear that our actual Uber theory at the time was that for IT operations folks, automation and monitoring were ultimately converged. So the winning vendor for IT operations wasn’t just the winning vendor who had HP OpenView. But it was the one who had the best automation and the best monitoring. When you think about it at that level, by the way then your competitors are very few people. You’re competing with HP and with the BMC NCA. And so the number of people who could actually if that's really the winning strategy in IT operations, how many people are positioned well to compete with us. So we really thought that if we did this deal, it was us and BMC competing to dominate IT operations. In light of that you can see why the buy decision became very clear, that we felt it was strategic land not just because of the immediate opportunity around virtualization and kind of the core automation problem but our hypothesis that it would become a converged solution and that that would actually strengthen our already dominant OpenView business, right? And that it would be a 1 plus 1 is 3 in the broader IT operations business. So you can see what drove from our point of view we called it a coveted asset. We felt that Opsware would be not just breaking the Opsware business but it would be affecting a much larger existing business within HP.
David:So you do end up buying it in July 2007 for $1.6 billion. And after the pivot 5 years earlier in the public markets, the public market pivot, what then became Opsware was trading for $28 million of market cap which was $40 million less than the amount of cash that they had in the bank. So they had 60 or 70 million of cash in the bank and they’re trading for $28 million. So 5 years later, incredible turnaround and achieve an exit that's 50 times that. What was it like after you bought them though? From an integration process and a culture, this was a team that had been through the fire twice.
Ben:Absolutely. I want to know that. Michel, the one thing I’ve been really withholding back from asking is, okay, so you make this presentation and it’s five slides and you make a decision, like what logistically happens after that? You shoot an email to like Ben at Opsware? How does that happen?
Michel:So there’s actually two interesting things that happens, if you don’t mind, before we answer the integration. So the process, obviously the executives have to kind of come to some consensus that they agree to that. There was quite a lot of discussion that I wasn’t part of but where the head of software talked to his head of sales and so kind of validating, “hey, this is important. Hey, we’re seeing them in all the deals.” So the executives needed to go and think about it as well as kind of validate the data I put forth to them about how important this was going to be. So it took some time for us to get kind of organizational alignment on the state of the market and how key this could be. Honestly, it was not that controversial, I think. It was really clear that we needed something that customers wanted us to have a product. The interesting discussion was then, who do you buy? So kind of before you get to the buying Opsware, there was an alternate vendor.
Michel:BladeLogic. Right, yeah.
David:Which BMC did buy.
Michel:Which BMC did buy, right. So the interesting thing about that is you don’t email. So what happened is someone from corp dev was assigned to us. So Sandeep Johri at the time was running corporate development and he kind of took ownership of the project on the corp dev side. I wasn’t actually involved in that, not in that piece of it but I wasn’t on all the email chains where they’re emailing Ben. I was in most of the meetings. I did all the technical due diligence so you kind of start these threads and we ran our threads in parallel, so we were talking to both Opsware and BladeLogic. And that involved financial due diligence, customer reviews, technical diligence. It was pretty fascinating. In fact, once we had decided our vendor, we were onsite during their sales kickoff which was a little-known fact and I in fact couldn’t leave the room, so everybody else is allowed to leave but there were so many Mercury people at Opsware that people were worried that if I left, everyone would know who I was. So there’s quite a lot of drama to that. But look, the net of why Opsware versus BladeLogic, to me it boiled down to what do you need to buy and how many acquisitions can we execute. So, there’s kind of a little-known wrinkle here which is why they started as a server automation company, that was the LoudCloud heritage. Ben’s vision was to automate the data center. So they did acquisitions to acquire a runbook automation technology from a company called iConclude that was based in Seattle actually. They bought a network automation company. I actually believe that one was based in Seattle as well. So they made a couple acquisitions to extend their product line from server automation to what they call data center automation. And our theory was actually slightly bigger than that as we felt that what customers wanted to do was deploy services end to end. So the winning vendor would be executing a product strategy to bring desktop, server, network, storage, all of the automation elements into a suite to automate application deployment so that servers on some level are just one tiny piece of an end-to-end IT service. So that was the strategy we were executing. When you look at that, we had a client product already at HP and we had a storage product from these acquisitions we had.
So really there was a lot of differences from a market share perspective. Clearly Opsware was ahead of BladeLogic and that's very attractive. You kind of de facto always want to buy the market leader. However, at the time, BladeLogic had a better product than Opsware, so that is the downside of this kind of LoudCloud. And I would say better product in the sense of usability. So where they lost deals, it was on usability. Where they had one deals, it was an enterprise scale. So there were product implications to this kind of pivot that they did.
David:To preview tech themes a little bit, I mean this is something that for listeners that aren’t as familiar with enterprise technology, it is just a hard thing initially to get your mind around. Steve Jobs talked about this that in the enterprise, it’s not always the best product that wins. Opsware was the market leader but as you’re saying, they didn’t have the best product. They had the best sales motion.
Michel: Yeah, and at least in server automation. So their strategy was to basically move to the suite motion. So they had the best suite. BladeLogic did not have other products. They had partnerships to solve that problem. So if Opsware could move the buying criteria to being data center automation, they won, because it isn’t just head-to-head product to product. So our assessment was, number one, we wanted to buy the market leader and that having the first mover in our channel, best current position in what we thought was one of the best channels in the world is the best combination. But the second piece of math for us was that if we had gone after BladeLogic, we would have had to do three additional acquisitions and we felt that the risk, even though if it would have been cheaper, we thought that actually the likelihood of our ability to successful acquire four companies was significantly less than one. If you look at big companies buying small companies, in many cases the medium-sized ones do the best. They’re big enough that they can be put in a channel and it works. In many cases these little technology tuck-ins, a $10 million acquisition is harder to make work than a billion-dollar acquisition because there’s not a critical mass of people and ideas to teach the rest of the company how to sell.
Michel:So the two pieces for us on Opsware were, I guess three. Strategic alignment, they had the full suite, they were the market leader. And even if they had some product deficiencies, we felt that we were much more likely to be able to execute that successfully than BladeLogic plus three others. So that's kind of the math that led to the end of us saying our preference, our top partner, our top target would be Opsware versus BladeLogic. And we continue talking to BladeLogic to the end. So if we had lost Opsware to BMC or to whomever, we would have had a fallback plan. But we had a clear preference and paid a premium for it, frankly.
David:So now I want to jump to the culture and the people piece. That is bulletproof logic there. But the Hard Thing About Hard Things or you listen to Ben or you look at Andreessen Horowitz and the first thing that comes to mind is not HP. What was it like integrating this team?
Michel:Interesting. So one, if you’ve read the book, Ben has a management technique called Freaky Friday. So I thought, hey, I'm going to run the integration and they’re just going to give me some special projects and send me off in the sunset. I didn’t expect to have product ownership at that point. So ben actually swapped me and his head of product at the time, Eric Vishria. So Eric took over ITSM. Eric is now at Benchmark Capital as a VC and founded his own company kind of in between his stint at HP and joining Benchmark. But Eric joined the ITSM team and took it over. And Frank Chen who was the product management half of that partnership–
David:Who is now at Andreessen Horowitz.
Michel:And is now at Andreessen Horowitz, moved into engineering to help, under Jason Rosenthal who was the head of engineering there at the time. So Ben gave me a product and that was incredible. So he calls it Freaky Friday where he swaps executives.
David:Oh, like the Jamie Lee Curtis movie.
Michel:Yeah, that's one of his management techniques that he wrote about. And I worked directly for him. So that was pretty amazing as an opportunity and experience. I think a part of why it worked is that I wasn’t HP. I was a Mercury person where the DNA is much closer to Opsware. By the way, like that silly sales kickoff story, there were many Mercury people at HP. Mercury was a very Israeli company. Very, very aggressive. Very direct. We were very customer-focused and winning was incredibly important. So a lot of external values that I think naturally close to the Opsware teams.
So I think one piece of it was he put someone in charge of the integration who had the same cultural values as his own team and I think that made things easier. But for sure there’s cultural friction. As an example, we’re going through the integration, the formal integration process and I remember being on the phone with the IT organization and the IT organization is insisting that we have to shut down all these nonapproved apps that Opsware has and one of the nonapproved apps – I’ll give you two that are just outrageous. One of them happened to be the licensed key generator for all of the Opsware software and we had to shut it off at the time of acquisition according to IT. And I'm like, “Someone help me understand why we would spend $1.6 billion and then basically be unable to sell and turn on any of the software. Or the other one was like –
Ben:Wait, there was no like grace period of like we should spend something else so that –
Michel:No. Day one. So you’re in this like six-month whatever it was, four-month. I don’t even remember. It was kind of like dog years. You’re in this integration which is super intense but you have this deadline. And IT had very strict objectives. I mean, Mark Currin was running HP at the time, so it was Mark Currin’s HP. Second, they had a source control standard within the company and of course they were like, well, you’d have to migrate all the source control and source code into this new...
David:This is pre GitHub.
Michel:Yeah. And as you know, in that time, that was just almost impossible. So there was a lot of these kind of weird operational hurdles that I wouldn’t have anticipated. That's kind of a whole class of problem that you have to deal with. Again, I feel like I was very lucky because I was kind of a liaison. I probably absorbed a lot of that weird cultural friction for those guys in that sense, at least during the integration. And actually, at the time Scott Cooper was my partner on the Opsware side so he’s now I guess the COO running all the operating arm of Andreessen Horowitz. And he’s a great partner on the Opsware side. For me, working with them was very easy and a lot of my job was basically trying to prevent the big mechanism of HP from making unnatural things happen. But once we had them integrated, I think then it was a lot more interesting so you kind of get this middle period where you’re dealing with all the organizational administrivia that’s frustrating. I think one thing we did well in that period was we took market share so we kind of really sold the heck out of Opsware in that period and gained a pretty good advantage over BladeLogic because at the time, BMC hadn’t yet announced their deal with Blade.
And then was we formally integrated them, we had all of the challenges you can imagine. So the software, the sales organization, you start to break up the teams so instead of being Opsware now, engineering is part of Ben’s organization, so Ben took over products and engineering for HP software. So on some level that’s a little safe. The sales organization got put under some of the sales leaders as overlays and to be honest, that’s an area where if I look back, gosh, I wish we had done a better job. So the good news is we had these experts, these black belts, and Opsware was global. So we immediately got traction globally. But, you know, overlays are a hard thing to make work, I feel like.
Ben:You say overlays as in there’s HP management on top of each of them.
Michel:Oh, no. Yeah, sorry. Sales overlay. So generally speaking, when you put a new product that's hard to sell, there’s a lot of IP in how to sell it. And so you take the sales organization of Opsware and who used to just sell Opsware and now they’re basically what we call overlays. They work with the HP people because the HP people already own all those accounts and they sell this huge portfolio software but they don’t know Opsware. So you have this kind of digestion period where you try and disseminate the expertise of the acquirer company into your sales organization and eventually you want the motion to be that's fully absorbed and everybody’s fully trained and you can sell. But the biggest question is how do you train and enable that sales organization to be even half as effective as an Opsware person was in objections and challenges and competitive landscape and so forth. That presents its own whole set of challenges.
David:I was going to say I think this is a big thing for listeners to understand. It’s easy to look at this from the outside and say, okay, like enterprise is about sales channels and sales motions, like I sort of get what that means. But like this is it in practice. The Opsware sales team was sort of a finely tuned machine to sell data center, automation and management. But the HP sales team is selling all sorts of things, a whole portfolio of everything you can imagine to CIOs at companies and so now Opsware is going to be just a small piece of that portfolio and so you need the HP sales team to digest that and understand how to sell Opsware best. But it's not just about selling Opsware; it’s about selling everything.
Michel:Yeah. So you have a huge enablement challenge and I love that. I ran the product management and product marketing organization for the combined business, what we ended up calling BSA. So it was business service automation. We kind of did away with the DCA term. But it was a phenomenal challenge. We did so much training. I actually flew in the year after that acquisition. I think I flew 350,000 miles worldwide, visiting customers, doing deals, trading reps. It was pretty phenomenal and we saw huge growth. It’s been a long time for me. It’s been a decade but I don’t remember. I think by the time I left we had seen a 350 percent growth in the business. So from that perspective, it's at least a huge early down payment of success on your vision of kind of the value of that technology.
Ben:We’ve got a format to this show that at some point we’ll move here into categorization, but I'm curious looking back on it all where the state of data centers are today and with the rise of cloud services and the major players being Google, Amazon, Microsoft. You can make arguments about that but you don’t often hear HP thrown around in there. What do you think happened in the last decade from the world of data center automation and the business center automation?
Michel:Business services automation.
Ben:Business service automation into the world that we have today and why isn’t HP one of those big three or big four?
Michel:Yeah, interesting. Well, I mean I look at the natural successors of Opsware and I think of companies like Puppet and Chef.
Ben:By the way, how fascinating. One’s local in Seattle here but they’re both going to be public companies. I don’t remember if Puppet already filed but it’s pretty clear that those companies are on their way. So the inheritors of the problem in the market opportunity are those companies and in fact it will be very interesting to see whether dockerization brings a new generation, a third generation or whether dockerization just accelerates Chef and Puppet, they’re able to capitalize on that motion. But why not HP? Look, it’s very hard for big companies to innovate and here’s the reason why. Innovation, number one, is a people thing. So you have to have a really high quality of thought. That's all people. And at least at the time I was at HP, it was interesting. Hurd had a very manufacturing mindset and manufacturing companies look at people as very interchangeable. Software companies have this idea of the 10x-er where the 10x developer can do things that no one else can do and the 10x product person can see things no one else can see and it’s really true. That there isn’t a scaleableness to the way software works inherently like you can’t replace Steve Jobs with a hundred other people and get the same work that Steve Jobs did. It just doesn’t work that way. So when you look at kind of our software organization or a software business, one, you need to retain those top people I think big organizations have just an incredibly hard time doing it because of a culture mismatch. My level of patience for the HP culture was very low. By the way, my culture fit with them was very low. I swear too much for HP for example. But you get that like weird DNA mismatch. That’s kind of one big challenge. I think the other big challenge is that institutionally, you need courage. So I actually thing Mercury is an example. There are big software companies that can innovate and cannot have a disruption destroy their business but take advantage of it. Maybe Chef and Puppet will as an example. But Mercury went from zero to 3000 people, zero to a billion. So you can do it.
And I think the second thing required besides these 10x-ers and your key roles and product and engineering and sales is you need the courage to basically bet before the data is obvious. So you’re an ops person in unusual situation where the product – by the way, their vision was whatever, 10 years ahead of its time really, so timing might have been a problem for them. But the vision’s dead on and the product was close enough that they could go monetize it and they ended up, their timing was right on virtualization. So talk about the confluence of events. I think when you’re in a big company, the second challenge that's really hard is that disruptions often sneak up on you. So if you’re HP and you own Opsware and you’ve won, do you really have anyone in the company who can feel that docker is coming and know that existentially docker is a threat to your control? Or whatever it was, I don’t know. I wasn’t close enough to the business around the Chef and Puppet time frame. Yeah, actually probably it was dev ops. So the fact that development and ops were converging represents an existential threat to your business.
So the second challenge that big company has is not only do you have the right person but that person would see that threat coming and be able to mobilize the leaders to move. And so, in a big company you need the geniuses, you need them to see far like with almost no data, and you need leadership who will bet based on that. And that's, I mean, to be honest, most executives in big companies are used to waiting until the entire PowerPoint deck is 50 slides and all the data is there and that the decision is safe and you have Microsoft not under Satya but maybe that's Ballmer’s Microsoft. And you miss the entire market. So I think that's probably why it’s not HP and it is Puppet because it’s much more than those. The software is the outcome or the people and the process the leadership use, right? And once that falls apart, it’s almost impossible to replicate. My two cents.
David:Oh, man. I'm just itching here. This is going to fit in so perfectly with my tech theme. Should we move along to get there? I definitely want to come back and talk about what it’s like now having Ben on your board at Usermind. But let’s finish out Opsware first.
So acquisition category. For me, this seems pretty clear. It's a product that you bought to put into the HP sales channel. So to me, this is a product acquisition.
Ben:Yeah, and I’ve been torn between product and business line. And we sort of defined business line as self-sustaining, independently functioning product that comes with sales and vision that just may not be independently broken out to shareholders as a separate line item but basically functions as its own independent business. It seems like after hearing you talk and after David asserting product, I'm closer to product now and I'm thinking there is much tighter integration much more quickly and it was not really an independent business. But we’d love to hear your thoughts on that.
Michel:Yeah. No, not really. I mean Ben took over the whole HP software business. He became the head under Tom Hogan of product and engineering. And we definitely had the Opsware organization separate for a short period of time but no, the integration was incredibly rapid. And the purpose of that was to inject the DNA into a broader organization. So there was a larger transformation happening within HP software at the time. The acquisition of Mercury was I think the first and then Opsware and they did others after I left. Autonomy not being a great example. But there was a bunch and there was an Uber strategy, an overarching strategy there that they were trying to transform the culture and transform the software organization. So the integration strategy was very much driven by this overarching vision that they had about kind of bringing in a bunch of fresh DNA. So no, it was not run as a standalone business except for the period during the integration when that's required.
Ben:Cool. David, go for it.
David:I was going to say then we have What Would Have Happened Otherwise? I think we probably covered that pretty well with the discussion of BMC and Blade Logic.
Ben:Yeah, I have one thing to sort of posit on that. And Michel, if you guys have made the decision that you know what, we’re not going to buy, we’re not going to build, we’re just going to be done in this market, would HP be in a significantly different position today?
Michel:You know, I’ve been gone so long, it’s a very, very hard question to answer. Look, I mean, I guess if I had been there and the answer was we didn’t want to do Opsware or Blade, then I think I would have proposed that we take all the engineers, I would shut down the DCA business and I would have proposed essentially shooting for the next product and taking that engineering team and building a converged automation and monitoring product with every engineer from the team, and basically give up the land for the current iteration and wait for the next disruption and bet that we’d be on time. I don’t know if that would have happened or if it would have been successful but I believe I wouldn’t have gone down without a fight. I would have fought for what I felt was the right thing for the company.
Ben:Right. It’s a very interesting tech theme where we’ve seen this multiple times with multiple companies but when you miss one hill it really gives you an opportunity to see the world from a different perspective and be better at taking the next hill and be better at targeting exactly what customers want, and there’s a little bit of desperation there. I mean, Apple and the iPhone. There’s tons of examples of...
Michel:Mother of invention.
Ben:Yeah. We missed this war or we missed the battle but hopefully we hit the next one.
David:Yeah. I mean, LoudCloud into Opsware. Shall we jump into tech themes?
David:Ben, you want to kick it off?
Ben:That was the main one that I wanted to point out, so why don’t you go for it.
David:Okay. Well, I just loved it. I was grinning ear to ear, Michel, when you were talking about timing and management. And for me, what this story just illustrates so well is like the absolutely critical role of timing in technology, both consumer and enterprise. I mean LoudCloud was 100 percent the right product. It was AWS, before AWS, and AWS is one of the probably top three biggest and most important products in technology today. But the timing was wrong. And I can’t remember where I heard this but I think Sequoia (the venture capital firm) did a study a number of years ago about what sort of the most important factor for their investment partners in how the quality of their decision-making and the quality of their investments, and they concluded that it was timing. It was getting the timing right in a market. So that was what I had down as my theme for this episode but I think what you said, there’s more to it than that, and that's that the role of talent in technology both from a product and management standpoint, is managing that timing. Like it would have been so easy at LoudCloud to say like, “Well, we got the timing wrong. We’re done.” But what Ben and Marc were able to do was say “We got the timing wrong but we’re going to get the timing right on this other piece of it and we’re going to pivot into that.” And I think that’s what like talking about 10x folks in tech, it’s having that vision and being able to manage timing in a market that’s really what it comes down to I think both in consumer and enterprise.
Michel:Yeah. Look, I think timing is it’s the one law you just don’t control. It’s interesting. I think Marc Andreessen talks about it. Good market, bad team - they do alright. Terrible market, great team - you’re kind of screwed. And so like, what trumps what? You’ve got kind of is the idea good enough, how big is the market, timing, and then people. So I always say like, what’s the why? What’s the idea? What problem are you solving why? The second question is, why now? Why is it inevitable now that this idea should matter or be more relevant or actually be a business. And the third part is where team is in. It’s like what’s the likelihood you have to execute into that. Then it’s interesting. I think on the people front if you go into Ben Horowitz’s office and Andreessen, he has people on the wall, pictures of people. And it’s scientists on one wall and boxers on the other. And we’re both big boxing fans. But he would summarize it this way, which he says entrepreneurship is the intersection of intellect and courage. So I think it’s not just seeing that the thing is happening. It’s having the courage to fight for the deal on the case of an acquisition or fight for the strategy or fight for your life in the company if you’re failing. I think that can’t be underestimated, is the level of grit and kind of I call it a little bit irrationality that's required in that human capital to be successful.
Ben:Wow. I love that phrase.
David:It was that, right, that took a negative equity value public company at the time of the pivot to a $1.6 billion acquisition.
Michel:Yeah. I think Ben is a great man, there’s no question about that. And one of the most genuinely humble and nice people I’ve ever met in my life which is just doubly incredible.
David:That's awesome. All right, should we grade this?
Ben:Yeah. So Michel, we were talking before the show and you said, “Yes, indeed I will help grade.” So I'm curious looking back on this and sort of taking yourself out of the equation, how did it go?
Michel:I would probably give it a B. I think we were able to get a huge revenue boost. We essentially accelerated the market dominance of Opsware. I think the reason I wouldn’t give it an A is I don’t think we saw the strategic long-term vision come to fruition the way it certainly could have and I think the biggest difference is people. You lose Ben, you lose me, you lose Marc Cranney. Those are the people who would have made that next wave of value creation happen. So that's my perspective. Although I guess maybe it's an A+ in the sense that if we hadn’t acquired Opsware, Marc and Ben wouldn’t have founded Andreessen Horowitz.
David:Wouldn’t have founded Usermind.
Michel:And I think they’ve disrupted the Valley. So, maybe it’s an A from that point of view.
David:David has pulled that card before where the actual financial outcome for the company was something but the goodness for the world was something else.
Michel:And maybe I meant B from HP’s perspective.
Ben:Yeah, and that is how we grade on the show typically, is how good of a decision was it for the acquirer to make a decision. And David, I think the time when you pulled that was PayPal mafia.
David: Yeah. I think it's completely relevant here again. I mean, there is an Opsware mafia. You talked about Eric at Benchmark and practically the whole Andreessen Horowitz team or at least the initial team.
Ben:And we’re sitting here in the beautiful Usermind office looking out over the skyline of Seattle. So definitely a mafia.
Michel:Well, locally in Seattle, obviously Aptio was their first investment. That's where I was their head of product and that company has since IPO’d and Sunny Gupta was CEO. Ben had acquired his last company iConclude. So I mean there’s many more, right? Their initial investment and Okta and now Signal Effects where that's one of the CTOs of Opsware is now the cofounder there. And Karthik Rao, Eric Vishria’s roommate, is the CEO. It just goes on and on and on. It's pretty crazy.
David:It's totally crazy. Well, I can’t argue with those grades.
Ben:I have far less perfect information, so B sounds great to me.
David:Before we jump into Carve Outs, I’m sort of dying to talk about given all that, what’s it like now on the other side of the world where Ben is at Andreessen Horowitz and gets on your board.
Michel:Well, number one, Ben is an incredible board member. So taking away Usermind and just my personal journey, he’s phenomenal. I think their whole philosophy – so now, obviously at Aptio I was in the leadership team and I was part of the board meetings and would present to the board. So I got to see that board and now I’ve got my own board. But it’s really striking to me, this thesis that they have even more broadly than Ben that operators, former CEOs make better board members. For me, I don’t know if that's true broadly because I'm working with Ben but I feel that Ben’s experience as a CEO helps me every day, every week, every month, every board meeting. He has been just incredibly invaluable in my development as a CEO and helping me kind of think about how to grow the company on every level. You think about board members are being really valuable in the context of a board meeting. Reviewing financials and helping you think about when to scale with function and when do you add what executive and kind of how are you doing from a customer traction point of view, and he’s phenomenal there.
But Ben, to me, is as or more valuable to a CEO in your one-on-one’s where I might be talking with him about a management challenge, or how do you run a staff meeting as you grow the company? Or how do you think about different inflection points in your own leadership style and the way the business is changing? And where do you spend your time. Think about hiring your first exec. How do you do that and what are you looking for? There’s so many more ways that a board member adds value to a CEO’s both decision-making and growth as a CEO than the board meetings. And part of it is our relationship, I'm sure, because I trust him and he knows me very well. But he’s just an incredible sounding board with such a wealth of talent. I remember asking him, as an example, to share advice, I asked him when I was hiring my first executive, my first non-cofounder executive in the company kind of like, “What’s the central thing I'm looking for?” And I’ll just generalize it because I don’t need to talk about the specific role and his answer was: “An executive is someone who gives you leverage.” I'm like, okay, actually that is the ultimate truth. So if you’re hiring as a CEO a person, one of the things is they probably know more about their function than you. Which means that it’s very hard to interview them. But on the flip side, it also means that if that person joins and doesn’t give you instant leverage, you’ve hired the wrong person. And talk about like I’ve never in my entire life heard anyone in like a single word.
Ben:Distill it so succinctly.
Michel:So succinctly articulate how to evaluate a hire and how to both before hiring them and as they’ve joined the company. So that's just a simple example of like one question I’ve asked him and the kind of response that I get. So I don’t know if that's the type of information you’re looking for but yeah, I feel blessed every day.
Ben:Hey, I learned something today.
David:Yeah, me too. Well, and this is something that I’ve been reflecting on a lot recently. Being in venture myself and Ben and I have been doing this together too. Really, this is making the case for as a venture investor, there’s this concept of being a company builder and contributing to the building of the company. You called it adding value, Michel. And I really think like if you’re not doing things like that, then what are you? You’re a stock picker. And does that even make sense in startups? You can’t pick stocks in startups. And if you want to earn returns for your investors and yourself, the only thing that makes sense really is to do approach this craft like Ben does and like Eric does at Benchmark and like many, many VCs do which is there has to be – and for you, I would imagine, that provides a hugely compelling value why you would want them on your board.
Michel:Oh yeah. There’s so many elements to how you think about your board composition and I think what you’re looking for. But if you can get a person who is that level of genius who can contribute in such a fundamental way to value building. Let’s not underestimate kind of the value of the brand as well, so not just Ben Horowitz but Andreessen Horowitz. I remember in the early days of the company, engineers would say, I’d be like, “Why did you take the meeting with us?” and they’d say, “Well, you’re an Andreessen Horowitz company.” So the brand is also something that helps you build the company and separates you from other startups that helps you kind of be competitive in this war for talent which is happening all around us in Seattle. I think just the particular expertise that that board member brings is something extremely unique. I did not know Ben was going to leave and start a venture capital firm when he left HP. But it’s shaped my life. He’s the person who said to me, “you need to go be in a startup.” He’s why I went to Aptio and joined. In fact, at the time, he said, “You should just found.” But I had never worked in a startup so I wanted to go work for a serial CEO and learn something. And I'm glad I did. I think it's the right choice for me. I knew the right choice for me. But he fundamentally shaped my life trajectory. So if I shaped his by kind of changing his trajectory by the acquisition, he’s profoundly changed mine. I wouldn’t have known I’d be a CEO. I wouldn’t have thought I would end up in startups. I love product, I'm certainly a product person but I didn’t wake up at 23 thinking that’s what I was going to do.
Ben:That's a great perspective.
David:Great note to wrap this one up on. We do have our last final segment of Carve Outs and actually this is a really good tee-up for mine for the week. Mine is Jimmy Iovine, the record industry executive and cofounder of Beats with Dr. Dre who he produced as a music producer, was on the Bill Simmons podcast on The Ringer last week, and it’s wonderful. It's the music industry and the record industry and lots of great stories there from all the artists from all genres that Jimmy worked with. But he talked about kind of just that, what you were talking about, Michel, and like the sort of courage to go and do his own thing and blazes on a path in the business and he talks about this concept of having fear and like fear can be sort of paralyzing and for a long time he was paralyzed until he found this thing, and that was music and the music industry that like the fear kind of motivated him. The fear was like I fear that I'm going to miss out if I don’t go and I capture this opportunity. He used the analogy of like when you’re playing baseball and either you’re in the outfield and you could think like don’t hit the ball to me. You could be fearful of it or you could say like “hit the ball to me” because I'm fearful like I'm going to make the play. If it doesn’t come to me I'm not going to make the play.
Ben:Right. It’s like opportunity to succeed rather than an opportunity to fail.
David:Yeah, it’s great. Highly recommend.
Ben:Ha. Man, I love The Ringer podcast. If you’re listening to the show and you’re thinking “I’ve listened to a lot of shows and I’ve listened to a lot of episodes at Acquired,” if there’s any that was particular good where I was like pumped up and you felt like I was on my A-game, it's because I listened to Bill Simmons before and there was that voice in my head and I was ready to go. So that's your Carve Out, you can take that one but I also recommend you listen to The Ringer podcast.
Mine is a software package called StarStaX. It would be overselling to say I’ve been an amateur photographer. I’ve enjoyed taking pictures for a long time and especially I do these big backpacking trips every summer with my dad. And this time, I decided to carry the extra weight and bring about a 2.5 pound tripod out with me and try and do some Star photos. So this is super hard and I was bad at it 4/5 nights with either crazy blurry photos or like it was cold and the lens fogged or the clouds rolled in. But there was one night where I kind of nailed it. So the process is wild. You like leave the camera out on a tripod, you go to bed, you set an alarm, you wake up in the middle of the night like 3 or 4 hours later and you go collect it and you cross your fingers and hope for the best when you import it all later. StarStaX is this incredible cool piece of software on your computer that will take hundreds of long exposure photos that are taken over several hours and overlay them all on top of each other kind of automatically so you don’t have to do it all manually in Photoshop and really produce some cool star trails. So if anybody’s interested, we can link to that from the show notes and I highly recommend StarStaX.
That's all we’ve got. Michel, thank you so much. Where can our listeners find you? Are you on the socials?
Michel:Yeah. So @MichelFeaster at Twitter. We’re at Usermind Inc. Both easy ways to kind of meet my acquaintance. We’re also on Facebook obviously as Usermind and I'm Michel Feaster pretty much everywhere socially. Or Michel at Usermind, if people are out there and you’re an early founder, you know, I don’t take every meeting because I'm super busy because I feel like I’ve only gotten where I've gotten because so many people have helped me. So easy to get me and if you can make time to help folks, I definitely will.
Ben:Awesome. Well, thanks again for coming on. Listeners –
David:Yeah. Thank you, Michel.
Ben:Thank you, Michel. Thank you so much to Perkins Coie for sponsoring this episode. Listeners, check out the Slack at Acquired.fm and we would love, love, love a review on iTunes. So, thank you so much. Have a great day!
David:We’ll see you next time.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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