The Top 10 Acquisitions of All-Time

5 years and 100+ episodes into Acquired, there’s been one question we get asked more than any other: what are the best acquisitions of all-time, and what can we learn from them? We thought it was time to formalize our answers. So here it is, the Acquired Greatest Hits album. :) We also put together an accompanying blog post, which goes into greater detail on the numbers and methodology behind out rankings. You can find it here: https://www.acquired.fm/episodes/acquired-top-ten-the-best-acquisitions-of-all-time Feel free to share with your friends or on social media! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Hey Acquired listeners. We recorded this episode a few weeks ago in what already feels like a very different era. Obviously, we live in a whole new world now with the spread of the novel coronavirus and the global health, economic, and frankly, emotional fallout as a result.

• 0:17David Rosenthal?

  Yeah. In that vein, we have a few announcements to make. First and most importantly, we're thinking about all of you right now and in the weeks and months ahead. Many of us know people who've lost their jobs or businesses already, or even worse, whose families have been affected, and that's likely just going to grow significantly in the coming weeks. We want you all to know that Ben, myself, and the whole Acquired community are here to support each other.

• 0:42Ben Gilbert?

  It's true. And related to that, we are going to make some changes for now to both the community and the Acquired show itself. As for the show, we'll share more in the days ahead.

• 0:53David Rosenthal?

  On the community side, we're changing a few aspects of our Slack to help us all do everything that we can to support each other right now. You'll find all the details in the announcement that we've pinned to the general channel, and if you haven't joined our Slack yet, now is a great time to do so. You can find a link on our website. We think it's especially important to find ways to try to be together right now, virtually, even when physically we have to be apart.

• 1:19Ben Gilbert?

  Yep. One other thing, I'm a believer that when you have a voice, you should use it. And David and I are fortunate to be able to talk to all of you. So in this time, we are here to tell you to stay home. Most of you who listen to the show are already doing this, but we figure if we can touch just one person, we can make a difference. Social distancing really works and has saved countless lives in countries across the globe. If it's not bad in your city yet, be the reason that it won't be. We promise you will look like a hero later for reacting early and reacting quickly. And of course, go pick up some takeout food from the local restaurants you love.

• 1:55David Rosenthal?

  Amen on both of those. Finally, one last thing. Some of you might be wondering why, despite everything we're saying here, we still decided to release this episode right now. We thought about it a lot and we decided to go ahead. One, because even with everything going on, we think the world does still need some entertainment and, most importantly, to laugh. And some of the things that we say in here are pretty funny now in retrospect. Two, though, we also thought it was a good reminder that even as tough as things are and are likely to get right now, at some point, things will return to normal again. And it will seem completely normal to debate the top 10 acquisitions of all time. So hopefully this will be a little reminder of that.

• 2:40Ben Gilbert?

  Yep. Well, thank you to everyone for being on this journey with us. Stay safe and healthy. We will get through this together. And now, on to the show.

• 2:58Ben Gilbert?

  Welcome to season six, episode three of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert.

• 3:07David Rosenthal?

  I'm David Rosenthal.

• 3:08Ben Gilbert?

  And we are your hosts. Today, we are tackling an episode to cover the question we get asked most. What are the best acquisitions of all time? And what can we learn from them? So today, here it is. The Acquired Top 10.

• 3:23David Rosenthal?

  Acquired Top 10. We figure we're over 100 episodes in now. It's time for a greatest hits album.

• 3:29Ben Gilbert?

  Yeah, listeners, the idea originally started as a blog post, which you can find linked at the top of the show notes. But we wanted to do an episode with really more of a director's cut of the list and how we thought about each one, since even though there's lots of numbers involved, it's not quite an objective exercise.

• 3:47David Rosenthal?

  We reserved the right to, great as we see fit.

• 3:49Ben Gilbert?

  As always. All right, a few announcements before we dive in. First, we had a great limited partner episode this week with Hamilton Helmer, and you can listen to a segment of it attached at the end of this episode. For those who don't know Hamilton's name, he is the author of Seven Powers, which David recently dis- Subscribe to me as the best business strategy book out there. Now, David is in good company here, getting high praise from strategy master Reed Hastings at Netflix, Daniel Ek at Spotify, Peter Thiel, and many, many more. So we had to, of course, have the author on the LP show. Now, if you want to go deeper on company building topics, you can become an acquired limited partner and get access to all the things that come with that by clicking the

• 4:29Ben Gilbert?

  link in the show notes or going to glow.fm/acquired and all subscriptions come with a seven day free trial.

• 4:37David Rosenthal?

  Hamilton was fantastic.

• 4:39Ben Gilbert?

  Indeed. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 5:00David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 5:21Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 5:43David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 6:01Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off. And just tell them that Ben and David sent you. All right, David, how on earth are we structuring this episode?

• 6:32David Rosenthal?

  Well, instead of history and facts, we're going to replace that with notes and methodology today.

• 6:37Ben Gilbert?

  It must be two things coupled by an and in the middle.

• 6:40David Rosenthal?

  Exactly. Ampersand, not an and.

• 6:42Ben Gilbert?

  Oh, isn't it an ampersand? Do you know they're not interchangeable?

• 6:46David Rosenthal?

  Really?

• 6:46Ben Gilbert?

  Yeah.

• 6:47David Rosenthal?

  Whoa, that's shocking to me.

• 6:48Ben Gilbert?

  This is like little-known nerd fact. So I'm not going to get this exactly right, but it is when you are coupling two things together rather than when you are using and in the way that you sort of would in a sentence.

• 7:02David Rosenthal?

  Like a compound sentence as a conjunction and whatnot. Yeah, okay, that makes sense. That makes sense.

• 7:06Ben Gilbert?

  Yeah. Also, it has a cousin called et cetera. And there's a crazy, you can go sort of research the evolution of this glyph. But if you think about the and sign, the ampersand sign, not the big curly one that looks like an S, but sort of the smaller one that has two curly things on the side.

• 7:24David Rosenthal?

  Yeah, yeah, yeah.

• 7:24Ben Gilbert?

  It's actually an ET.

• 7:27David Rosenthal?

  Oh.

• 7:28Ben Gilbert?

  And so it sort of comes from the same root as et cetera does.

• 7:32David Rosenthal?

  I think we could have a whole spinoff podcast about this.

• 7:33Ben Gilbert?

  I think so, too. Origins of odd typography and linguistics.

• 7:37David Rosenthal?

  All right. Well, back to the lecture at hand. So first off, we thought about all acquisitions out there in history. We didn't necessarily limit ourselves to just the technology universe, as you will see as we go through the list here. But the big caveat is it's based on kind of what we know in our universe and our experience. So there may be ones out there that, you know, we didn't identify, that we slipped. We thought a little bit about some of the Berkshire Hathaway acquisitions. Obviously, they are fantastic, but by some of the criteria that we look at, don't quite compare to what we have on our list. Big caveat that we may be missing some, and obviously, please write in if you have super interesting ones, and we'll have to just cover them on the show in the future.

• 8:21Ben Gilbert?

  Yes, please. Also, the acquired Slack at acquired.fm would be an awesome place because I think this one is going to be a good fodder for for community discussion.

• 8:30David Rosenthal?

  Yeah. Okay, so that's caveat one. Caveat two, enough time has to have passed since the acquisition that we can make a definitive call. So we're not going to be talking about like Visa's acquisition of Plaid here, or Credit Karma, or anything that just happened, you know, in the last few weeks, or even in the last couple of years. We need to be able to say definitively what the outcome was here.

• 8:50Ben Gilbert?

  Yep. Another thing is, it must be a majority purchase. So there are many amazing pickups of minority shares in companies, better known as investments. But, you know, one listener-

• 9:03David Rosenthal?

  Nasdaq's Tencent comes to mind.

• 9:06Ben Gilbert?

  Yep. One listener pointed out Liberty Media buying, what, 40% of Sirius XM, which is now worth over, I think, $20 billion.

• 9:18David Rosenthal?

  About $20 billion. Yeah, that was incredible. I remember being a media investment banker, investment banking analyst on Wall Street at the time, and seeing this happen and just being like, "Pfft, Sirius XM? My dad listens to Sirius XM. That's a dumb idea. These guys are going to go bankrupt." And yeah, that was why I'm no longer a media investment banker.

• 9:36Ben Gilbert?

  Yeah, just a world-class podcaster instead. Another one, this represents a moment in time with company market capitalizations as of the end of March 3rd, last night, when we compiled a lot of this data, in the midst of the US Democratic primary, coronavirus, and everything else going on in our macroeconomic world right now. And so this, you know, episode may not be the exact order that we would rank it five years from now, even one year from now, even six months from now. So it definitely represents a moment in time, though I think directionally correct for a while.

• 10:09David Rosenthal?

  Yeah. This episode, we may actually be the actual music that is playing on the Titanic while deck chairs are being rearranged, but we'll see. Hopefully not.

• 10:18Ben Gilbert?

  Oof. Yeah. Well, as you know, on Acquired, the way we issue a grade is using this criteria. How good of a use of capital was it for the big company to buy the small company? So of course, the way we ended up ranking our list, best we can tell, is what is the absolute dollar return in value to the big company from buying the smaller one? So in other words, if I have a company worth $1 billion, like Acquired, and I buy David's piddly little startup-

• 10:50Ben Gilbert?

  David, your little startup's worth a dollar, and I pick it up for that. And my company then later becomes worth $2 billion by integrating your product. We would look at this as an acquisition that added nearly $1 billion of value. And that's sort of how we would rank it.

• 11:05David Rosenthal?

  999 million, 999. So.

• 11:07Ben Gilbert?

  Look, I'm rounding up for you.

• 11:08David Rosenthal?

  No, value added minus the acquisition price, because this is going to be important in a couple of these.

• 11:11Ben Gilbert?

  Fair point.

• 11:13David Rosenthal?

  Last thing is, in cases where, or at least the last note to methodology that I have, in cases where the acquired company's product ended up becoming a component of a larger product within the acquired company, we thought of some sort of subjective discount of like, in our estimation, what percentage is this acquired company's product responsible for the success of the ultimate product?

• 11:39Ben Gilbert?

  Yeah, you could imagine if you bought maybe like a way to make chips, or maybe a programming language, or something like that.

• 11:46David Rosenthal?

  Where are you finding those examples?

• 11:48Ben Gilbert?

  You might, you might say that that's not responsible for all of the company's future value, or even all of that product line's future value.

• 11:55David Rosenthal?

  Yep.

• 11:56Ben Gilbert?

  All right, now with all that out of the way, I think it's time to actually start moving through our, our top 10, and dare I say, our, our top 15.

• 12:06David Rosenthal?

  Actually, 16.

• 12:08Ben Gilbert?

  Ah, adding too many to the list here.

• 12:10David Rosenthal?

  Well, we're only going to rank the top 10, but we have some honorable mentions to start with. First, and most aptly given recent acquired history, we would be completely remiss if we don't mention WhatsApp on this list. And by estimated, and as we talked about on the show, on the episode, definitely one of the best acquisitions of all time. However, by our criteria, where we are looking at revenue and market cap contribution to the parent company, oh, I don't think we said, so the way we tried to estimate market cap contribution of the acquired companies into the parent companies was via the percentage of revenue that that company is now responsible at the parent company, and then what the revenue multiples of the parent company are.

• 12:53David Rosenthal?

  We totally recognize that a lot of these companies don't trade on revenue multiples, they trade on free cash flow basis, but we can't get the cost structures of the acquired companies anymore, so this is the best we could do.

• 13:04Ben Gilbert?

  Yep. Again, I think it's directionally correct and the fun part about getting to do a show, that's kind of the director's cut here is we can talk a little bit, especially in playbook as we get into it, and hem and haw a little bit about ones that we were too generous on or not generous enough by just thinking about it as revenue contribution to the business.

• 13:22David Rosenthal?

  So by our screen, WhatsApp essentially generates zero revenue for Facebook, so they're not going to show up on the list.

• 13:27Ben Gilbert?

  They were far lower than 16 if you.

• 13:29David Rosenthal?

  But definitely deserved to be mentioned.

• 13:31Ben Gilbert?

  For sure. For sure. It's funny how that one's a, I don't know, a six-year-old acquisition that's still in camp too soon to tell.

• 13:36David Rosenthal?

  Yeah, serious. Well, we know that it was a, as we talked about, not too soon to tell on the defensive move front.

• 13:43Ben Gilbert?

  Right.

• 13:44David Rosenthal?

  Too soon to tell on the revenue front.

• 13:45Ben Gilbert?

  Yep. All right. Well, coming in at 15th, or I guess our first of our honorable mentions coming in, an episode that we have not yet done yet, but a couple of listeners, especially recently, have been suggesting in the Slack that we try it. So that is VMware being acquired by Dell EMC.

• 14:06David Rosenthal?

  First by, acquired by EMC and then later EMC was of course swallowed up by Dell. This one is super interesting. EMC acquired VMware for $625 million. VMware currently is doing right under $9 billion in revenue.

• 14:24Ben Gilbert?

  Oof.

• 14:25David Rosenthal?

  Now EMC acquired 80% of VMware. So VMware has always had this public stub that trades publicly of the rest of the equity. Super, super interesting, though. The only reason this is so far down on the list is because of all the complicated EMC Dell stuff, we'll get into when we do this episode someday. Dell is actually trading in the public markets at a significantly lower value than what their stake in VMware is worth.

• 14:52Ben Gilbert?

  It's crazy.

• 14:53David Rosenthal?

  It's completely nuts.

• 14:54Ben Gilbert?

  I think we saw this with that holding company that owned part of, what episode was that? Where there was like a nine-person holding company based in?

• 15:05David Rosenthal?

  It was Altaba.

• 15:07Ben Gilbert?

  Altaba, that's right, owning the stake in Alibaba.

• 15:10David Rosenthal?

  Yeah.

• 15:10Ben Gilbert?

  Where it actually traded lower than what their percentage of Alibaba was worth.

• 15:14David Rosenthal?

  We thought that was crazy. I mean, the discount, and again, we haven't done all the math here and know the whole corporate structure and everything, but with that caveat, the discount at which Dell is trading on the public markets, simply to the 80% they own of VMware, which is also publicly traded, is astounding.

• 15:30Ben Gilbert?

  Yeah, so on the one hand, it's a cheap way to pick up some access to VMware. On the other hand, the way the stock market is sort of behaving, they're putting a massive, massive discount on it for its lack of being able to escape out of Dell.

• 15:45David Rosenthal?

  Yeah, yeah. Okay, next, we have our

• 15:51Ben Gilbert?

  A heartbreaker.

• 15:51David Rosenthal?

  near and dear to our hearts, both a heartbreaker and our very first acquired episode.

• 15:57Ben Gilbert?

  Pixar.

• 15:58David Rosenthal?

  Pixar.

• 15:59Ben Gilbert?

  So in 2006, Disney, which at some point, we gotta cover Disney on this show, you know, David?

• 16:06Ben Gilbert?

  Disney bought Pixar in a landmark $7.4 billion deal. And I thought this one would be a lot higher, but we'd like to walk you through sort of how we did the math on this. And the absolute dollar return that we're looking at, that, you know, from a bunch of our estimates and this methodology, is about $2.3 billion to Disney's market cap. And the way we sort of thought about that is Pixar is basically good for a film a year.

• 16:33David Rosenthal?

  Yep.

• 16:34Ben Gilbert?

  And as much as I wanted to do this by summing all of the profits, or maybe abstracting one layer up and summing all of the revenues from all their films, really, the right way to think about, especially as we're thinking about contribution to market cap, is how much revenue of Disney's annual revenue are they responsible for every year?

• 16:54David Rosenthal?

  Yeah.

• 16:54Ben Gilbert?

  Which is effectively one film's worth.

• 16:57David Rosenthal?

  Yep.

• 16:57Ben Gilbert?

  Now, what is one Pixar film worth in revenue from its sort of worldwide gross after release? It's about $1 billion in the success case. You look at The Incredibles 2 or Toy Story 4, each brought in right around $1 billion. Because of our Disney episode, we know that you make about twice as much from parks and merch as you make from the film itself, or at least the division as a whole does. So we felt it was reasonable to say triple the amount of money that any given film gets from the box office to sort of its total revenue contribution to Disney. And you get about $3 billion. And so contributing about $3 billion in revenue per year to Disney out of their close to $7 billion.

• 17:40Ben Gilbert?

  $70 billion market cap.

• 17:41David Rosenthal?

  $70 billion revenue.

• 17:43Ben Gilbert?

  Sorry, $70 billion in revenue.

• 17:46David Rosenthal?

  You get to just, just under $10 billion in market cap contribution from Pixar. But of course, they paid $7.4 billion for it. So when you net those two out, you get incrementally about 2.3 billion in market cap contribution from Pixar.

• 18:01Ben Gilbert?

  This, you should also note, is our lowest annualized return out of anything from the entire list, with about 2% per year, since this was a 10-year-old acquisition.

• 18:12David Rosenthal?

  Well, we're gonna have-

• 18:12Ben Gilbert?

  A 14-year-old acquisition.

• 18:13David Rosenthal?

  We're gonna have some more discussion in grading about this one. Okay, next on the list, another fun episode from acquired's history. Our first big independent live show, Venmo. Pickup by PayPal in 2012 for $26 million. PayPal was recently announced doing about $300 million in annual revenue, or sorry, Venmo, doing about $300 million in annual revenue within PayPal. You do the math, and that nets out to market cap contribution within PayPal of about $2.5 billion. Not bad for buying it for 26 million.

• 18:52Ben Gilbert?

  Yeah, and of course, this went through Braintree, so it was 26 million that Braintree bought it for, and then less than a year later, that was picked up for 800 million. But sort of rolled that 26 forward, since that is the isolated number for, for Venmo alone. Now, David, I will say, still not profitable.

• 19:09David Rosenthal?

  Indeed.

• 19:09Ben Gilbert?

  But, you know, not, not a part of our analysis here.

• 19:12David Rosenthal?

  Profits, what are you talking about? We don't care about revenue here on acquired now.

• 19:16Ben Gilbert?

  But they do, it is worth noting that they did give guidance that they thought this, by the end of the year, Venmo would be a profitable unit. So that's an interesting, interesting update to our Venmo episode.

• 19:26David Rosenthal?

  Yep. Next, we have Bungie, near and dear to my hearts. My heart played so many, so many sessions of Halo over the years. Microsoft's pickup of Bungie in the year 2000 for an estimated $30 million. Now, this one was really interesting to think about, because the Halo franchise in total has generated about $5 billion in revenue over the life of the franchise. And of course, Microsoft got that IP as part of the acquisition. But you also gotta think about- How many Xboxes did Halo sell? And no Halo, what would have happened to the Xbox franchise? The Xbox franchise generates about $11 billion in annual revenue for Microsoft.

• 20:05David Rosenthal?

  We estimated current market cap contribution of that $30 million Halo, Bungie Halo pickup in 2000 to be about $8 billion currently.

• 20:15Ben Gilbert?

  It's funny, like, this is an honorable mention that doesn't make our top 10 list, but like, oh my god, getting that thing for 30 million, even with all the work they poured into it afterward, was a friggin' steal in order to bootstrap the Xbox business.

• 20:27David Rosenthal?

  Totally, totally. I mean, it was the killer app.

• 20:31Ben Gilbert?

  Yep.

• 20:32David Rosenthal?

  Speaking of killer apps.

• 20:33Ben Gilbert?

  Yeah. P A Semi. So, long, long time listeners of the show will know that we did an episode early on with Apple's 2008 purchase of P A Semi, which at the time was working on very advanced...

• 20:51David Rosenthal?

  ARM infrastructures.

• 20:52Ben Gilbert?

  Yeah, yeah, and developing IP for new chips that they didn't manufacture. They like...

• 20:59David Rosenthal?

  Fabulous semiconductor.

• 21:00Ben Gilbert?

  Yep, many, many firms these days outsource it. But it seemed not contrarian, but a little odd for Apple to be buying this sort of like researchy CPU, you know, company.

• 21:10David Rosenthal?

  This was right after the first iPhone had come out.

• 21:13Ben Gilbert?

  Yep.

• 21:14David Rosenthal?

  People were confused.

• 21:15Ben Gilbert?

  And they paid a bunch of money, too. I mean, it's $278 million. So this isn't like some of our other ones that were like tiny little pickups. And Apple's market cap back then, let's just say they weren't a trillion-plus-dollar company. And so, you know, this is a decent-sized bet for them, but as we know today, the iPhone being as differentiated and creating as magical of an experience as it does is in many ways attributable to Apple making their own silicon, which of course all started with P A Semi. You also look at Apple's innovations in silicon elsewhere, so in their wearables division, being able to do the W series chips for, you know, the AirPods and the watch, the, what is the... There's the W chips and then there's another one.

• 21:59David Rosenthal?

  There's like an S series of chips, I think.

• 22:02Ben Gilbert?

  Yeah. Even actually, I think the touchbar has its own...

• 22:05David Rosenthal?

  That's right.

• 22:06Ben Gilbert?

  ARM CPU in it, which probably is attributable to...

• 22:10David Rosenthal?

  And of course, all the rumors are, you know, these have been rumors for years, but rumors are this year maybe, or next year, we're gonna see ARM-based and even P A Semi technology-based MacBooks.

• 22:21Ben Gilbert?

  Yep. So this is like the hardest thing to figure out, and this is probably the most fun thing to sort of debate on this show, or at least in this format. How do you account for something like this that is necessary but not sufficient to create the product line that they have today? That if you look at the revenue contribution of the iPhone, the iPad, and the wearables division, which are all sort of made possible by Apple making their own silicon. It's $188 billion a year in revenue. So necessary but not sufficient. So what do you do? Well, David and I took some, a little bit of a hack job of estimates here, but basically

• 23:03Ben Gilbert?

  what we said is, look, you can probably say 25% of iPhone revenue is attributable to making their own silicon.

• 23:12David Rosenthal?

  Yep. iPhone and wearables and iPad, like, that's 25% of the differentiation.

• 23:17Ben Gilbert?

  Yep.

• 23:18David Rosenthal?

  Is from the chips.

• 23:19Ben Gilbert?

  5%, then. We further discounted that and said 5% of making their own silicon is attributable to their acquisition of PA Semi. So what that basically says is, well, let's take all that revenue and go grab 1% of it.

• 23:33David Rosenthal?

  Yep.

• 23:34Ben Gilbert?

  And I promise we didn't come up with that 1% number. We first came up with this 25% and then that 5%.

• 23:39David Rosenthal?

  We love false precision here.

• 23:41Ben Gilbert?

  It is, it is false precision at its finest, but that gives us a, the funniest metric of all time that Acquired should probably trademark, the discount adjusted current market cap contribution.

• 23:53David Rosenthal?

  Eat that community justice EBITDA.

• 23:56Ben Gilbert?

  And we look at that as contributing about $11 billion to Apple's market cap, which of course is a nice 36% annualized return, absolute dollar return of over $11 billion, but somehow still not making our list.

• 24:13David Rosenthal?

  Just missing the top 10.

• 24:14Ben Gilbert?

  My god, is this a gilded set of acquisitions that we've got in the top 10. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 24:34David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 24:48Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 24:58David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 25:15Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 25:31David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 25:48Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 25:57David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. All right, should we move into the official top 10?

• 26:12Ben Gilbert?

  Yes.

• 26:13David Rosenthal?

  Okay. Coming in at number 10, what we and I have sometimes referred to on the show as the best media acquisition of all time. Turns out it's not. There's going to be one that's above it, coming later in the list, but Disney's 2009 acquisition of Marvel. This was just. Brilliant.

• 26:33Ben Gilbert?

  Who would buy some defunct comic book?

• 26:35David Rosenthal?

  Comic book company.

• 26:36Ben Gilbert?

  That's IP is already basically leased out to everyone and cut up 11 ways for 10 years.

• 26:41David Rosenthal?

  Totally. Well, this, we're gonna, I'm gonna talk more about this in playbook, but you know, Marvel was, I can't remember exact, but sort of like going on a, you know, 70, 80 year old company. It was a very old company at this point, been around forever. Of course, Marvel Comics, one of the pioneers of the comic industry. But Marvel Studios and Iron Man, the first film out of it, had only launched a year earlier. So it was actually pretty early in this part of the market for Marvel. So Disney, of course, paid $4.2 billion to acquire all of Marvel in 2009.

• 27:14Ben Gilbert?

  Which of course is 3 billion less than Pixar.

• 27:18David Rosenthal?

  Yes, 3 billion less than Pixar. So for Marvel, we did essentially the same thing as we did with Pixar. But you'll note with Marvel, as opposed to Pixar, where they're cranking out one feature length film per year. With Marvel, they're cranking out multiple feature length films. They're cranking out TV series. They're cranking out action figures. They're doing comic books, of course, still, all sorts of stuff. So we took their revenue since the acquisition. We did that on an annualized basis. We applied the same 2X multiple for parks and merch that would apply to the content revenue that they're creating.

• 27:49Ben Gilbert?

  Yep. And that, that revenue that you mentioned that, that at the beginning there, that we are only taking their films revenue.

• 27:56David Rosenthal?

  Films revenue. That's what we had access to. Yep, yep. So you do that, you get between 6 to 7 billion dollars of annual revenue contribution from Marvel to Disney. Out of 70 billion dollars in total revenue.

• 28:08Ben Gilbert?

  Which is fascinating. So it's basically more than twice as much revenue per year from Marvel than it is from Pixar.

• 28:16David Rosenthal?

  I mean, 10% of Disney's revenue by this estimation coming from Marvel.

• 28:19Ben Gilbert?

  It's crazy.

• 28:20David Rosenthal?

  Crazy. We may not be correct on that, but like, it seems reasonable.

• 28:24Ben Gilbert?

  Yeah. So if you look at, you know, there, I just want to do this comparison to Pixar, like they're, they're making twice, over twice as much money per year. They paid almost half as much for it originally and they did it three years later. And so it's sort of this like every lever that you have the ability to sort of pull and make this one a better acquisition, they did.

• 28:46David Rosenthal?

  So if you just look at the stats, we have an absolute dollar return, market cap contribution minus the price they paid for the acquisition of over 16 billion dollars on Marvel. Incredible. Fantastic. Not quite The Incredibles, but even better than The Incredibles.

• 29:03Ben Gilbert?

  Also coming in, right around $16 billion of an absolute dollar return is Google's acquisition of three companies, Where2, Keyhole, and Zipdash.

• 29:13David Rosenthal?

  The Google Maps suite.

• 29:14Ben Gilbert?

  Yes, around 2004 to create the Google Maps that we know of today. Now, estimates are that Google Maps does about $3 billion in revenue. This mostly comes from the sponsored products that you see that are basically the ad units that are shown on Maps.

• 29:32David Rosenthal?

  And the Maps API revenue, I believe.

• 29:34Ben Gilbert?

  That's right.

• 29:34David Rosenthal?

  Yep.

• 29:35Ben Gilbert?

  That's right. So bought for $70 billion.

• 29:38David Rosenthal?

  70 million.

• 29:39Ben Gilbert?

  Sorry. Gosh, the orders of magnitude here. This one's a hard one to do because you just keep forgetting commas everywhere and sets of three zeros all at the same time. Bought for $70 million, doing about $3 billion in revenue 16 years later. So we looked at the current market cap contribution of about $16 billion to Google's near trillion-dollar market cap. That kind of pencils. I mean, if you think about it, like, is it-

• 30:04David Rosenthal?

  I could maybe even make an argument it should be a little higher.

• 30:07Ben Gilbert?

  Than 1.6% of the value of the company? Totally. Totally. So when you look at, similar to Marvel, you look at the absolute dollar return, it was about $16 billion. The funny thing is, if you compare another, there's another number we sort of have here that's interesting to compare, the ROI multiple. So what, you know, what's the return on the invested capital there? With Marvel, it was five. With Google Maps, it was 242.

• 30:34David Rosenthal?

  Yeah. This is where, you know, we, okay, we'll talk about this in playbook and grading more, but, you know, you can become a little myopic as invested, you focus on, you know, return on invested capital or cash on cash multiples or whatnot. And like, you know, that's nice, but like, it's paper money that, you know, feeds your family and pays the bills. And at the end of the day, 16 billion is 16 billion, whether it's a 240x, you know, ROIC or a 5x ROIC, it's still 16 billion in incremental dollars.

• 31:04Ben Gilbert?

  Everything else is a vanity metric.

• 31:06David Rosenthal?

  Yep.

• 31:06Ben Gilbert?

  And speaking of those vanity metrics, we are going to publish this whole table. So if you click the link in the show notes- You can go check out with probably some false precision, all the numbers that we came up with across all of these different measures.

• 31:20David Rosenthal?

  Well, next on our list, next highest on our list.

• 31:23Ben Gilbert?

  And what are we at? That was, that was nine.

• 31:25David Rosenthal?

  So here we're, we're here at the actual best media acquisition of all time. We're going right back to our friends at Disney, actually ABC Capital Cities. The acquisition of ESPN 1984. Is this the oldest? This is the oldest acquisition on our list. Acquisition price of just under $200 million. ESPN currently is contributing over $10 billion in revenue to Disney through obviously advertising revenue and subscription fees and including ESPN plus in there now too. Just incredible. This, even though this acquisition happened in 1984,

• 32:08David Rosenthal?

  generated by our estimation over $30 billion in absolute dollar returns. 166 ROI multiple. We also calculated the annualized return to just try and adjust for time here a little bit. 15% annualized return since 1984. That is just incredible. That is like Berkshire Hathaway levels of return by an acquisition within a company.

• 32:31Ben Gilbert?

  Yep. Yeah. If you found a financial advisor who could figure out how to guarantee you a 15% annualized return for, what is this?

• 32:39David Rosenthal?

  For 1984. I was born in 1984 and I'm 35.

• 32:42Ben Gilbert?

  Yeah, that would be, I'd happily pay whatever they need for the cash management.

• 32:47David Rosenthal?

  Management fees on that.

• 32:50Ben Gilbert?

  Absolutely. All right. Moving on to number seven.

• 32:54David Rosenthal?

  The mafia.

• 32:55Ben Gilbert?

  eBay's acquisition of PayPal in 2002. And David, as you say, the mafia, it is, is not just for all the future value that would be created by all those founders. Starting every company from Tesla to Yelp to.

• 33:11David Rosenthal?

  To LinkedIn to you name it.

• 33:14Ben Gilbert?

  Wild group, but actually the value of PayPal growing inside eBay was friggin crazy. So the way that we did this one, because eBay actually did spin PayPal out in full.

• 33:27David Rosenthal?

  In 2015.

• 33:29Ben Gilbert?

  2000, I think 15, is that right? Yeah. 15, 16, somewhere in there. This is the only one where our sort of.

• 33:36David Rosenthal?

  We have exact numbers.

• 33:37Ben Gilbert?

  We do have exact numbers and we know an exact annualized return and we're not pegging that to the market cap today, but rather the actual spin out. So when they did spin it out, the market cap of the independent PayPal entity was $47 billion. Now, in 2002, they bought the company for $1.5 billion. So, no analysis needed. That was $45.6 billion of an absolute dollar return for eBay shareholders. A 28% annualized return. Just an unbelievable job of picking something up relatively on the cheap. Both doing a nice job integrating it with PayPal to create new, dare I say, synergy

• 34:22Ben Gilbert?

  value and of course betting on a trend that was internet payments and being spot, spot on there.

• 34:28David Rosenthal?

  Yeah. Now, we're going to get into, start to get into some of the real fun. I mean, not that all of these aren't fun. The next one, this acquisition was so incredible that the company that bought it, bought this little company back in 2005, has now fully changed its name, even though this was a large public company buying tiny, tiny little company. The company is now called the name of the little company. We're of course talking about Priceline's acquisition of Booking.com and Active Hotels, as we discussed about on the episode with Drew. It was that those two companies together, even though Booking is, was the larger at the time and is still the larger, $135 million in 2005.

• 35:12David Rosenthal?

  Booking.com, as best as we can tell, separating out what the core Booking and Active Hotels revenue is within now the, it's Booking Holdings.

• 35:21Ben Gilbert?

  Booking Holdings. It's no longer the Priceline Group, but Booking Holdings.

• 35:24David Rosenthal?

  Booking Holdings is over $10 billion in annual revenue contribution and-

• 35:29Ben Gilbert?

  The company does about $15 billion in revenue. At least 10.8 comes from what they call the agency revenue, which is basically Booking's original business model. There's even more-

• 35:41David Rosenthal?

  Yeah, there's even more in there.

• 35:43Ben Gilbert?

  There's sort of other segments that, of their revenue that Booking also contributes to, but we were concerned- Bit of an analysis here and basically said, let's just call booking.com's contribution here. The, the, the agency revenue. So responsible for over two thirds of, of booking holdings revenue now. And as David mentioned, 10, 10 billion dollars.

• 36:01David Rosenthal?

  So that translates to an absolute return of just under 50 billion dollars. Here's a crazy thing. You know, we were talking about annualized return with ESPN a minute ago. 35 years of 15% annualized return. Here we're talking about 15 years, so not 35. They got a long way to go to get to 35. You know what the annualized return on this one is?

• 36:19Ben Gilbert?

  I'm not looking at my screen, so I don't know.

• 36:20David Rosenthal?

  48% annualized return compounded for 15 years. Man.

• 36:28Ben Gilbert?

  Insane.

• 36:28David Rosenthal?

  That is, that was a good acquisition.

• 36:30Ben Gilbert?

  The other fun one about this is I think all the rest of them that we're going to mention come up very, very commonly in conversations where people say, what's the best acquisition of all time?

• 36:40David Rosenthal?

  Actually, I think number two is going to be a surprise for people. It was a surprise for me.

• 36:44Ben Gilbert?

  Okay, fair. But yeah, with booking, like it's, it's one that I think people don't realize.

• 36:50David Rosenthal?

  Still don't appreciate.

• 36:51Ben Gilbert?

  Yeah.

• 36:51David Rosenthal?

  You know, the booking is, I haven't checked the latest market caps, but I remember back, you know, when we did the episode. Booking Holdings, you know, is worth roughly by market cap, several multiples of Airbnb, several multiples of Expedia.

• 37:07Ben Gilbert?

  I mean, Expedia is a 13 billion dollar company right now, market cap. And, and what's booking?

• 37:13David Rosenthal?

  Booking is 70. Now, of course, we're doing this in the middle of the coronavirus outbreak. So the bookings, all travel companies, you know, market caps have been taking a big hit.

• 37:22Ben Gilbert?

  But still, I don't think particularly people in the Seattle area don't appreciate how much larger booking is than, than Expedia.

• 37:29David Rosenthal?

  Yeah, absolutely. This was, you know, I mean, again, like what happened says it all. Like the company is now called Booking Holdings.

• 37:37Ben Gilbert?

  Very true. Okay. The next one, number five.

• 37:41David Rosenthal?

  Next is next.

• 37:42Ben Gilbert?

  How come I get both of these ones? So number five, Apple's 1997 Aqua Hire of Steve Jobs.

• 37:51David Rosenthal?

  Greatest Aqua Hire of all time.

• 37:53Ben Gilbert?

  And all of the incredible technology that comes from next.

• 37:56David Rosenthal?

  That's the thing. It's not. Just Steve Jobs with Next.

• 37:59Ben Gilbert?

  Right. So this one had to be in there, right? Because Apple's a $1.4 trillion company now that certainly would not be but for the next acquisition. So this is another situation where we have necessary but not sufficient.

• 38:14David Rosenthal?

  Yeah.

• 38:14Ben Gilbert?

  So Apple makes this move, gets Steve Jobs back. They also get the sort of new and blooming object oriented programming.

• 38:22David Rosenthal?

  Yeah.

• 38:23Ben Gilbert?

  The Objective-C language and runtime, uh, next step, which turns into macOS 10, which then gets refactored into iPhone OS, which then became iOS, which then forked to iPad OS, which then forked to Watch OS.

• 38:37David Rosenthal?

  Watch OS, yup.

• 38:38Ben Gilbert?

  So for as much as we wanted to attribute value to the hardware from P A Semi, the software in all of Apple's, you know, everything that is Apple today.

• 38:48David Rosenthal?

  Comes from Next.

• 38:49Ben Gilbert?

  Yeah, it is not.

• 38:51David Rosenthal?

  Don't forget.

• 38:51Ben Gilbert?

  Gershwin and Copland and all these machinations of.

• 38:54David Rosenthal?

  Oh, man, Copland.

• 38:55Ben Gilbert?

  Machinations? I don't think I know that word. Of macOS 9.

• 38:58David Rosenthal?

  Machinations.

• 38:59Ben Gilbert?

  Machinations progressing through. It was, nope, new thing, based on next step.

• 39:04David Rosenthal?

  Yeah. Don't forget, they also got the Cube.

• 39:07Ben Gilbert?

  They also got the Cube.

• 39:09David Rosenthal?

  Also got the Cube.

• 39:09Ben Gilbert?

  So of course, how do we, how do we value this one? So what we basically said, so first of all, the acquisition price, $429 million. Again, big freaking pickup for Apple. You think about 1997, that, that much money for them. Huge bet, huge bet. The funny thing is, the company wouldn't do literally any of the revenue, of the $260 billion in revenue that they do today.

• 39:32David Rosenthal?

  Zero.

• 39:33Ben Gilbert?

  Without that acquisition. But of course.

• 39:35David Rosenthal?

  Look at all their business lines. All the iOS business lines.

• 39:38Ben Gilbert?

  Yup.

• 39:38David Rosenthal?

  iPhone, iPad, wearables, none of that. Mac, none of that. Services, none of that.

• 39:44Ben Gilbert?

  Yup.

• 39:45David Rosenthal?

  Everything.

• 39:46Ben Gilbert?

  Yup.

• 39:47David Rosenthal?

  Yeah.

• 39:48Ben Gilbert?

  So then how do we do the math here? So what we basically just kind of like squinted at is we said that the discount for future dependency, so this discount that we apply, where we're basically saying what percentage of the, the product that ships today came from outside the assets acquired? We're going to say it's about 95%. That necessary but far, far, far, 95% from sufficient. And so we take a 95% discount on Apple's current market cap today.

• 40:18David Rosenthal?

  Now, here's the crazy thing. Oh, what's 5% of Apple's market cap? Some tiny number. $63 billion.

• 40:25Ben Gilbert?

  Providing us with an absolute dollar return of 62 and a half billion dollars. That are very squinty math here, but honestly, it's, it's hard to come up with something better. Would yield for Apple buying next.

• 40:37David Rosenthal?

  Yeah. Okay. Number four, just a hair's width outside of our top three. But absolutely just, this is, well, we'll, we'll get to, we'll reveal what it is. This is going to win the prize for ROI multiple here by a long, long shot. We are talking about Google's 2005 acquisition of Android for $50 million.

• 41:05Ben Gilbert?

  Which, one of the, one of the things this points to is how you can get these gigantic multiples from early stage investing.

• 41:11David Rosenthal?

  Yeah.

• 41:12Ben Gilbert?

  I mean, when, when you say this one wins the award for ROI multiple, what I really hear is must have been a really cheap pickup price.

• 41:18David Rosenthal?

  Yeah, exactly. Well, exactly. Exactly. But again, like you can't eat ROI multiple. So that's why this is number four and not number three, two, or one. But still a monster. Okay. Android, $50 million to buy this thing. We tried to think about, how do you account for what Android's current revenue contribution is to Google?

• 41:40Ben Gilbert?

  And of course, Google is not helpful to us at all in this segment. That when they report Android revenue, they report the search revenue that is generated from people searching on Android phones, which is like not, not really how you'd want to do this. You'd, you really want to think about like.

• 41:56David Rosenthal?

  Yeah, that's Google search revenue. That's not like Android.

• 41:59Ben Gilbert?

  Google searches were going to happen somewhere anyway, whether they had, you know, the Android or not. So how should we think about this?

• 42:06David Rosenthal?

  Well, there's one, there's one piece of the revenue that is actually the much, much easier part, which is Google Play Store revenue.

• 42:12Ben Gilbert?

  Yep.

• 42:12David Rosenthal?

  That is fully attributable to Android. That was going to happen, you know, like there's no, there's no sharing of that. It's like no Android, no Google Play Store.

• 42:19Ben Gilbert?

  Yep, exactly. The other component, which is a little bit harder to sort of squint at, is what we call "traffic acquisition costs." So it is reported that Google currently pays Apple about $9 billion a year in order to keep Google as the default search engine on the iPhone. That is an insane, insane number in their cost structure. And so, one big thing that we sort of determined on the episode with Android, in addition to the Play Store, how should you think about the value of Google creating Android in-house? You should think about it as money they don't have to pay anyone else for that traffic. Because if they own the operating system, then they can for free keep Google as the default search engine.

• 43:04Ben Gilbert?

  And so, the way that we went about that is we compared the amount of money that is spent on the iPhone through, you know, the App Store to the amount of money that is-

• 43:14David Rosenthal?

  Sort of purchase intent that would be monetizable search traffic?

• 43:17Ben Gilbert?

  Exactly. To the amount of money that is spent on Google's Play Store. Apple makes about twice as much money as Google does on the App Store versus the Play Store, which kind of gives us a sense of there's, if you think about gross purchase intent, or basically the value of the traffic on iPhones, it's about twice as much as the value of the traffic on Android phones. And so, that's sort of how we backed into, "Let's add another $4.5 billion in quote 'revenue' per year to Google for owning Android." Because it's basically costs they don't have to pay to anyone else.

• 43:51David Rosenthal?

  Yeah. Now, here's the surprising thing to me, though. The total number that we come up with revenue contribution for Android is right around $13 billion, right?

• 43:59Ben Gilbert?

  Yep, $13.5 billion.

• 44:01David Rosenthal?

  $13.5 billion. So $4.5 of that we're attributing by our flawed methodology here, flawed in some way, we don't know way, to search. I realized this- There's so much revenue in the Play Store. Like, it's so big now, even though the iOS App Store monetizes more and is, you know, worth more. Google is gonna do, by estimates, Google did about just under $30 billion in total gross merchandise value in the Play Store last year in 2019. They take a 30% cut of that, you know, we're under, slightly under $10 billion in, you know, super high margin revenue to

• 44:40Ben Gilbert?

  To Google.

• 44:41David Rosenthal?

  Basically infinite revenue, infinite margin revenue to Google. That's incredible.

• 44:44Ben Gilbert?

  Yep. Yep. Yeah, listeners, I would love to hear your thoughts if you have a better way of thinking about Google's sort of revenue contribution. We fully recognize that this, this cost saving is different than revenue. We also fully recognize that taking a ratio of the App Store's earnings and sort of using that as a ratio of traffic acquisition costs.

• 45:05David Rosenthal?

  We may be vastly underestimating search value here.

• 45:08Ben Gilbert?

  It's true. And of course, the $9 billion number that they paid Apple is not a Google disclosed number, that is a reported number.

• 45:15David Rosenthal?

  Yep.

• 45:16Ben Gilbert?

  And so, yeah, would, would love to have more conversation around that.

• 45:19David Rosenthal?

  So we net out all of this when you, current market cap contribution, taking out the $50 million acquisition price of $77.68 billion in absolute return on this acquisition of Android, which represents an ROI multiple of 1,555x compared to a 5x for Marvel.

• 45:41Ben Gilbert?

  And a nice little annualized return of 63%.

• 45:44David Rosenthal?

  Oof, man. 63% over 15 years. Now, of course, that's not hard cash, like booking, which is the 48% annualized of like, yep, that's like, you can take that to the bank.

• 45:56Ben Gilbert?

  Yep.

• 45:56David Rosenthal?

  But still, gotta rank this one super high.

• 45:59Ben Gilbert?

  All right, well, our Google streak continues.

• 46:02David Rosenthal?

  It's gonna continue for a little while here.

• 46:04Ben Gilbert?

  Number three, Google's 2006 acquisition of YouTube, which I think the acquired podcast called this a C when they did that episode.

• 46:15David Rosenthal?

  Those guys, those guys are. Morons.

• 46:17Ben Gilbert?

  Yeah, they definitely need to revisit this one.

• 46:19David Rosenthal?

  Definitely need to revisit.

• 46:19Ben Gilbert?

  Consider this a primer on our revisit. So, big acquisition price. I mean, this was a $1.65 billion acquisition. And in 2006-

• 46:29David Rosenthal?

  For a year-old company.

• 46:30Ben Gilbert?

  For a year-old company that was basically incubated inside Sequoia.

• 46:34David Rosenthal?

  Yeah.

• 46:35Ben Gilbert?

  So-

• 46:36David Rosenthal?

  Actually, is, I believe, still to this day, the only publicly available Sequoia investment memo out there, because of course, it was a part of discovery in the YouTube Viacom lawsuit.

• 46:46Ben Gilbert?

  Yep. We'll link that in the show notes. If you're listening to this show and you find this interesting, you will, like, love geeking out over this investment memo. It's awesome.

• 46:57David Rosenthal?

  I think this was Realoff's first investment in Sequoia.

• 46:59Ben Gilbert?

  I mean, it's remarkably cogent for someone's first successful investment memo.

• 47:05David Rosenthal?

  Well, you know, it's better to be lucky than good. He's good, too.

• 47:09Ben Gilbert?

  So, Google finally did us a favor and broke out YouTube in its most recent earnings, a fast-growing revenue segment of $15 billion a year. I've got lots of comments on this, but I'm going to hold it for our playbook section. We're going to do a little more analysis. But you look at the acquisition price of $1.65 billion, now doing $15 billion in revenue. Google total is doing about $160 billion in revenue. So that comes to a market cap of-

• 47:35David Rosenthal?

  Contribution.

• 47:36Ben Gilbert?

  Market cap contribution to Google's trillion dollars of $86 billion in market cap contribution for YouTube, which of course, then is an $84 billion absolute return on Google's cash.

• 47:49David Rosenthal?

  We're just getting into silly numbers at this point.

• 47:53Ben Gilbert?

  Yeah, if you can get a 52x ROI multiple on a billion and a half dollar investment, you're doing pretty good.

• 48:00David Rosenthal?

  Doing pretty good.

• 48:02Ben Gilbert?

  There's lots more I want to say here-

• 48:04David Rosenthal?

  We'll hold this one for the end of the show, but- All right, here, number two. I was shocked by this. I'm just shocked. We have not covered this as an episode. I mean, listeners, you're listening along. What would you think number two is gonna be? This is not what you think it's gonna be.

• 48:21Ben Gilbert?

  And you probably know what number one's gonna be, based on the number of times we reference it.

• 48:24David Rosenthal?

  On the show.

• 48:24Ben Gilbert?

  So, yeah, what is two?

• 48:26David Rosenthal?

  Okay, so, big caveat here. We haven't done this episode. We need to dig in more. This is, this episode is like, coming right up to the top of the list now of like, we need to do the work here. Another Google acquisition.

• 48:38Ben Gilbert?

  And, and, and let's pause. It's another Google acquisition, so listeners, take, take five seconds and think about like, what else did Google buy?

• 48:45David Rosenthal?

  2008, that's when it happened.

• 48:49David Rosenthal?

  DoubleClick. Man, I was like, Ben, when you first put this on like, the first draft of our list, I was like, DoubleClick, come on, no. Like, that's not like, yeah, I mean, there's revenue and stuff in there, but like, a bunch of that was already in Google, and then they did other stuff. And so we almost took it off the list, you know, and then we went and we actually like dug in a little bit, and we're like, wow, no. DoubleClick contributes, the former DoubleClick assets now contribute a massive amount of revenue to Google. You know, Google Ad Manager, that business line and the business unit that it's within, which is almost all DoubleClick and AdMob. They acquired AdMob in, when was that, 2012?

• 49:29Ben Gilbert?

  Somewhere in there for 750 million.

• 49:32David Rosenthal?

  So you put those two together, that's about $22 billion of revenue within Google today. Now, obviously, that's not search revenue, that's like, display revenue.

• 49:40Ben Gilbert?

  Right.

• 49:40David Rosenthal?

  But, that's revenue.

• 49:42Ben Gilbert?

  Listeners, the way to think about this is, of, of the sort of two big Google ad segments, and we're excluding YouTube here, and there's the stuff they own. So there's search engine ads that come up, and that used to be called AdWords. It may still actually be called AdWords.

• 49:58David Rosenthal?

  I think they just changed it to Google Ads.

• 49:59Ben Gilbert?

  Google Ads, okay. And that's the larger segment. And then there's this other, still very large segment, that's the stuff they don't own. So the, the ads that they're showing on other people's websites, which used to be called AdSense.

• 50:11David Rosenthal?

  Yeah, and that predates the, the DoubleClick acquisition. And that's why initially I thought like, oh yeah, AdSense has been around forever, that wasn't DoubleClick.

• 50:18Ben Gilbert?

  Yeah.

• 50:18David Rosenthal?

  But AdSense, that product line is actually quite small these days. Almost all of what is in, what are they called now? It's like Google Network Ads, or something like, Google Network Advertising, maybe something like that. Almost all of it is DoubleClick and AdMob.

• 50:33Ben Gilbert?

  It's wild. And so, of course, this requires a much more nuanced understanding of sort of the digital ad serving ecosystem and, you know, understanding double click for publishers and understanding what's an ad network versus, you know, double clicks. Is it a DSP?

• 50:51David Rosenthal?

  Well, there's like, yeah, there's a double click for publishers and then there's double click for advertisers. And that's, you know, I believe, again, we're not ad tech experts, but I believe that's like the standard, you know, rails that all kind of third-party ad tech runs on these days.

• 51:05Ben Gilbert?

  Yep. I know. I know. Every publisher for sure still has DFP as the sort of main container that all the, all the ad networks plug into on their site. So the TLDR on this one is they created an unbelievable amount of value. It's still massively value created for Google and we're excited to do an episode on it.

• 51:23David Rosenthal?

  Yeah. So they bought it for $3.1 billion in 2008. Current revenue contribution of, of this segment within Google is just a hair under $22 billion. Multiply that out by the market cap and you get $126 billion in market cap contribution. Net out the acquisition price, $123 billion of value creation.

• 51:45Ben Gilbert?

  You know, anyone should be trepidatious spending $3 billion. But when you have any sort of guess that 103 billion could pop out the other end, or I guess 126 billion could pop out the other end, have a little more faith.

• 51:59David Rosenthal?

  All right. Well, number one on our list, no surprises here.

• 52:03Ben Gilbert?

  The king.

• 52:04David Rosenthal?

  The king. The goat.

• 52:06Ben Gilbert?

  So after three Googles in a row, we have Facebook buying Instagram in 2012. They bought it for a billion dollars. Recent estimates say that there's about $20 billion in revenue that comes from advertisers going into the very same portal on Facebook that they use to buy Facebook ads and instead buying Instagram ads.

• 52:27David Rosenthal?

  Or in addition, probably most often.

• 52:29Ben Gilbert?

  Yep.

• 52:31Ben Gilbert?

  So Facebook's current market cap, around $540 billion. They do about 70 billion in revenue, so 20 of this 70 comes from Instagram.

• 52:41David Rosenthal?

  And that's nuts. Two-sevenths of Facebook's revenue is Instagram.

• 52:46Ben Gilbert?

  Yep. So not ridiculous to say that they contribute somewhere around $150 billion to Facebook's current market cap, which, you know, let's just round and say somewhere around $150 billion in absolute value return. Nuts. And you think about how recent that was too, 2012. That puts it at an 88% annualized return for Facebook.

• 53:08David Rosenthal?

  So on our whole list, this is the highest annualized return. Now, only eight years, but still eight years of annualized return of 88%. Wow. 88% compounded annualized return.

• 53:21Ben Gilbert?

  It's funny-

• 53:22David Rosenthal?

  There's nothing more to say.

• 53:22Ben Gilbert?

  These percentages really force you to understand, for folks who aren't used to looking at like IRRs or, you know, annualized returns, like you'll notice like even the best one isn't 100%. And so it really forces you to sort of like-

• 53:37David Rosenthal?

  Think exponentially.

• 53:38Ben Gilbert?

  Think exponentially, which humans are bad at.

• 53:40David Rosenthal?

  Yeah. Well, it's, you know, there's the Warren Buffett and Charlie Munger re-quote of, I believe it was Albert Einstein, that said, "Compounding interest is the eighth wonder of the world." Like, if you can compound something at 88% per year for even just eight years, you get the greatest acquisition of all time.

• 53:59Ben Gilbert?

  It's true. So, we're gonna do a little bit of a modified version here of acquisition category. So David, how are you thinking about this?

• 54:08David Rosenthal?

  So, I went through our top 10. It's only the top 10 that qualify. And I categorized for me, this may be slightly different than what we did on the episodes of the show, maybe different than what you think. Each, I categorized each real quick. So Instagram has a business line, DoubleClick business line, YouTube business line, Android product. Next, People Plus Technology, Booking.com business line, PayPal business line, ESPN business line, the Google Maps suite I said product, and then Marvel business line. So, of that, we have two products. One, People Plus Technology, and all the other seven business lines for me.

• 54:43Ben Gilbert?

  Wow.

• 54:43David Rosenthal?

  You agree?

• 54:44Ben Gilbert?

  Yeah, I would not change a single categorization there. Did you call Instagram a product or did you call it a business?

• 54:49David Rosenthal?

  I called it a business line. That's maybe somewhat debatable.

• 54:52Ben Gilbert?

  Revenue when they bought it. I think it's a product that plugs into Facebook's existing business line.

• 54:56David Rosenthal?

  Yeah, that's, that's, that's debatable on that one. I could, I could see that. That kind of straddles the line.

• 55:01Ben Gilbert?

  Yeah. Cause we define business line as like it, it is a, if not sustainable, then having a path to sustainability business on its own, right?

• 55:11David Rosenthal?

  Yeah. So like booking.com, of course. ESPN, of course.

• 55:15Ben Gilbert?

  Yeah.

• 55:16David Rosenthal?

  YouTube, of course.

• 55:17Ben Gilbert?

  Ah, was YouTube, was YouTube generating ad revenue when they sold? I guess that's not that important.

• 55:23David Rosenthal?

  No, but it's like, it's pretty same like.

• 55:25Ben Gilbert?

  In the same way that Instagram would have implemented some sort of ad product.

• 55:29David Rosenthal?

  Yeah.

• 55:31Ben Gilbert?

  Wouldn't have been successful, as successful because it wouldn't have been aggregated on the backend with all of either Google's existing advertisers or Facebook's existing advertisers in either of those cases.

• 55:39David Rosenthal?

  Whereas I think like Android is definitely a product because, you know, Android got integrated into so much.

• 55:44Ben Gilbert?

  What are they going to Windows style, sell licenses to the OS?

• 55:48David Rosenthal?

  Right, right. It wouldn't have worked. There's no way Android's business model could have existed except within Google. And, and same with the suite of Google Maps acquisitions. Like that was not, where to was not going to build, uh, they were building Google Maps, but they weren't going to build the business of Google Maps.

• 56:04Ben Gilbert?

  Right. It's funny, like I, I, so I generally agree with your thesis that the dominant tech theme here is, uh, is business line acquisitions. And if you had asked me 100 episodes ago or 110, you know, when we started the show, like, what, what do you think your takeaways might be? And I think we had this categorization thing within the first few episodes.

• 56:23David Rosenthal?

  Yep.

• 56:23Ben Gilbert?

  I don't think I would have told you that the most successful ones would be the business line acquisitions.

• 56:29David Rosenthal?

  Well, it kind of makes me think, it's kind of a justification for venture capital for me, right? Like, cause kind of you could maybe make an argument that what these, some of these super, super successful acquisitions that our business lines are is just like, oh, well, the parent company, the bottom of the, kind of like a bunch of capitalists, like they funded, Google funded YouTube for a long time. And YouTube turned out to be an amazing business. And it's a separate kind of standalone business. You could say the same thing about Instagram. I think probably Zuck and Facebook, you know, we'll talk about in just a sec about acquisition philosophies of different companies. I think that's kind of how they think about things like the like the Facebook quote unquote style acquisition of we're going to buy you and we're going to leave you alone. Well, it's kind of like what it would be like if you're operating as a standalone venture backed company.

• 57:14Ben Gilbert?

  Yep. It's a great point. You know, it's funny, as you talk about the companies that show up here and then we're drifting into playbook and themes here a little bit, notably missing is Amazon.

• 57:25David Rosenthal?

  Yeah.

• 57:25Ben Gilbert?

  Nowhere in the top 15. I mean, you've got Microsoft, Google, Facebook, Apple.

• 57:31David Rosenthal?

  Yep.

• 57:32Ben Gilbert?

  You don't have Amazon.

• 57:34David Rosenthal?

  Yeah. Well, okay, let's talk about this. So the other thing I wanted to talk about in in category section is use this to talk about the acquirers. Let's talk about each of these. So maybe can we start with Google? Google has four of the top 10.

• 57:49Ben Gilbert?

  Yeah, it's amazing.

• 57:50David Rosenthal?

  Like, I mean, people know, like, I think, yeah, Google's like, you know, well, right. Like, this is, Google has the best M and A track record in history. Right? Like.

• 58:00Ben Gilbert?

  Yep.

• 58:01David Rosenthal?

  Four of the top 10 and three of the top four. That's pretty good.

• 58:10Ben Gilbert?

  And they were in a bidding war for that, for Instagram. So.

• 58:14David Rosenthal?

  That's right.

• 58:15Ben Gilbert?

  It would have. Could have been four of four.

• 58:16David Rosenthal?

  It could have been, it could have been four of the top four and five of the top 10. You know, if you think about Google, you know, maybe Eric Schmidt, I can see this, but like Larry and Sergey, you don't like, they don't scream like M and A genius to me.

• 58:27Ben Gilbert?

  Yeah, I mean, I was tempted to blame it on the sort of M and A spree that they were on in the sort of like late 2000s, early 2010s.

• 58:35David Rosenthal?

  Shots on goal, you're going to hit some winners.

• 58:36Ben Gilbert?

  Yeah, but like those ended up being the sort of like 20 to 100 million dollar pickups. They were doing, it was a bunch of Y C companies, it was a bunch of Google alums.

• 58:46David Rosenthal?

  Those were aqua hires. They were just buying employees.

• 58:49Ben Gilbert?

  Like, these were bets. I mean, if you look at 1.65 billion, you look at 3 billion, like, these are, these are big strategic bets that they were making out of the company, you know, in what, 2005? In six, it's not like, I mean, how much was Google worth in 2006? 1.6 billion was very real money.

• 59:09David Rosenthal?

  I remember my investment banking interview, one of my interviews was the Google YouTube acquisition had just happened. And the question was, what do you think about this? And I remember saying like, oh man, they spent so much money. This seems crazy.

• 59:24Ben Gilbert?

  Yeah. Well, here, okay, here is my sort of thesis on it is when you say like Larry and Sergey, don't strike me as M and A geniuses. Obviously Eric Schmidt was very active in the company at this point. Was he CEO?

• 59:34David Rosenthal?

  He was CEO during all of these acquisitions, I think.

• 59:37Ben Gilbert?

  So, you know, very seasoned executive there, technology executive. But the way I sort of think about Google is at their founding, they were tech geniuses. They figured out something very disruptive, but didn't really realize it. They didn't know what to use it for, this sort of like.

• 59:53David Rosenthal?

  As Doug Leoni said, it took them a couple of years to figure out, they knew they had something, but exactly what it was, they didn't know.

• 59:59Ben Gilbert?

  And they kind of fell backward into a business model. I mean, they kind of like realized that, oh my gosh, this thing that we're doing by having the fastest and most accurate search results with the lowest cost structure because of our distributed compute infrastructure, like, oh my God, we can do that thing that Overture is doing. And have incredibly high margin, incredibly defensible revenue.

• 1:00:21David Rosenthal?

  Yep.

• 1:00:21Ben Gilbert?

  Oh, okay. I guess we'll start doing that.

• 1:00:23David Rosenthal?

  They didn't invent that.

• 1:00:24Ben Gilbert?

  But then I think the thing that they did realize was the power of that. And then like, I think it's a billions quote that Bobby Axelrod says, when you, when you have an advantage, press it.

• 1:00:35David Rosenthal?

  Yeah.

• 1:00:36Ben Gilbert?

  I think they became very good at figuring out, hey, how do we leverage our existing strategic position to just widen the moat? And create more business lines or create things that just add tremendous high margin revenue to our existing business lines.

• 1:00:51David Rosenthal?

  Here's, here's something interesting though, like. All of these fantastic acquisitions happened 10 to 15 years ago for Google. Now, you could argue, as we said at the top of the show, we're not going to include recent acquisitions in this because it's too early to tell. So maybe Google has made some recent acquisitions that are going to turn into this, but I kind of don't think so. I think two things happened to Google, maybe three things, in the period after when they were making these incredible acquisitions. One, Facebook showed up and started making some of these acquisitions. So like, whereas before, Google was kind of the only scale tech acquirer. Now, all of a sudden, Facebook's on the scene.

• 1:01:28Ben Gilbert?

  And there's tons of alumni at Facebook from Google. I mean, the whole Facebook Ads team was the original Google Ads team. Sheryl moving over.

• 1:01:36David Rosenthal?

  Yep, yep. So Facebook gets Instagram, Facebook gets WhatsApp, you know, Facebook gets Oculus, which obviously, of course, is not on this list, but like, you know, was a big bet to make. You know, you should be making these bets. It's like takeaway here, playbook, you know, news flash, make these bets. Two, though, maybe in response to that, Google starts shifting to this strategy of like, oh, we're going to build stuff in-house with like Google X and whatnot. And I just don't think that works as well.

• 1:02:02Ben Gilbert?

  That's a good point.

• 1:02:02David Rosenthal?

  You know, I see sort of the rationale, but like, the incentives are wrong, you know? If you're an entrepreneur and you're going to build a company, you're like going to be all in and aligned. If you're making a Google salary and you're building a company, it's not, it doesn't work the same way.

• 1:02:18Ben Gilbert?

  We sit here the day after Waymo finally took external capital.

• 1:02:23David Rosenthal?

  Right, right. Yeah, I mean, maybe Waymo will become this, but like, anyway, that's two. And then I think three, related to both of these, was the leadership change at Google. You know, Eric Schmidt steps back, Larry Page becomes CEO. Kind of what I said, Larry and Sergey, both like incredible entrepreneurs, incredibly, you know, stewardship of Google and everything, but this isn't their MO, you know, making these acquisitions.

• 1:02:46Ben Gilbert?

  Yeah, yeah, Google X is in very, I mean, I don't know as much lore around the founding of Google X, but it does strike me as trying to recreate the conditions upon which Larry and Sergey invented Google Search.

• 1:02:58David Rosenthal?

  Yeah.

• 1:03:00Ben Gilbert?

  I'm sure there's many business school professors who study this professionally, but it strikes me that you can kind of do that once and then when you hit your tipping point and what you need to do is grow and defend, M&A is a much more high likelihood of hit rate strategy than trying to replicate those initial conditions.

• 1:03:19David Rosenthal?

  Which brings us to, I think, the next company to talk about, which is Facebook.

• 1:03:22Ben Gilbert?

  Yep.

• 1:03:23David Rosenthal?

  Yeah.

• 1:03:24Ben Gilbert?

  So I thought, coming into this, that my takeaway would be that Facebook is the greatest acquirer of all time.

• 1:03:30David Rosenthal?

  Well, they got number one.

• 1:03:31Ben Gilbert?

  Yeah.

• 1:03:31David Rosenthal?

  Locked down.

• 1:03:32Ben Gilbert?

  And ultimately, the value from number one over, like, as it continues forward in the future, may actually prove that nothing else matters.

• 1:03:40David Rosenthal?

  Power law. Number one beats two through 10 combined.

• 1:03:44Ben Gilbert?

  Yep.

• 1:03:44David Rosenthal?

  Maybe, maybe.

• 1:03:46Ben Gilbert?

  But at the end of the day, there's two very different, like, holding my comments about online advertising, there's two very different modalities of sort of this traffic. There's intent-based and then non-intent-based, or I don't know what you call Facebook, but mess around on your free time-based.

• 1:04:00David Rosenthal?

  Yeah, yeah, uh, yeah.

• 1:04:02Ben Gilbert?

  They both serve an incredibly different and incredibly powerful purpose, and they haven't really stepped on each other yet. Like, they've tried in different ways, Google Plus tried, and actually, Facebook hasn't launched a search engine, even though they index most of the web, which is kind of interesting.

• 1:04:19David Rosenthal?

  Interesting.

• 1:04:19Ben Gilbert?

  I do think both of those will continue as independent enduring juggernauts because they serve very different purposes for the types of advertising that they serve people in the moment in which they catch them.

• 1:04:30David Rosenthal?

  Yep, yep. It's interesting to think about, you know, Facebook is, we were just talking about Google and this era of, this incredible era, and then sort of seeding that, definitely not intentionally, to Facebook, but Facebook is also kind of like, they haven't made acquisitions like this in quite a while. I wonder if that's because the venture capital industry is so, has been so robust over the past few years, like, where it used to be like, oh yeah, Facebook wants to buy you for billion dollars, couple billion dollars, 20 billion dollars.

• 1:05:01Ben Gilbert?

  We have a small fund, that sounds great to us.

• 1:05:02David Rosenthal?

  Now you can raise money at $10 billion valuation, so...

• 1:05:06Ben Gilbert?

  Yeah, it's a great point.

• 1:05:07David Rosenthal?

  Yeah, interesting.

• 1:05:08Ben Gilbert?

  One of my big tech- Themes is like, oh, my gosh, these have all happened largely in the last 20 to 25 years. And based on your comment there, it may be the case that there was a 20 to 25 year window where the best M and A of all time existed.

• 1:05:24David Rosenthal?

  Yeah.

• 1:05:24Ben Gilbert?

  And if this ability to both stay private longer and raise huge amounts of capital, and there are people with huge funds to support you to do that, or as you said, robust venture capital infrastructure, like maybe we don't see this kind of thing as much anymore. Because if YouTube was started five years ago, actually, what would happen is it would

• 1:05:46David Rosenthal?

  Google wouldn't have bought it.

• 1:05:47Ben Gilbert?

  Be a competitor to

• 1:05:49David Rosenthal?

  Facebook.

• 1:05:50Ben Gilbert?

  Facebook at this point, and it would be a large independent company. I mean, TikTok is the sort of what would have happened otherwise if YouTube was 10 years later.

• 1:05:58David Rosenthal?

  Well, now that's so it's I was gonna say that it's both of what would have happened. It's it's two it's a counterfactual and a counterfactual to a counterfactual is in that they bought Musically. Musically is too early to tell if that's gonna make the list, but it could. There's a world in which it could, and that's a recent acquisition. Super I it makes me very glad that we broadened acquired from just acquisitions to you know, first IPOs and now just great technology companies. Because, yeah, this the era of these type of acquisitions may be, it's never gonna be over, but like that that fertile window from, you know, 2005 to 2012, I don't think it's gonna come again.

• 1:06:33Ben Gilbert?

  Yeah, like you needed the right overlap of a technology wave and a capital wave.

• 1:06:38David Rosenthal?

  Yeah.

• 1:06:39Ben Gilbert?

  And I think the interesting thing about the technology wave is these are all internet companies. And so you alluded to this at the beginning where you said, hey, we are going to cover non-tech companies too, and we're thinking with a lens of covering non-tech companies. But when you think about it, it software being distributed over the internet.

• 1:06:58David Rosenthal?

  Zero marginal cost.

• 1:06:59Ben Gilbert?

  Yeah, like, like, holding my comments about YouTube, like, you look at Instagram's gross margins, right? Like, they don't have to pay anything for the content. The advertisers are all aggregated anyway from their big stable with Facebook and even more people coming for the combined Facebook and Instagram. And the bandwidth cost to serve it out to the billion plus users on the platform now.

• 1:07:24David Rosenthal?

  Not zero, but

• 1:07:24Ben Gilbert?

  Not zero, but much, much lower than, you know, the revenue that they're generating off of this. So

• 1:07:30David Rosenthal?

  It's not just it's not just cost structure, but it's also, I think, even maybe even more important in why. At least by our bias lens, we kind of only had tech and a few media companies in here. It's just the ability to scale. If you're making widgets, you can't go from a million people buying your widgets to one out of every two people in the world buying your widgets within 10 years. You just can't do that.

• 1:07:55David Rosenthal?

  Unless you're Apple, I guess.

• 1:07:57Ben Gilbert?

  Yeah, that's a, that's a fair point. So there's, there's a margin, there's, there's scale and there's defensibility that all sort of come. I mean, you're not going to unseat Instagram at this point.

• 1:08:06David Rosenthal?

  Yeah.

• 1:08:07Ben Gilbert?

  Try a SnapMite. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:08:21David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:08:38Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:08:53David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:09:17Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:09:36David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:10:06Ben Gilbert?

  Truly insane numbers, and that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com/acquired and just tell them that Ben and David sent you.

• 1:10:31David Rosenthal?

  Let's go run through quick the other big tech companies. So Apple's on this list, but it's interesting. Apple's just whole approach and MO to this is so different. You know, they make hardware, right? Like they buy components.

• 1:10:40Ben Gilbert?

  Apple buys small technology companies from time to time. It's always their comment.

• 1:10:45David Rosenthal?

  We thought about that as a name for the show originally, right?

• 1:10:47Ben Gilbert?

  That's right.

• 1:10:50David Rosenthal?

  Glad we didn't do that.

• 1:10:51Ben Gilbert?

  Yeah.

• 1:10:54David Rosenthal?

  Microsoft.

• 1:10:57David Rosenthal?

  What do we think?

• 1:10:58Ben Gilbert?

  So they have none in the top 10. We've got Bungie as an honorable mention.

• 1:11:03David Rosenthal?

  Yep.

• 1:11:04Ben Gilbert?

  Microsoft famously bungled M&A for most of the Ballmer era.

• 1:11:08David Rosenthal?

  Yeah. Which is interesting, given they had such a robust team. They had probably a bigger, more robust team than, than, but maybe they overthought things.

• 1:11:17Ben Gilbert?

  It's a couple of things. Well, actually, they all stem from the same thing. It's Microsoft's culture. Either the not invented here syndrome just crushed anything that came in to the point where they weren't going to play nice.

• 1:11:28David Rosenthal?

  Right.

• 1:11:29Ben Gilbert?

  Or-

• 1:11:29David Rosenthal?

  Microsoft bought a Quaniv, like at the same time, Google bought DoubleClick and like-

• 1:11:34Ben Gilbert?

  Yep. I mean, that's the counterfactual.

• 1:11:36David Rosenthal?

  Yeah.

• 1:11:37Ben Gilbert?

  Or the crony culture or the cronyism that emerged from the, the, the culture there. People would make these acquisitions for political reasons within the organization and then refer to point one for wouldn't end up playing nice when they tried to get integrated.

• 1:11:53David Rosenthal?

  Yeah.

• 1:11:53Ben Gilbert?

  And I think frankly, like for as dominant as Microsoft was and as much as the culture helped them get to that position, I think it was pretty value destructive for being able to grow meaningfully through M&A.

• 1:12:05David Rosenthal?

  Yeah. Yeah, that makes sense to me. Under Satya now with the new Microsoft, obviously, Microsoft is, is Microsoft the current, currently the largest company in the world by market cap?

• 1:12:16Ben Gilbert?

  It's up there. Yeah, I don't know.

• 1:12:18David Rosenthal?

  I think they may be above of Apple now.

• 1:12:19Ben Gilbert?

  I do know that their stock went up 50% between December 30th, 2018 and 2019.

• 1:12:27David Rosenthal?

  Wow, wow. So obviously Satya is doing an incredible job leading the company. It would be interesting, given we were just saying, the era of the great golden age of M and A may be over. If it weren't over, though, would Microsoft and can Microsoft even in this era make some?

• 1:12:42Ben Gilbert?

  I mean, you look at like, what, Minecraft?

• 1:12:45David Rosenthal?

  Yeah.

• 1:12:45Ben Gilbert?

  What else have they bought in the last few years?

• 1:12:47David Rosenthal?

  They bought LinkedIn, of course.

• 1:12:48Ben Gilbert?

  LinkedIn.

• 1:12:49David Rosenthal?

  LinkedIn's never going to qualify because it was already so large, like so much of the value had already been created.

• 1:12:53Ben Gilbert?

  Yep. Which to your point, like this sort of like robust capital environment, although LinkedIn was the same era of as Facebook.

• 1:13:00David Rosenthal?

  It was, but they went, but they went public. They were, LinkedIn went public right before Facebook. And they were kind of the first, there was a huge drought of tech IPOs after the financial crisis and LinkedIn kind of broke the logjam. Anyway, the only other one I want to mention, you know, that we have to, Disney got two of the top 10 media company, you know?

• 1:13:19Ben Gilbert?

  Yeah. So I had this like blog post that I've wanted to write for a long time that might be just better as an LP show. But what is the same and what is different between content and software?

• 1:13:28David Rosenthal?

  Yeah.

• 1:13:29Ben Gilbert?

  Because both are, I mean, if you look at software, it's really just content. Like it's, I mean, it executes.

• 1:13:35David Rosenthal?

  Yeah, it is. It's content.

• 1:13:36Ben Gilbert?

  But it's copyrightable, you know, it's words-ish and it's a set of instructions that is processed by some brain, just like an essay is. And so it has the same characteristic where you create it once and then you can create an infinite number of copies, so zero marginal costs. This era, it has basically the same distribution costs as software does. Putting 4K video out there obviously is a little bit more expensive to host and distribute YouTube than other forms of, you know, than SaaS, for example. So there's like these things that are the same, but then the things that are different are like, you have to create the constant next thing in content in the way that you don't in software. I mean, you need to maintain it and stuff, but like,

• 1:14:21David Rosenthal?

  Right, right.

• 1:14:22Ben Gilbert?

  When was the last time Slack added a new feature that was meaningful to your life? Never. But like,

• 1:14:27David Rosenthal?

  Whereas we go three weeks without making an episode and we start getting like real antsy.

• 1:14:30Ben Gilbert?

  It's nothing. It's like, what Doug Leone say, like without, without the next great investment, we just got the chickens in the back.

• 1:14:37David Rosenthal?

  20 chickens running in the back.

• 1:14:39Ben Gilbert?

  And that's how it feels. I mean, that's the difference between-

• 1:14:40David Rosenthal?

  We gotta start using that line more often. That's a really good line.

• 1:14:43Ben Gilbert?

  Totally. I mean, it's the difference between sort of building an enduring thing that has a snowball effect and grows over time versus, you know, having to start from square one each time.

• 1:14:52David Rosenthal?

  Yeah.

• 1:14:52Ben Gilbert?

  So to me, it's like, the reason why these content things are on here is because they have zero marginal and low distribution costs. So they can sort of have this high gross margin characteristic.

• 1:15:04David Rosenthal?

  Yeah.

• 1:15:05Ben Gilbert?

  Where you sink a ton of money into making it and then you can amortize that over tons and tons and tons and tons of people. But the reason why they're not in the top, you know, one, two, three, four, five, yeah, is, and the reason why Pixar didn't make the top 10 is because it's all about your next hit.

• 1:15:21David Rosenthal?

  That's so funny. And like, I just riffed on this for a minute. Pixar didn't make the top 10. Marvel and ESPN did. Marvel and ESPN are more predictable and repeatable than, you know, Pixar is dependent on the brain trust coming up with something great every year.

• 1:15:37Ben Gilbert?

  Yep.

• 1:15:37David Rosenthal?

  And sometimes they don't. Whereas, you know, ESPN's like, sports are gonna get played every, every day of every year.

• 1:15:44Ben Gilbert?

  That's true. The content kind of creates itself, too.

• 1:15:46David Rosenthal?

  And with Marvel, like, the depth of the bench and existing library is like, yeah, you gotta make good content. The movie's gotta be good and whatnot. But like, you're taking a lot less risk than you are on like, okay, brain trust, go make me something good, you know?

• 1:15:59Ben Gilbert?

  Yep. Yeah, that's a great point.

• 1:16:02David Rosenthal?

  Yeah. Okay. Playbook?

• 1:16:04Ben Gilbert?

  Yeah. Can we talk about the fact that the top three are all online advertising?

• 1:16:11David Rosenthal?

  Yeah, let's talk about that. I have, this is my, what I think you're gonna say is also my number one theme here.

• 1:16:17Ben Gilbert?

  Yeah. I mean, there's a few different ways to attack this. One is a defensibility perspective, which I think is interesting. Like, once you already have all the advertisers and you already have all the users, it's a far cry to ever break that, that bond that's created. And, and so the other side of that coin is being anti-competitive. So, you know, the, the fact that our top three are all online advertising network effect businesses that were bought by other online advertising network effect businesses, like, that may pay some credence to the drum that Ben Thompson has been meeting around, do we need a new regulatory framework for the internet?

• 1:16:53David Rosenthal?

  Yeah, regulation, yeah.

• 1:16:54Ben Gilbert?

  So hugely, hugely value-creative for the companies that bought them. Open question of whether it's net positive for the world for this combination to exist.

• 1:17:04David Rosenthal?

  Yeah.

• 1:17:04Ben Gilbert?

  What other angles do you have on?

• 1:17:06David Rosenthal?

  Well, it's interesting. So my angle on this, I agree totally with everything you said. My angle on this, though, certainly for this insight that the top three are all online advertising markets, but also the whole list and all the honorable mentions. This comes back to me like, this is another beat yourself over the head with a hammer moment of like, you want to build a big company, target a big market, you know? Like, you're not gonna build a big company if you don't target a big market, you know? And there's lots of big markets out there, but, but this top three all being online advertising, you know, like, think about it for a minute.

• 1:17:40David Rosenthal?

  Online advertising is probably the biggest market in the history of markets.

• 1:17:45Ben Gilbert?

  So it's interesting. Advertising all up, at least in the US, consistently tracks as 1% of GDP.

• 1:17:52David Rosenthal?

  Yeah. Now, okay, you could argue that residential real estate is larger. I'd buy that argument. But those two, I can't think of anything bigger because it like, advertising and online advertising, like, you're taking a vague on everything that is sold.

• 1:18:06Ben Gilbert?

  Yeah, you basically get a vague on the economy.

• 1:18:08David Rosenthal?

  You're getting a vague on the economy. Yep. And, and so like, it's so big that it can support the three biggest acquisitions of all time.

• 1:18:15Ben Gilbert?

  I think, yeah, I don't know if you should say it's the, like, if you look at household consumer spend, there's like a big chunk, I think like 30% is like their housing and then like 10 to 20% is their car and like 10 to 20% is food. So like, I guess the, what I would say-

• 1:18:36David Rosenthal?

  But if you think about all of those, even housing, advertising-

• 1:18:39Ben Gilbert?

  Right, Zillow.

• 1:18:40David Rosenthal?

  Yeah.

• 1:18:41Ben Gilbert?

  But I guess the point I'm making is like, maybe it's the single largest high-margin, addressable market by a number of consumers' perspective, but from an absolute dollars perspective, I bet those other markets are, are larger. The only difference being, one, you actually have to do the hard stuff, like bringing, making the food, bringing the food, whatever it is. Cars, you know, making a car. Margins, segments. Like, online advertising knows no segments.

• 1:19:08David Rosenthal?

  Yeah, you can hit everything.

• 1:19:10Ben Gilbert?

  Everybody has a social network account. It's crazy. And, and ease of scale.

• 1:19:14David Rosenthal?

  Yep.

• 1:19:15Ben Gilbert?

  So like, I don't think the amount of revenue available in online advertising compares to the amount of revenue available in residential real estate. However, the reason these market caps. Yeah, the reason these market caps are the way that they are and the reason these multiples are the way that they are is gross margin.

• 1:19:32David Rosenthal?

  Yep.

• 1:19:32Ben Gilbert?

  Lack of segmentation and growth characteristics.

• 1:19:36David Rosenthal?

  Now, what we're talking about at the end of this episode with, you know, in our clips with Hamilton, as we talked about in the whole episode with him. The mistake that VCs always make is you only look at market size. That's only one half of the equation. The other half of the equation is your ability to create defensibility within that market.

• 1:19:52Ben Gilbert?

  Yeah.

• 1:19:52David Rosenthal?

  And we haven't talked about that on this episode. This is not the time and place for it, but, um, you know, all of the top companies on this list were able to do that. The other two quick kind of sub bullets of that that I want to say are, one, if you look at all these acquisitions on the list with a couple notable exceptions, double click being a really notable one, these acquisitions were done early in that particular market's development in the lifecycle of the market. And, um, you know, Hamilton also talks about this, like it's the, the growth phase of a market. That's when you can create power, you can create defensibility. If you wait too long, you can enter markets later, but you're never going to dominate a market unless if you enter later. Now, double click is interesting in that Google bought that in 2008.

• 1:20:37David Rosenthal?

  I think double click was founded in 1995. So that was, that, but you could argue that was an evolution of the market. Anyway, and then my other sub bullet is like, if this, if you're big game hunting, you know, if you're big elephant hunting, uh, price doesn't matter, you know, bring a big gun. You can spend 1.65 billion for YouTube and like, still end up number three on the list.

• 1:20:57Ben Gilbert?

  All right, David. So in this final section, most commonly known as grading in every other episode, we're going to use this to sort of talk about things we, we might want to adjust in this list.

• 1:21:08David Rosenthal?

  Acquired adjusted ranking.

• 1:21:10Ben Gilbert?

  Acquired adjusted ranking. And we're not going to actually change the rankings at all, but there's some things like you can't serve all masters and there's some masters we didn't serve, namely profit contribution, um, you know, gross margin, strategic value.

• 1:21:24David Rosenthal?

  Yep.

• 1:21:24Ben Gilbert?

  That, that deserve to be talked about here.

• 1:21:26David Rosenthal?

  Like what's up?

• 1:21:27Ben Gilbert?

  And so this is sort of our opportunity, I think, in, in this to grade.

• 1:21:31David Rosenthal?

  Are there entries on this list that we're like, ah, you know, maybe that should be higher or lower?

• 1:21:36Ben Gilbert?

  Yeah. First, let's just talk about how unbelievable Instagram is again. So Instagram-

• 1:21:43David Rosenthal?

  Can we make it higher than number one?

• 1:21:44Ben Gilbert?

  There's a defensibility amazingness to it that I think gets harped on over and over and over again. There's another thing that is, they don't pay the creators for the content on it.

• 1:21:56Ben Gilbert?

  Like Instagram generates $20 billion in revenue from content that they get for free.

• 1:22:03David Rosenthal?

  It's incredible.

• 1:22:04Ben Gilbert?

  Yeah. It is like-

• 1:22:06David Rosenthal?

  And the content is like, what's interesting, you know, we're gonna talk about YouTube in a sec. They gotta pay for the content. They gotta pay the creators. Then you look at like Facebook, like, oh, Facebook gets their content for free. But the nature of the content on Instagram is like, super high, like it's art. Like, there's, there's, like, that content has value. Whereas like, the Facebook content, does that have value? If it does, you know, like, me typing out a status update, you know, like whatnot.

• 1:22:28Ben Gilbert?

  You haven't been on Facebook in a while. It's kind of the same as Instagram.

• 1:22:30David Rosenthal?

  Oh, is it? Yeah, well, I don't think I've been on Facebook in-

• 1:22:33Ben Gilbert?

  But like, you know, professional photographers and brands and people creating incredibly-

• 1:22:38David Rosenthal?

  For free.

• 1:22:38Ben Gilbert?

  Yeah, highly produced content.

• 1:22:40David Rosenthal?

  Yeah.

• 1:22:40Ben Gilbert?

  That they could, you could go spend a million dollars to make a film that you release on Instagram for free. Like, crazy.

• 1:22:46David Rosenthal?

  Crazy.

• 1:22:47Ben Gilbert?

  A million might be high, a hundred thousand. So then compare that against YouTube, where, of course, they pay something like half of their revenue out to creators. So when Google says, "We generated $15 billion in revenue in our YouTube segment last year." It's like, I would, there's an argument about if that's even revenue. And, and like, they, they chose to report it as revenue and have a higher revenue, lower gross margin percentage business line there, rather than, I think what you could have done is said, you know, "We have seven, eight billion revenue here."

• 1:23:19David Rosenthal?

  DMV and-

• 1:23:19Ben Gilbert?

  Exactly. That is what it is. It also, YouTube is serving 4K content. And so their bandwidth and hosting costs gotta be, I don't know, at least-

• 1:23:29David Rosenthal?

  Meaningful.

• 1:23:30Ben Gilbert?

  Three-ish billion dollars. And YouTube's, I'm sure, or Instagram's, I'm sure are high too, but you think about the, the level of compression that people are totally happy with on, uh-

• 1:23:40David Rosenthal?

  On mobile screens.

• 1:23:41Ben Gilbert?

  On mobile screens. And the fact that like, oh, they haven't released an iPad app. I, feels, of course, like- They're resource constrained, but like, gosh, you might want much higher quality stuff if you're having it shipped down to a retina iPad Pro. And so I guess the macro point here is I think it's always worth comparing two similar companies like this, YouTube and Instagram. Instagram doesn't pay for a lick of their content. YouTube has half their revenue going out the door. And I think probably significantly higher hosting and bandwidth costs.

• 1:24:12David Rosenthal?

  Yeah. It's important to note too, like we, we're not going to do value creation, value capture on this episode, but they're like a bunch of, we're not talking about like what's good for the world, what's not good for the world, like all this stuff. I think a lot of arguments that Instagram is like bad for the world and like how it is right now. But purely as a shareholder from a like investor economic perspective, if I could hold shares in Instagram versus YouTube, I would put all of, all 100% of my dollars between those two into Instagram and zero into YouTube, even though I love YouTube.

• 1:24:42Ben Gilbert?

  Burn.

• 1:24:43David Rosenthal?

  Well, it's just like Instagram is

• 1:24:44Ben Gilbert?

  Totally.

• 1:24:45David Rosenthal?

  It's everything we were just talking about.

• 1:24:46Ben Gilbert?

  Yeah. Yeah. The other thing that's worth talking about YouTube now that we've denigrated it is, it is, is talk about the strategic value, which we didn't talk about anywhere in here.

• 1:24:58David Rosenthal?

  Yep.

• 1:24:58Ben Gilbert?

  So YouTube is the second most, I think this is still true, the second highest trafficked search engine in the world.

• 1:25:04David Rosenthal?

  Yeah.

• 1:25:05Ben Gilbert?

  And they're owned by the highest trafficked search engine in the world. And so it is worth, in the same way that with WhatsApp, we said, was it worth Google, was it worth Facebook paying 20% of their value to go and

• 1:25:19David Rosenthal?

  Yeah.

• 1:25:19Ben Gilbert?

  make sure that their core isn't threatened. It's, it's hard to put a price on Google owning, also owning the second most valuable search engine in the world.

• 1:25:29David Rosenthal?

  Yep.

• 1:25:29Ben Gilbert?

  So, you know, I think it deserves to be up there probably for that reason alone, albeit that's not how we made this list.

• 1:25:36David Rosenthal?

  Yep. Another one that I wanna discuss here, and again, we're a little bit out of school because we haven't done the episode on it yet, and we absolutely need to, is VMware. Like, the only reason VMware is as low as it is is because of this crazy thing going on with EMC and Dell right now. Like, to acquire 80% of VMware for $625 million, like, man, if I could go do that again, I would go like mortgage, you know, my house a million times over to do that, like.

• 1:26:04Ben Gilbert?

  Yeah, it turned out virtual machines were a-

• 1:26:06David Rosenthal?

  Were a thing. And also reflects all the playbook we were talking about, like, early in a big market, like, also interesting that it's the, I believe, yeah, it's the only kind of enterprise company on this list.

• 1:26:18Ben Gilbert?

  Oh, that's interesting. When you're talking about attacking big markets, I thought that was a direction you were gonna go earlier of like-

• 1:26:24David Rosenthal?

  Consumer is the big market, yeah.

• 1:26:25Ben Gilbert?

  Yeah, DoubleClick is arguably-

• 1:26:28David Rosenthal?

  B2B, but it's serving, the end customer is consumers.

• 1:26:32Ben Gilbert?

  Right. And like, it kinda makes sense that the biggest companies would be consumer companies, because the consumers-

• 1:26:38David Rosenthal?

  Businesses serve consumers.

• 1:26:40Ben Gilbert?

  You know, you pay retail price for something, and then there's 11 businesses that are chopping up all the revenue that you gave to the retailer along the way to power the backend of the retailer, and that all has to add up to less than what you bought it for.

• 1:26:54David Rosenthal?

  Yeah.

• 1:26:54Ben Gilbert?

  Otherwise, you know, so they're losing, the retailer's losing money. And so it sort of makes sense that, like, the biggest companies would be consumer companies, and the most successful acquisitions would be consumer acquisitions.

• 1:27:06David Rosenthal?

  Makes sense.

• 1:27:06Ben Gilbert?

  But, yeah, we didn't point that out before.

• 1:27:09David Rosenthal?

  Do you wanna make your Pixar apology statement, not apology, but your apology not in that you're sorry, but like a justification for Pixar here?

• 1:27:19Ben Gilbert?

  Of why it's all the way down at 14?

• 1:27:22David Rosenthal?

  Of why it's worth more than we say it is.

• 1:27:25Ben Gilbert?

  Yeah, yeah, so there's, there's a, that's right, we talked about this last night. So Pixar, a thing that we didn't do is also count the Disney Animation's value that it created, of course-

• 1:27:37David Rosenthal?

  And revitalization of the whole company.

• 1:27:38Ben Gilbert?

  Totally. Like, I think, what's the phrase from the Iger book, "So with animation goes the company."

• 1:27:44David Rosenthal?

  Yeah.

• 1:27:45Ben Gilbert?

  You know, Jeffrey Katzenberg did an incredible job with- Aladdin and what Beauty and the Beast and Lion King. And then we had sort of him leave, even though we had the Lilo and Stitch era and we had Tarzan and we had, and those are the good ones.

• 1:28:00Ben Gilbert?

  And so, you know, you have Disney Animation falling off a cliff, which of course, so as

• 1:28:04David Rosenthal?

  Drives the flywheel of everything.

• 1:28:06Ben Gilbert?

  And so in acquiring John Lasseter, Ed Catmull and the rest of Pixar, you know, they revitalized.

• 1:28:13David Rosenthal?

  And Pete Docter and like all the whole, the whole brain trust.

• 1:28:16Ben Gilbert?

  Totally. They revitalized Disney in a way that it's, it's kind of hard to put a value on. The easy way to put a value on it is just multiply the number of basically that, that value that we said that it contributed by two and basically say.

• 1:28:31David Rosenthal?

  Cause you get for every one Pixar movie, you get one Disney Animation movie.

• 1:28:34Ben Gilbert?

  Exactly. And that's been largely true. They've both, both studios have basically done one big mega hit per year. Some, sometimes they try to, but sometimes you get frozen. Like it, it, it worked, you know, and so I do think.

• 1:28:48David Rosenthal?

  Let it go, Ben. Let it go.

• 1:28:49Ben Gilbert?

  It's, it's, if we were considering sort of strategic value, then I do think you'd probably want to say Pixar contributed not, what did, what did we say? Three billion a year, but six billion a year, something like that.

• 1:29:00David Rosenthal?

  Yeah.

• 1:29:01Ben Gilbert?

  But that wouldn't materially put it up with some of these other ones.

• 1:29:03David Rosenthal?

  It wouldn't, you know.

• 1:29:06David Rosenthal?

  Software is hard to beat.

• 1:29:07Ben Gilbert?

  Yep.

• 1:29:09Ben Gilbert?

  Any other, any other comments?

• 1:29:12David Rosenthal?

  I don't think so. The only other caveat that we said in the beginning, I'll say again, we're probably missing some in here. So please write us an acquired FM at gmail.com, join the Slack, hit us up in there. But I can't wait to do a double click episode and a VMware episode.

• 1:29:29Ben Gilbert?

  Yep.

• 1:29:30David Rosenthal?

  It's gonna be super fun.

• 1:29:31Ben Gilbert?

  I think this just pointed out the, the sort of need to do both of those, if not this season, then soon.

• 1:29:35David Rosenthal?

  Yeah.

• 1:29:37Ben Gilbert?

  All right. Carve outs. We haven't done them in a while.

• 1:29:38David Rosenthal?

  Oh, we haven't done them in a while. I got two. First is the piece of software, To Do List.

• 1:29:46Ben Gilbert?

  Oh, yeah.

• 1:29:46David Rosenthal?

  I'm loving it.

• 1:29:47Ben Gilbert?

  Me too.

• 1:29:48David Rosenthal?

  My to do list. Apple reminder is just like, I just finally couldn't take it anymore. It got buggy. It was so, so icky. And even though my whole life ran on it for years. So I tried a whole bunch of different, you know, options and finally landed on To Do List. And I, I just love it. It's great. It's everything I want in a, you know, to do list reminder, which sounds simple, but I managed my whole life on it. So.

• 1:30:15Ben Gilbert?

  And I can assure you, as someone who's built a to do list.

• 1:30:18David Rosenthal?

  That's right.

• 1:30:18Ben Gilbert?

  Thing over the years is, is, uh, it's actually harder, and this is any piece of software, but it's actually harder to make it feel simple.

• 1:30:26David Rosenthal?

  Simple.

• 1:30:26Ben Gilbert?

  Than it actually is to make it feel janky.

• 1:30:28David Rosenthal?

  Well, everything should be as simple as it can be, but no simpler, you know? To Do List does a really good job of this. The other one.

• 1:30:34Ben Gilbert?

  What's the, what's the Hamilton quote? Simple but not simplistic?

• 1:30:37David Rosenthal?

  Yes, that's right.

• 1:30:37Ben Gilbert?

  Yeah.

• 1:30:38David Rosenthal?

  Simple but not simplistic, which you'll hear from Hamilton in a minute here. My other carve out is, uh, you know, Ben, a couple, I was on the WhatsApp episode. Your carve out was computer glasses.

• 1:30:47Ben Gilbert?

  Yep.

• 1:30:48David Rosenthal?

  Our friends, not a sponsorship, but Felix Gray, uh, direct to consumer computer glasses brand. Fans of the show listened, reached out to us and they sent us a pairs of computer glasses. And I've been using them. They're awesome. I love them. Like.

• 1:31:04Ben Gilbert?

  Welcome to the party.

• 1:31:05David Rosenthal?

  And, and the best part is I finally, I'm very lucky. My vision is normal. But when I wear glasses, I look very erudite. But I was like, I'm not going to be that guy that wears like, you know, glasses that don't actually have prescriptions. It's just like erudite. Now I have an excuse to look erudite.

• 1:31:19Ben Gilbert?

  I love it. I don't actually know what that word means.

• 1:31:21David Rosenthal?

  You know, like knowledgeable, intelligent.

• 1:31:23Ben Gilbert?

  I see. I think you look that way anyway.

• 1:31:26David Rosenthal?

  Oh, thanks, Ben.

• 1:31:28Ben Gilbert?

  All right. My carve out is the masterclass taught by Dead Mouse.

• 1:31:33David Rosenthal?

  Ooh.

• 1:31:34Ben Gilbert?

  So if, for anyone out there who's a masterclass subscriber or wants to give it a shot. I, I spent a weekend, a couple of weekends ago, uh, doing the, watching and then experimenting a little bit on my own with producing some music and watching the, the Dead Mouse class. And it was awesome. It's. It's cool that he agreed to do it because with that many hours of just like somebody talking about their craft, you really get a sense of how his creativity works. It's interesting from a learning perspective, learning the software. It's interesting from watching the ways in which he is resistant to using a lot of like out of the box software or cookie cutter loops. And he's like, it's a massive wall of things that he's actually plugging into and dials

• 1:32:18Ben Gilbert?

  and doing it all sort of analog and then recording the analog sounds.

• 1:32:22David Rosenthal?

  Acquired goals.

• 1:32:23Ben Gilbert?

  Dude, it's, it's, it's really cool and it's, it's really creative. For anyone who sort of likes to watch the creative process in action, I highly recommend it.

• 1:32:32David Rosenthal?

  That sounds awesome.

• 1:32:33Ben Gilbert?

  Whether you're an EDM fan or not. So can't, can't recommend it enough.

• 1:32:38David Rosenthal?

  Do you think Desol watched it and learned from it?

• 1:32:41Ben Gilbert?

  DJ Desol? Probably not. I don't know if that guy has the kind of time on his hands to be able to.

• 1:32:46David Rosenthal?

  Yeah, probably not.

• 1:32:48Ben Gilbert?

  Yep. All right. Well, listeners, if you aren't subscribed and you like what you hear, you should. This particular episode is different in that it has a accompanying blog post that we're going to publish sort of the full data table and a little probably short paragraph on each company. We got to write it, so who knows exactly what it will be. But the hope is to create kind of the first enduring piece of acquired, kind of acquired artifact outside of just these 100 plus episodes that we've done that is, is a little bit more sort of referenceable and I think discoverable for folks who aren't, aren't already big fans of the show. Feel free to click the link in the show notes to check it out, to share it with your friends.

• 1:33:30Ben Gilbert?

  And we'd love to have a conversation about it, both on Twitter, at acquired.fm and in the Slack.

• 1:33:36David Rosenthal?

  By the way, you can join the Slack. Go to our website, acquired.fm and there'll be a big button to get an invite to the Slack there. We have going on 5,000 people hanging out there. All sorts of great stuff going on.

• 1:33:46Ben Gilbert?

  It's true. Well, stay tuned after this for an excerpt of our LP episode with Hamilton Helmer, who is the author of Seven Powers. If you'd like to become an Acquired Limited Partner, subscribing gets you access to our LP show, where we dive deeper into the nitty gritty of building companies in real time. To listen, you can click the link in the show notes or go to glow.fm/acquired and get a seven day free trial for all new listeners. With that, thank you to Silicon Valley Bank and Wilson Siniseeni, and we will see you next time.

• 1:34:18David Rosenthal?

  See you next time.

• 1:34:33David Rosenthal?

  Welcome LPs. I am here in lovely Los Altos, California with a very, very special guest that we've been wanting to have on the show for a long time, Hamilton Helmer, the author of a book called Seven Powers, which is just spectacular and probably the best kept secret in Silicon Valley. We and I first heard about your book on Patrick's Invest Like the Best podcast on the episode with Keith Raboy, where he said basically the same thing. And so I ordered on Amazon and I look at the blurb in the inside of the jacket. The people who agree that this is the best kept secret in Silicon Valley, the list of them is just kind of staggering. So Reed Hastings, who also wrote the foreword

• 1:35:15David Rosenthal?

  for your book, Daniel Ek, Michael Moritz, Peter Thiel, the former CEO of Adobe, Bruce Chisen, Patrick Collison from Stripe, Daphne Koller from Coursera, Jonathan Levin, who's the Dean of Stanford GSB, Pete Docter from Pixar, who directed Monsters, Inc. and up and Inside Out. The list goes on and on and on. We are so excited to have you with us here to talk about the book, talk about your work.

• 1:35:39Ben Gilbert?

  Yeah, I would say we're sorry to blow your cover, but it's sounding like that's pretty well blown as no longer the best kept secret in Silicon Valley.

• 1:35:47Speaker 02

  I was going to say that the fact that it's the best kept secret says something about my acuity as a good marketer.

• 1:35:56David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:36:03Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:36:13David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:36:34Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:36:46David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started. So, okay, let's get into the fun stuff. The Seven Powers, you know, when I read it, to me at least, the thing that was so enlightening about it was I see this mistake all the time in Silicon Valley and in venture investing of like, everybody's like, tell me about the TAM. Got to target a big market. But that's kind of only half of the equation of what makes for a great enduring company is targeting a big market. Of course, you have to have a big market, but you also have to have, you know, what you call power in the book within that market.

• 1:37:31David Rosenthal?

  You have to have defensibility. You have to have, you know, something that makes your company and your business stand out. Can you tell us a little bit about how you define power and how you came up with it?

• 1:37:42Speaker 02

  Yeah, yeah, sure. So as I consulted with more and more companies, because I ran my own consulting firm for decades. Three things started to become evident to me. One was that really strong performance is persistent. If you look at Intel's results this year and Intel's results next year, the fact that they have high profit margins will probably be true next year. And it turns out there's a lot of empirical work that verifies that, that there's persistence. It's like the exact opposite of hedge fund managers year to year. Or mutual fund managers. You know, there's no persistence in mutual fund managers. Now, interestingly, you probably know there is persistence in venture capital. Yes.

• 1:38:24Speaker 02

  And then the next thing, if you've done a lot of valuation work, I'm sure you've done a ton, and I've done a ton, and I've even taught it. What you learn is it's all in the future. Yep. So if you take a company's growing at about 10%, do a standard valuation model, what you find is 85% of the value is after year three. Yep. Right. So persistence and in the future. So that says that if you can understand the issues that drive persistence, you're going to understand what drives value, right? But then, as I did more and more consulting work, another thing came into focus, which was that the path to establishing

• 1:39:07Speaker 02

  that kind of persistence is not linear. There's a step change. So there's a period when a company can establish that, and that window often closes, if you will. And it's the kind of business that you are so familiar with. It's in the earlier stage. I think you called it the takeoff phase of the market. Takeoff phase, yes. So if you think of a founder, there's this period of where there's tremendous flux going on. They don't know who the customers are. Technologies can change you like crazy. They have all of a wide variety of different types of competitors. And in that, there are all kinds of degrees of freedom about how you move. You know, the fact that people even talk about pivoting

• 1:39:51Speaker 02

  is just suggesting that it is possible, in fact, to pivot. Yeah. Ask Intel to pivot, and it won't happen very easily, you know? And they've certainly been trying for a long time. So what that says is that there's this moment. But then the problem is, from a strategist's point of view, is that

• 1:40:09Speaker 02

  All the information is changing so radically that the person or the group that has to process that is the founder and his team.

• 1:40:18David Rosenthal?

  Yep.

• 1:40:19Speaker 02

  And, and, and it's not hiring somebody like me and making a recommendation or strategic planning or something like that. It's, it's, it's actually processing all this time. And as you move through space and time, understanding, okay, this direction looks a little better than that direction.

• 1:40:36David Rosenthal?

  Yeah. Silicon Valley founders and the venture capital ecosystem identify here's a big, large market opportunity. Hundreds of companies get funded and rush in and only one or two of them make it out.

• 1:40:47Speaker 02

  Right.

• 1:40:47David Rosenthal?

  And so it's these decisions that guide, you know, what's going to create power.

• 1:40:51Speaker 02

  That's right. That's right. And so what that said to me was that what people needed was not advice from an expert, but rather teaching to fish, trying to assemble a way of looking at strategies so that the people on the ground who are really making these decisions have a way of thinking about it that will, it's never perfect, but guide them in the right direction. But the problem in doing that for me was that providing a mental model like that, as I say in the book, it has to be simple, but not simplistic. It's simple so that you can retain it, not simplistic so that it's relatively complete. You don't miss a lot. That's a really high bar in strategy. And that's what took me so long.

• 1:41:36Speaker 02

  I mean, I wrote the book. It took me 20 years of writing it, basically, you know?

• 1:41:39Ben Gilbert?

  And Hamilton, I'll tell you, like, having read a bunch of business books and having an even larger pile of business books I've bought but haven't read, and then probably even bigger than that of recommendations I've had but haven't made it to, there's so many different mental models for how to think about this stuff. I will say, like, thank you for taking the 20 years to do it because the fact that there is a one-page reference card that's sort of like assembles this whole thing. It actually does make it so you can reference the seven powers and sort of make decisions in real time. And it takes, I think, I've read the book very recently. I'm sure it will take me some time to sort of like make that system one thinking instead of system two thinking, but it's certainly much more accessible than, I think, trying

• 1:42:23Ben Gilbert?

  to weave your own fabric of lots of different theories.

• 1:42:26David Rosenthal?

  Let's talk about a few. We won't have time to go through all seven, but they're all fantastic. Maybe a good one to start with, since most of our audience is in technology and most of those folks are entrepreneurs or aspiring entrepreneurs. Counter positioning. This is such a fun one. I know it's your favorite power. And particularly such a fun one, because it's in many ways, the most relevant for startups and entrepreneurs in a lot of markets. Can you talk to us a bit about?

• 1:42:50Speaker 02

  Yeah, yeah. I do have a special place in my heart for counter positioning, I have to say, because it's so contrarian. And I'm sort of a contrarian person, I guess. A counter positioning occurs if a company comes up with a new business model and challenges often a powerful incumbent with it. And but for the incumbent to mimic this model, they would incur, or at least think they would incur, so much immediate financial damage that they just say, I can't go there. Even though maybe long term it would be good, they just can't, they can't do it. So, and that provides, you know, a powerful disincentive for them to to respond quickly.

• 1:43:35Speaker 02

  And if something's happening in the kind of flux that you guys deal with very fast, responding late may mean that you don't do it. So I'll give you some examples. So Netflix versus Blockbuster. So

• 1:43:47David Rosenthal?

  Late fees.

• 1:43:48Speaker 02

  Yeah, yeah, yeah, late fees. So late fees accounted for half of Blockbuster's income. Netflix says, we're not doing it. And Blockbuster eventually mimicked Netflix. And who knows? But my suspicion is if they'd done it a year earlier, I'm not sure Netflix would exist, you know? And so, and the place I got to kind of cut my teeth in this was I was a big investor, big for me, not big for them. A big investor in Dell in the 90s, right? And my investment hypothesis was that Compaq couldn't respond quickly to them because Dell was going direct. And Compaq had these lucrative arrangements going through stores.

• 1:44:28Speaker 02

  But there was nothing in the literature that sort of, I kind of, looking as investor, I could see that was true, but what? You know, why, you know? And so, so that kind of got me thinking about it from sort of a ground up. And eventually I was able to, to formalize it.

• 1:44:45Ben Gilbert?

  Hamilton, one thing to, to push on there. So it seems like, and I'm remembering from your book, that the criterion are basically, this new thing is both a good business, but net negative for the big incumbent because of the cannibalization that would occur. Are there, are there any other things you would sort of add to, to?

• 1:45:05Speaker 02

  Yeah. So, so, so there, there are a few flavors of counter positioning. One is that, is that it's a, a net negative and, and therefore, because their current model is so lucrative, that actually even if they did a net present value, they would end up with deciding not to do it, even though they'll eventually, the business will go to, to the challenger. And these are not mutually exclusive. It's very often true, I'd say almost always true, that there's, there's cognitive bias involved, which is that the, the incumbent, they've done just great. Their model has worked for years. I mean, Blockbuster saying, oh, you know, we've got all these stores, you know, people love it.

• 1:45:48Speaker 02

  They come in, they can browse, you know, what's wrong with that? You know, and they think they just, and, and the idea of somebody doing this rough and ready group, sending out red envelopes in the mail, they'd say, what the hell? You know, they're, this is just not going anywhere. So they're very cognitively biased towards thinking that their model works. And then there are also agency issues, what economists call agency issues, which means that the, the person who controls the business may not be, have a lot, interest aligned with the long-term interest of the business. So, so for example, CEO comp is often about, you know, this year's performance or the next few years' performance.

• 1:46:29Speaker 02

  And, and so you, you, so to upset the apple cart for a gain that will happen four years out, you may say, you know, I just don't want to go there.

• 1:46:39Ben Gilbert?

  That's something that's really.

• 1:46:40David Rosenthal?

  Hard to do if you are a hired CEO of a large, long-lasting company. And if you're not a founder, then most of your worth is in the equity of the company. And so the long-term matters. Right. It also reminds me, as you were talking, I hadn't thought about this, but obviously for startups, counter positioning can be great, and Netflix is a fantastic example. But even remembering a blog post Bill Gurley wrote a number of years ago in the beginning of when Android was starting to take off, and I think the title of it was like, "Less than Free", the new, like, the most disruptive business model ever of, you know, you had Android, which was less, it cost less than free. Like, they would pay you to use it if you're a carrier, to put it, if you're a handset manufacturer,

• 1:47:22David Rosenthal?

  to put it on your phones, versus like Nokia that's trying to make money or sell their stuff. Like, even as Google and a step, because they had the separate business model of search, they're able to enter this adjacent market with a completely counter positioned business model. Right, right, right.

• 1:47:38Ben Gilbert?

  Hamilton, listeners who have read The Innovator's Dilemma, this is going to sound vaguely familiar and like, this would be the power that's sort of most similar to that concept. How do you think about, in the same way that we asked earlier, what's the difference between power and moat, how do you think about counter positioning relative to sort of that, that sort of grand theory?

• 1:47:57Speaker 02

  I recommend everybody to read that book, Innovator's Dilemma. It's a brilliant book, you know, and Christensen was just a scholar of innovation, you know, and deeply researched. I have great admiration for his book, but it's pretty different. So if you, if you want to get sort of mathematical about it, there's a many-to-many mapping between the two concepts, which is to say that counter positioning doesn't imply, doesn't apply disruptive technology, and disruptive technology doesn't imply counter position. Give you some examples. So, so I would argue that In-N-Out progresses counter positioned against McDonald's. There's no technology involved particularly at all, but it's counter positioned. So that's one case.

• 1:48:38David Rosenthal?

  And it's not disruptive in terms of Christensen's philosophy was low end. This is like a objectively worse product.

• 1:48:45Speaker 02

  Right, right, right, right, right. And yeah, so you're going back to Christensen's original book, which I think Is the more interesting one where where there's a product that's kind of doesn't, you know, satisfy everybody. I mean, you you could argue that Tesla's first cars were like that.

• 1:49:00David Rosenthal?

  Yeah.

• 1:49:01Speaker 02

  Okay. And so and then the other the other direction is that if something is a disruptive technology, it may not be counter positioned. So that's straightforward. And and the fact that they don't map to each other and the fact that power maps directly to value or there's a one to one mapping between power and value, it means that disruptive technology does not map to value. And so as an investor, so and and the the simple thing about that is you can disrupt something and it can be a really lousy business.

• 1:49:35David Rosenthal?

  Yeah.

• 1:49:35Speaker 02

  Happens all the time.

• 1:49:36David Rosenthal?

  Right. You you may not be able to realize.

• 1:49:39Speaker 02

  You poison the well.

• 1:49:40David Rosenthal?

  Sustained differential margins. Yeah.

• 1:49:41Speaker 02

  Poison the well, but there's no good endpoint for it.

• 1:49:44Ben Gilbert?

  I think, I mean, we we may be overly quoting girly here, but I think I saw a recent tweet, something along the lines of there is an infinite amount of product market fit for selling dollars for 90 cents.

• 1:49:56Speaker 02

  Yeah, yeah, yeah. Right. So, yeah, I mean, and you see this model all the time of of so, yeah, so just pricing something so that people are attracted to it and losing money is is not, there's no power there.

• 1:50:09David Rosenthal?

  Uh, man.