Episode 22 Zillow + Trulia (with Zillow Group CFO Kathleen Philips)

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal discuss Zillow Group's strategic acquisition of Trulia with Zillow's CFO Kathleen Phillips. Kathleen, who has been with Zillow since 2010 and played a pivotal role in their 2011 IPO, shares insights into the company's M&A strategy, emphasizing the deal's acceleration of Zillow's scale in online real estate advertising. The hosts commend the execution of the $2.5 billion stock-for-stock transaction, which faced intense FTC scrutiny and required Zillow to rebuild its real estate listings supply due to a fallout with ListHub. Despite challenges, the merger fortified Zillow's market leadership, enabling it to capture a larger audience and offer enhanced services like Dotloop. The episode also touches on the company's culture and Kathleen's experience of navigating the complex merger process.

Summary Notes

Introduction to Episode 22 of Acquired Podcast

  • The episode features Kathleen Phillips, CFO of Zillow Group.
  • Kathleen was formerly Zillow's COO and General Counsel.
  • She has been in charge of corporate development for six years at Zillow.
  • Kathleen has also held VP and General Counsel roles at StubHub and Hotwire.
  • The episode will discuss Zillow's acquisition of Trulia and their M&A strategy.

"We'll be talking about Zillow's 2015 acquisition of Trulia and their M&A strategy overall. Kathleen Phillips is our guest. She is the CFO of Zillow Group and was formerly Zillow's COO and general counsel."

The quote introduces the main topic of the podcast, which is Zillow's acquisition of Trulia, and introduces the guest Kathleen Phillips, detailing her role and relevance to the discussion.

Pilot as a Sponsor for Acquired

  • Pilot is a startup-focused accounting firm.
  • It provides accounting, tax, and bookkeeping services.
  • Pilot operates the entire financial stack for companies.
  • It offers CFO services like investor reporting and budgeting.
  • Pilot is trusted by startups like OpenAI, Airtable, and Scale.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

This quote explains the services offered by Pilot and emphasizes its position as a leading accounting firm for startups in the US, highlighting its relevance to the podcast's entrepreneurial audience.

Zillow's Founding and Public Offering

  • Zillow was founded in 2005 by Rich Barton and Lloyd Frank.
  • The company is known for its Zestimate, a data-driven home value estimation.
  • Zillow went public in July 2011.
  • Prior to the IPO, Zillow had raised approximately $80 million in venture capital.

"Zillow was founded in 2005 by Rich Barton and Lloyd Frank, who previously had worked together at Microsoft here in Seattle and then had founded Expedia in 1996."

The quote provides background information on Zillow's founders and the company's origins, which is important for understanding Zillow's trajectory and expertise in the tech industry.

Trulia's Founding and Public Offering

  • Trulia was founded in 2004 by Pete Flint and Sammy Inkinen.
  • The company was started during the founders' time at the Stanford Graduate School of Business.
  • Trulia went public in September 2012.
  • Trulia raised $33 million from investors such as Excel and Sequoia.

"Trulia was founded a year earlier in 2004 in the Bay Area by Pete Flint and Sammy Inkinen, who were actually students at the Stanford Graduate School of Business."

This quote gives an account of Trulia's founding and its founders' background, which is crucial for understanding the company's culture and approach to the real estate market.

Zillow's Initial Approach to Acquire Trulia

  • Zillow first approached Trulia about a potential acquisition in late 2011.
  • The approach was made after Zillow's IPO, using its public currency.
  • Talks between Zillow and Trulia broke down in early 2012.
  • Zillow made a second approach to Trulia as Trulia prepared for its IPO.

"So it was more a factor of us having liquid public currency following the IPO. And that was actually one of the primary reasons that we concluded the IPO."

Kathleen Phillips explains that Zillow's IPO provided the necessary public currency to pursue acquisitions like Trulia, which illustrates the strategic financial planning behind Zillow's IPO and M&A activities.

Zillow and Trulia's Market Position and Growth

  • Zillow had a market cap of around $600-$700 million at IPO.
  • Both Zillow and Trulia saw significant growth post-IPO.
  • Zillow and Trulia's major shareholders overlapped, anticipating a future transaction.
  • The online real estate market is vast, with a lot of untapped potential.

"We have about two thirds of the traffic on the web overall and three quarters on mobile, on Zillow brand properties. And yet we only touch about 4% of real estate transactions in the US."

Kathleen Phillips highlights the disparity between Zillow's online traffic and the percentage of real estate transactions they influence, pointing out the massive growth potential in the online real estate market.

Negotiations for Zillow's Acquisition of Trulia

  • Zillow engaged Goldman Sachs as an advisor before approaching Trulia again in 2014.
  • Detailed negotiations are documented in SEC filings.
  • Shareholders supported the idea of a combination of Zillow and Trulia.
  • The acquisition would consolidate Zillow's position in the online real estate market.

"So there's an important clarification here, which is they were the same shareholders. So our major shareholders also held a stake in Trulia."

Kathleen Phillips clarifies that the shareholders they consulted were invested in both Zillow and Trulia, which is significant as it shows the shared investor interest in the consolidation of the two companies.

Zillow's Leadership and Initial Contact with Trulia

  • Rich Barton was not the CEO of Zillow at the time of the initial contact with Trulia; Spencer Rascoff had taken over as CEO before Zillow's IPO.
  • Rich Barton, as chairman of Zillow, reached out to Pete Flint, CEO and co-founder of Trulia, to schedule a dinner meeting.
  • Pete Flint declined the dinner invitation due to his busy schedule, likely aware of the implications of such a meeting given the competitive history between Zillow and Trulia.

"No, Spencer became CEO prior to our IPO. And Rich was chairman throughout that time and still is." "Mr. Flint indicated that his near term schedule would not accommodate a dinner."

  • The quotes explain the leadership roles at Zillow during the initial merger discussions and Pete Flint's response to the dinner request, highlighting the competitive dynamics between the companies.

Competitive Dynamics and Negotiation Psychology

  • Zillow and Trulia were fierce competitors with a history of valuation discussions and a preference for independent growth.
  • The shift from competition to considering a merger was challenging for both companies.
  • Both companies aimed to negotiate the best terms for their shareholders, involving strategic posturing and balancing strength with the potential benefits of a merger.

"Well, I would know not to put any words in Pete's mouth, but I think he knew very well what was coming." "Both parties are interested in getting the best terms possible, as did Pete and the Trulia board for their shareholders."

  • The quotes highlight the awareness of the competitive backdrop and the psychological aspects of merger negotiations, emphasizing the responsibility to shareholders.

Merger Proposal and Board Involvement

  • Prior to the merger proposal, Zillow had not approached the Trulia board directly, only engaging in management-level discussions.
  • Rich Barton's direct approach to the Trulia board with a merger proposal increased the urgency of the offer.
  • The quick timeline for the merger, from due diligence to the announcement, was characteristic of Zillow's efficient deal-making process.

"We had not directly put anything before the Trulia board." "This was a way of kind of turning up the urgency of the offer a little bit."

  • The quotes describe Zillow's strategic approach to escalating the merger discussion directly with Trulia's board and the company's preference for expeditious deal-making.

Kathleen Phillips' Dual Role at Zillow

  • Kathleen Phillips was the chief operating officer at Zillow, overseeing legal, corporate development, and the people organization.
  • Phillips had to balance her operational responsibilities with the demands of the merger process, which was time-consuming but described as enjoyable.

"At the time, I was still chief operating officer of Zillow." "For me, it was about eight months that I was pretty fully consumed."

  • The quotes reveal the dual role Kathleen Phillips played during the merger, highlighting the challenge of managing her regular duties while leading the merger process.

Valuation and Non-Price Terms

  • Zillow and Trulia had a history of operating at a ratio of two-thirds to one-third, which naturally influenced valuation discussions.
  • The merger discussions quickly converged on a valuation ratio that reflected their historical operating relationship.
  • Non-price terms, such as retention packages for Trulia's management and employees, were crucial in keeping the Trulia team motivated post-acquisition.

"It really was as simple as we had side by side nearly ten years of operating history." "We felt like we needed to keep folks energized and make everybody feel like this was a winning deal."

  • The quotes explain the rationale behind the valuation approach and the strategic importance of retention packages for ensuring a smooth integration and maintaining morale.

Brand Strategy and Product Development Post-Merger

  • Zillow intended to maintain both the Zillow and Trulia brands due to their individual strengths and customer preferences.
  • The merger allowed for operational efficiencies, such as a centralized real estate listing ingestion, freeing up resources for new projects.
  • The Premier Agent app, developed by former Trulia team members, exemplifies successful post-merger product development.

"We always knew that we wanted to keep both brands." "It's part of how we do deals at Zillow. We try to move them through really quickly so that we can get back to our day jobs."

  • The quotes discuss the strategic decision to keep both brands separate and the focus on efficiency and rapid integration to minimize business disruption and capitalize on new opportunities.

Merger Negotiation Details and Breakup Fee

  • Trulia's board countered with a proposal including a go-shop clause and a breakup fee, which Zillow quickly rejected.
  • The negotiation was a strategic dance, with both sides knowing their limits and the need to reach an agreement that made sense for both parties.
  • The breakup fee was set at $150 million, reflecting the potential opportunity cost of a failed deal.

"There was just no way we were going to entertain a go-shop." "This is a dance."

  • The quotes convey the strategic nature of the negotiation process, with Zillow's firm stance on certain terms and the understanding that some back-and-forth is part of reaching a final agreement.

Acquisition Drama and Finalization

  • The merger was announced on July 28, following intense negotiations and simultaneous work on the merger agreement and due diligence.
  • Trulia co-founder Sami Inkinen was rowing across the Pacific Ocean during the negotiations, highlighting the unusual circumstances surrounding the deal.

"You have to picture 50 people or so at Zillow working on the merger agreement and all the diligence because we needed to announce it right away." "I don't know what it was like in that boat, but we probably know jockey to say who was feeling a little bit more miserable at the time."

  • The quotes illustrate the intense workload and pressure during the final stages of the merger negotiations and the extraordinary situation of a key Trulia stakeholder being unavailable due to an extreme sporting event.

Proxy Voting

  • The discussion begins with a reference to a shareholder who presumably gave proxy to someone else for voting his shares.
  • Proxy voting is a mechanism for a shareholder to allow another person to vote on their behalf, often used when the shareholder cannot attend a meeting.

Well, presumably he'd given proxy to somebody because I would imagine he would need to vote his shares for the deal.

  • This quote highlights the assumption that a shareholder had to use a proxy for voting, indicating the importance of vote representation in corporate deals.

FTC Scrutiny and Regulatory Challenges

  • The deal faced significant scrutiny from the Federal Trade Commission (FTC).
  • The FTC made two requests for information, which is unusual and considered a negative sign.
  • The scrutiny led to negative market reactions and a drop in share prices.
  • The process was described as nerve-wracking and involved a lot of work in Washington D.C.

So this deal underwent a serious amount of FTC and government regulatory scrutiny. Right. I mean, there were two requests for information, which is uncommon.

  • This quote explains the level of attention the deal received from the FTC, indicating the complexity and potential issues in the regulatory process.

Yeah, it was a pretty nerve-wracking period for all of us. I essentially spent four months in DC full time trying to get the deal pushed through.

  • Kathleen Phillips describes the intense period of working to get the deal approved, highlighting the personal impact and effort involved in navigating regulatory challenges.

FTC's Market Definition and Concerns

  • The FTC's goal was to determine the correct definition of a market and whether the merger would create monopoly pricing power.
  • The debate centered around whether the online real estate portal market was a distinct market.
  • The company's perspective was that their market share was small in terms of transactions and advertising spend.
  • The FTC was concerned with the potential impact on online real estate advertising prices for agents.

What they're trying to determine is what is the correct definition of a market.

  • This quote summarizes the FTC's objective in analyzing the merger, focusing on market definition and its implications for competition.

In-depth FTC Investigation Process

  • The investigation by the FTC was incredibly detailed, involving subpoenas, economic experts, and antitrust lawyers.
  • The FTC examined a wide range of materials, including emails and pitch decks, to understand the characterization of the market.
  • They also spoke to other market participants and reviewed documents from various sources.

They were they subpoenaing or the equivalent thereof in this process information?

  • This question by David Rosenthal inquires about the depth of the FTC's investigation, which Kathleen confirms was extensive.

Importance of Careful Market Characterization

  • The conversation highlights the importance of being cautious in how startups characterize their market positions.
  • Innocent characterizations can be taken out of context and lead to regulatory nightmares.
  • The discussion serves as a reminder of the potential consequences of market characterization.

It's so easy to be like blase about, oh, I'm starting a startup, we're going to take over this market, or you actually need to be really careful about how you characterize things because you can end up in this nightmare scenario.

  • David Rosenthal emphasizes the need for startups to be mindful of their language regarding market dominance, due to potential regulatory implications.

Sponsorship Interlude: Statsig

  • Statsig is introduced as a new sponsor for the episode.
  • The company is described as a feature management and experimentation platform for product teams.
  • Statsig enables data-driven decisions, automates A/B testing, and provides impact visualization on core business metrics.
  • Notable customers of Statsig include Notion, Brex, OpenAI, and others.

Our sponsor for this episode is a brand new one for us, Statsig.

  • The introduction of the sponsor segment breaks from the main discussion to promote Statsig's services and their relevance to product development.

Zillow Group's Acquisition Strategy

  • Zillow Group's acquisition strategy is to accelerate existing operations and explore new opportunities.
  • Acquisitions are evaluated based on whether they can speed up current projects or offer new solutions.
  • The team aspect of acquisitions is crucial, as Zillow Group aims to integrate talented individuals who can contribute to its success.

How does this fit into what's the zillow group strategy for the next couple of years?

  • Ben Gilbert asks about Zillow Group's future strategy and how their acquisitions fit into it, prompting Kathleen to explain the rationale behind their M&A activities.

MLS Data and Listhub Challenge

  • Trulia and Zillow previously received a significant portion of their real estate listings from Listhub.
  • Listhub, owned by a competitor, cut off the data feeds, forcing Zillow Group to negotiate direct deals with MLS organizations.
  • The process of establishing direct data deals was linked to the FTC's concerns about monopoly power.

The cutoff of the listings actually came as a result of a natural termination of our contract, and we had engaged in negotiations to try and renew.

  • Kathleen clarifies the circumstances around the loss of Listhub's data feed and the efforts to renew the contract, highlighting the strategic challenges faced by Zillow Group.

Acquisition Categories and Zillow's Approach

  • Zillow's acquisitions are categorized based on their contributions to the company's marketplace.
  • The Trulia acquisition is seen as an expansion of supply and demand within the same business line.
  • The discussion includes different acquisition categories, such as people, technology, product, business line, asset, and other.

It's buying more supply and demand of the same business line and kind of like having multiple marketplaces.

  • Ben Gilbert characterizes the Trulia acquisition as an expansion of Zillow's core marketplace, emphasizing the strategic importance of increasing supply and demand.

Tech Themes and Rich Barton's Insights

  • Rich Barton's success with marketplace-based businesses is mentioned, including Expedia and Zillow.
  • The interview with Barton focuses on his approach to creating impactful marketplace platforms.
  • The tech theme revolves around the strategies for building successful online marketplaces.

What's your secret?

  • This question references an interview with Rich Barton, prompting a discussion of his methodology for developing successful marketplace businesses.

Marketplace Information Demand

  • People have a strong desire for specific marketplace information that they lack.
  • Zillow capitalized on this by providing home value estimates, which became highly sought after by homeowners.

"What piece of marketplace information do people crave and don't have? And I think that's really interesting. Zillow is like a perfect example of that."

This quote highlights the importance of identifying and providing information that consumers are actively seeking but do not have access to, as demonstrated by Zillow's success in offering home value estimates.

Hiring and Organizational Development

  • Building an organization requires a significant investment of time, often more than any other aspect of the business.
  • The concept of hiring "athletes" refers to looking for individuals who are versatile, adaptable, and capable of taking on various roles within a startup.
  • Zillow's approach to hiring and M&A emphasizes the importance of finding people who can grow with the company.

"Hiring and building your organization from a people perspective takes as much time as anything else in the business, if not more time."

This quote emphasizes the considerable effort required to hire and develop an organization's human resources, underscoring the importance of investing time in this area.

Examples of Leadership and Adaptability

  • Kathleen Phillips provides examples of leaders who have successfully transitioned roles within Zillow following acquisitions.
  • Susan Daimler and Justin LaJoy are highlighted as individuals who have adapted and taken on new responsibilities post-acquisition.
  • Culture fit and a broad ability to adapt are considered more critical than subject matter expertise alone.

"Susan Daimler, who now runs Streeteasy here in New York City...and Justin Lajoy...is still with us, running an entirely different product line."

The quote illustrates the value of adaptability and leadership in a high-growth company, showcasing how acquired talent can successfully transition to new roles and contribute to the company's evolution.

Real World Objects as Media

  • Zillow and Trulia have recognized that real-world objects, like homes, can be treated as media content.
  • This approach allows for the monetization of listings through advertisements and has turned browsing real estate into an aspirational, shared entertainment experience.

"One thing that Zillow and Trulia totally nailed is this idea that real world objects are also media."

This quote captures the innovative perspective that physical items can be leveraged as media, creating new opportunities for engagement and monetization.

Audience Building and Monetization

  • Zillow focused on building its audience before having real estate listings, believing that advertisers would follow.
  • The strategy was to grow the audience significantly to attract advertisers, as demonstrated by Trulia's investment thesis.

"Build your audience first and advertisers will come."

The quote underscores the business strategy of audience-first, which posits that a large user base will naturally attract advertisers and revenue.

Acquisition Analysis and Grading

  • The discussion moves to analyzing acquisitions, specifically the integration of Trulia into Zillow Group.
  • Financials are examined, and the acquisition is graded based on its accelerant effects on the business and the execution of the deal.

"I think it's pretty new... I think like we've been talking about earlier, I feel like a b plus with some variance here and there to see where it goes in the next few years is one."

The quote reflects the process of evaluating a recent acquisition, considering its strategic fit, and the potential for future benefits, resulting in a tentative grade of B+.

Execution and Experience

  • Kathleen Phillips reflects on the experience of executing the Trulia acquisition, describing it as a once-in-a-lifetime opportunity.
  • The team's execution is praised, and the belief is that the full benefits of the acquisition are yet to be realized.

"I often said during the time that everything was happening that I felt like I was living in a textbook."

This quote conveys the unique and educational nature of the experience gained during the Trulia acquisition process.

Company Follow-Ups and Market Moves

  • The conversation shifts to updates on previous episodes, including news about Snap Inc. and Twitter.
  • Snap Inc.'s ambitious moves and Twitter's potential acquisition by Disney are discussed.
  • The acquisition of Applovin by a Chinese private equity firm is highlighted as an example of a successful bootstrap company.

"Snap Inc. Had an Apple moment."

The quote draws a parallel between Snap Inc.'s rebranding and strategic moves to Apple's history of innovation and redefinition.

Personal Recommendations (Carve Outs)

  • The hosts and guest share personal recommendations unrelated to the show's main theme.
  • Recommendations include the Marvel symphonic universe video, Phil Knight's memoir "Shoe Dog," and the band The Struts.

"My husband and I spend our free time traveling to music festivals and thought I would recommend the band of the summer, which for us was the struts."

This quote offers a glimpse into personal interests and cultural recommendations, adding a humanizing element to the conversation.

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