The Top 10 Acquisitions of AllTime

In this episode, hosts Ben Gilbert and David Rosenthal, along with guest Hamilton Helmer, delve into the most impactful acquisitions in technology history, highlighting the top ten as determined by their acquired podcast. They discuss the persistent value creation of these acquisitions, emphasizing the importance of targeting large markets and establishing defensibility. The conversation also touches on the concept of counter-positioning, where a company introduces a business model so disruptive that incumbents are deterred from mimicking it due to significant financial consequences. The episode further explores the nuances of power versus moat in business strategy and the relationship between disruptive technology and value. Additionally, they briefly cover the role of online advertising in the success of the top acquisitions and the unique challenges faced by established companies when responding to innovative upstarts.

• The episode was recorded a few weeks prior during a different time, before the significant impact of the novel coronavirus was felt globally.
• The hosts express concern for the community's health, economic, and emotional well-being during the pandemic.
• Announcements regarding changes to the Acquired community and show are mentioned, with more details to be shared later.

"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."

The quote highlights the rapid change in global circumstances due to the coronavirus outbreak and its impact on the show's context.

• The Acquired community is emphasized as a support network during the crisis.
• Adjustments to the Slack community are being made to foster support among members.
• A call to action is made for listeners to join the Slack community to stay connected.

"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."

The quote explains the proactive steps being taken to modify the community platform to better support members during the pandemic.

• The hosts acknowledge their platform and the responsibility to use it to communicate important messages.
• A strong recommendation is made for listeners to practice social distancing and support local businesses by ordering takeout.

"To tell you to stay home... Social distancing really works and has saved countless lives in countries across the globe."

The quote conveys the critical public health message of social distancing to help mitigate the spread of the virus.

• Despite the crisis, the decision to release the episode is justified by the need for entertainment and laughter.
• The episode serves as a reminder that normalcy will eventually return, and debates about topics like acquisitions will be commonplace again.

"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."

The quote explains the rationale for releasing the episode, emphasizing the importance of maintaining a sense of normalcy and humor during challenging times.

• The episode addresses the frequently asked question about the best acquisitions of all time.
• The hosts discuss the methodology behind creating the top ten list, acknowledging that it is not an entirely objective exercise.

"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?"

The quote sets the stage for the episode's main topic, exploring the greatest acquisitions in history and the lessons they offer.

• The episode will focus on notes and methodology instead of historical facts.
• Criteria for selecting acquisitions include the passage of time for evaluation, majority purchases, and the impact on the acquiring company's market cap.

"Well, instead of history and facts, we are going to replace that with notes and methodology."

The quote outlines the shift in the episode's structure to focus on the analytical approach to ranking acquisitions.

• Some notable acquisitions like WhatsApp and VMware are mentioned but do not meet the criteria for the top ten.
• The list includes honorable mentions that have significantly impacted their parent companies but fall short of the top rankings.

"We've got 16... We're only going to rank the top ten. But we have some honorable mentions to start with."

The quote indicates that while some acquisitions are noteworthy, they will not be part of the official top ten list.

• The primary criterion for ranking is the absolute dollar return in value to the acquiring company.
• The methodology involves estimating the market cap contribution based on the acquired company's revenue and the parent company's revenue multiples.

"How good of a use of capital was it for the big company to buy the small company?"

The quote summarizes the main criterion used to assess and rank the acquisitions in terms of capital utilization and value creation.

• Disney's acquisition of Pixar is highlighted for its financial success.
• The acquisition is noted for its timing, cost efficiency, and the high revenue generated.
• Disney paid less for Pixar than Google did for their acquisitions but reaped significant financial rewards.

They're making over twice as much money per year. They paid almost half as much for it originally, and they did it three years later.

The quote emphasizes the profitability and strategic financial planning behind Disney's acquisition of Pixar, highlighting the timing, cost, and revenue benefits.

• The acquisition of Marvel by Disney resulted in a significant absolute dollar return.
• The market cap contribution from Marvel, minus the acquisition cost, is over $16 billion.
• The acquisition is deemed "incredible" and "fantastic" due to its financial success.

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 on Marvel.

This quote illustrates the financial success of Disney's acquisition of Marvel by detailing the impressive market cap contribution and overall dollar return.

• Google acquired three companies, Where2, Keyhole, and Zipdash, to create Google Maps.
• Google Maps generates revenue primarily from sponsored products and the Maps API.
• The acquisition cost was $70 million, with a current revenue of about $3 billion and a market cap contribution of $16 billion.

Bought for 70 million. Doing about 3 billion in revenue 16 years later.

The quote highlights the growth and revenue generation of Google Maps since its inception, resulting from the strategic acquisitions of mapping companies.

• Marvel's acquisition ROI was five times the invested capital.
• Google Maps' acquisition ROI was 242 times the invested capital.
• Despite the difference in ROI, both acquisitions resulted in an absolute dollar return of about $16 billion.

With Marvel, it was five. With Google Maps, it was 242.

This quote compares the ROI of two major acquisitions, Marvel and Google Maps, underscoring the significant difference in ROI but similar absolute dollar returns.

• The podcast plans to publish a table with detailed numbers across different measures.
• The discussion suggests that while some metrics might be seen as vanity metrics, the absolute dollar return is what ultimately matters.

Everything else is a vanity metric.

This quote suggests that beyond various financial metrics, the absolute dollar return is the most tangible and significant measure of an acquisition's success.

• Disney's acquisition of ESPN in 1984 is considered the best media acquisition of all time.
• ESPN was acquired for under $200 million and now contributes over $10 billion in revenue to Disney.
• The acquisition has resulted in over $30 billion in absolute dollar returns and a 15% annualized return since 1984.

Acquisition price of just under $200 million. ESPN currently is contributing over $10 billion in revenue to Disney.

The quote emphasizes the long-term financial success of ESPN's acquisition, noting the low acquisition cost and high current revenue contribution to Disney.

• eBay acquired PayPal in 2002 and later spun it out as an independent entity.
• The market cap of PayPal at the time of the spinout was $47 billion.
• eBay's acquisition of PayPal resulted in a $45.6 billion absolute dollar return and a 28% annualized return.

The market cap of the independent PayPal entity was $47 billion.

This quote details the financial outcome of eBay's acquisition and subsequent spinout of PayPal, highlighting the significant market cap and dollar return.

• Priceline acquired Booking.com and Active Hotels for $135 million in 2005.
• Booking.com contributes over $10 billion in annual revenue to what is now Booking Holdings.
• The acquisition has resulted in an absolute return of just under $50 billion and a 48% annualized return over 15 years.

Booking.com, as best as we can tell, separating out what the core booking and active hotels revenue is within now the.

This quote discusses the substantial revenue contribution and financial return of Booking.com to Priceline, now Booking Holdings, since its acquisition.

• Apple's acquisition of NeXT in 1997 was pivotal for the company's future success.
• The acquisition brought back Steve Jobs and technology that would become the foundation for Apple's operating systems.
• The acquisition is valued with a 95% discount on Apple's current market cap, resulting in an absolute dollar return of $62.5 billion.

Apple is a $1.4 trillion company. Now. That certainly would not be but for the next acquisition.

The quote underscores the critical importance of Apple's acquisition of NeXT and Steve Jobs, which contributed significantly to the company's current valuation.

• Google acquired Android in 2005 for $50 million.
• Android's revenue contribution to Google is estimated at around $13 billion.
• The acquisition resulted in a market cap contribution of $77.68 billion and an ROI multiple of 1555x.

Android, $50 million to buy this thing.

The quote highlights the relatively low acquisition cost of Android and its substantial contribution to Google's market cap and revenue.

• Google acquired YouTube in 2006 for $1.65 billion.
• YouTube now generates $15 billion in revenue annually.
• The acquisition's market cap contribution is valued at $86 billion, with an $84 billion absolute return and a 52x ROI multiple.

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.

The quote details the significant revenue generated by YouTube since its acquisition by Google, emphasizing its impact on Google's financial performance.

• Google acquired DoubleClick in 2008 for $3.1 billion.
• DoubleClick contributes roughly $22 billion in revenue within Google's advertising segment.
• The acquisition has resulted in a market cap contribution of $126 billion and an absolute dollar return of $123 billion.

Current revenue contribution of this segment within Google is just a hair under $22 billion.

This quote illustrates the substantial revenue generated by DoubleClick within Google's advertising business since its acquisition.

• Facebook acquired Instagram in 2012 for $1 billion.
• Instagram contributes approximately $20 billion in revenue to Facebook.
• The acquisition has resulted in a market cap contribution of around $150 billion and an 88% annualized return.

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.

The quote explains Instagram's significant revenue contribution to Facebook, highlighting the success of the acquisition in terms of financial returns and growth.

• Parent companies funding acquisitions are likened to venture capitalists.
• Successful acquisitions may operate as separate, standalone businesses.
• Facebook's acquisition style is to buy and leave the acquired company alone, akin to a venture-backed company operating independently.

"You could maybe make an argument that what some of these super, super successful acquisitions that our business lines are is just like, oh, well, the parent company at the bottom is kind of like a venture capitalist."

This quote illustrates the idea that parent companies, when making acquisitions, often fund and support these businesses in a manner similar to venture capitalists, allowing them to grow independently.

• Amazon is not among the top 15 acquirers, unlike Microsoft, Google, Facebook, and Apple.
• The absence is notable given the presence of other major tech companies.

"Notably missing is Amazon. Nowhere in the top 15."

The quote highlights the observation that Amazon, despite being a major tech player, does not rank among the top acquirers in the context being discussed.

• Google has an impressive M&A track record with four of the top ten acquisitions.
• They were in a bidding war for Instagram, which could have further solidified their position.
• Google's founders, Larry and Sergey, are not seen as M&A geniuses, but the company made significant strategic bets in the mid-2000s.

"Google has the best M&A track record in history. Right? Like, yep. Four of the top ten and three of the top four. That's pretty good."

The quote emphasizes Google's successful history in mergers and acquisitions, owning some of the most impactful acquisitions to date.

• Google's founders were tech geniuses who stumbled upon a disruptive search technology.
• They fell into a business model with high margins and defensibility by realizing the potential of their search technology combined with advertising.
• Google leveraged its position to widen its moat and add high-margin revenue streams.

"They kind of fell backward into a business model. They kind of realized that, oh, my gosh, this thing that we're doing by having the fastest and most accurate search results... we can do that thing that Overture is doing and have incredibly high margin, incredibly defensible revenue."

This quote outlines how Google's founders unintentionally discovered a highly profitable and defensible business model through their search technology.

• Google's acquisition strategy changed, with a shift towards building in-house projects like Google X.
• Facebook emerged as a significant competitor in acquisitions.
• Leadership changes at Google, with Eric Schmidt stepping back and Larry Page becoming CEO, influenced their approach to M&A and innovation.

"Related to both of these was the leadership change at Google, Eric Schmidt steps back, Larry Page becomes CEO."

The quote connects Google's change in acquisition and innovation strategy to the leadership changes that occurred within the company.

• Facebook is considered one of the greatest acquirers, with Instagram being a key example.
• There is a distinction between intent-based and non-intent-based traffic, which Google and Facebook capitalize on differently.
• Facebook's acquisition pace has slowed, potentially due to the robust venture capital environment.

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

The quote reflects the initial impression that Facebook's acquisition strategy has been highly successful, particularly with Instagram.

• The last 20 to 25 years may represent a unique window for the best M&A activity in tech.
• The ability to stay private longer and raise significant capital may reduce the frequency of such impactful acquisitions in the future.
• Companies like TikTok represent what could happen if a company like YouTube were started more recently.

"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 Google wouldn't have bought it, be a competitor to Facebook, Facebook at this point, and it would be a large independent company."

This quote speculates on how the current landscape of private funding and staying independent longer might affect the occurrence of major tech acquisitions.

• Microsoft had no acquisitions in the top ten, with a history of bungled M&A during the Ballmer era.
• The company's culture may have hindered successful integration and growth through acquisitions.
• Under CEO Satya Nadella, Microsoft's approach and success with acquisitions like LinkedIn and Minecraft have been different.

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

The quote criticizes Microsoft's historical performance in mergers and acquisitions, suggesting missed opportunities and strategic missteps.

• Apple's acquisition strategy is distinct, focusing on hardware and small technology companies.
• Their approach contrasts with other tech giants that have made more prominent and numerous acquisitions.

"Apple's just whole approach and MO to this is so different. They make hardware, right?"

The quote distinguishes Apple's acquisition strategy, which is more focused on hardware and less on large-scale acquisitions compared to other tech companies.

• The top three acquisitions are all related to online advertising, highlighting the market's size and defensibility.
• The discussion includes the regulatory implications of such powerful network effect businesses.
• The segment reflects on the importance of targeting large markets and the ability to create defensibility within those markets.

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

This quote points out the dominance of online advertising in the context of successful acquisitions and the significant market share these companies hold.

• Instagram's acquisition is discussed as an example of exceptional defensibility and value creation.
• The nature of content on Instagram versus other platforms is debated, with Instagram's content being high-quality and provided for free.
• The conversation considers the potential need for a new regulatory framework due to the impact of these acquisitions on the market and society.

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

The quote highlights the extraordinary financial success of Instagram, which generates substantial revenue without paying for the content it hosts.

• YouTube and Instagram have contrasting approaches to content creation and financial models.
• YouTube pays creators approximately half of its revenue, while Instagram doesn't pay for content.
• Hosting and bandwidth costs are likely higher for YouTube due to 4K content delivery.
• Instagram users tolerate compressed content on mobile screens, potentially lowering costs.
• Instagram has not released an iPad app, which may suggest resource constraints or a strategic choice to focus on mobile.
• Comparing similar companies like YouTube and Instagram can reveal significant differences in content payment policies and associated costs.

"Instagram doesn't pay for a lick of their content. YouTube has half their revenue going out the door."

This quote highlights the fundamental difference in content cost management between the two platforms. Instagram does not incur costs for content creation, while YouTube shares a significant portion of its revenue with its creators.

• From an investor's economic perspective, Instagram is favored over YouTube for investment.
• The preference is based on Instagram's financial model rather than its impact on society.
• The discussion excludes value creation and societal impact, focusing solely on shareholder value.

"If I could hold shares in Instagram versus YouTube, I would put all 100% of my dollars between those two into Instagram and zero into YouTube."

David Rosenthal expresses a clear preference for investing in Instagram over YouTube, emphasizing the economic benefits from a shareholder's point of view, regardless of personal sentiments towards the platforms.

• YouTube is the second most trafficked search engine, owned by Google, the top search engine.
• Owning both search engines is strategically valuable for Google.
• The strategic value is not the primary reason for YouTube's position on a certain list but is noteworthy.

"It's hard to put a price on Google also owning the second most valuable search engine in the world."

Ben Gilbert points out the strategic advantage Google has by owning both the top search engines, which has implications for the company's market dominance and long-term value.

• VMware's ranking on a list is influenced by EMC and Dell's acquisition activities.
• The acquisition of 80% of VMware for $625,000,000 is considered a significant opportunity.
• VMware's success reflects early entry into a big market and the playbook discussed earlier.
• VMware is notable as the only enterprise company on a particular list, emphasizing the importance of targeting big markets.

"The only reason VMware is as low as it is is because of this crazy thing going on with EMC and Dell right now to acquire 80% of VMware for $625,000,000."

David Rosenthal discusses the impact of the acquisition process on VMware's ranking and valuation, suggesting that external factors are influencing its current position.

• Consumer companies tend to become the largest due to serving end-users directly.
• The retail price paid by consumers supports multiple businesses in the supply chain.
• Most successful acquisitions are consumer-focused, as they cater to the larger end-user market.

"It sort of makes sense that the biggest companies would be consumer companies and the most successful acquisitions would be consumer acquisitions."

Ben Gilbert explains the rationale behind consumer companies' dominance and success in acquisitions, highlighting the direct relationship with end-users and the economic flow from retail prices.

• Pixar's acquisition by Disney had a significant impact beyond the direct financial contribution.
• The acquisition revitalized Disney Animation and the company as a whole.
• John Lasseter and Ed Catmull's leadership at Pixar played a key role in Disney's creative resurgence.
• The value of Pixar to Disney could be considered double due to the success of both Pixar and Disney Animation studios.

"In acquiring John Lasseter, Ed Catmull and the rest of Pixar, they revitalized Disney in a way that it's kind of hard to put a value on."

Ben Gilbert discusses the intangible and strategic benefits Pixar brought to Disney, which are not solely reflected in direct financial terms but have had a substantial impact on the company's overall success.

• Software companies often surpass others in value due to their scalable and high-margin nature.
• Despite the strategic value of certain acquisitions, software's economic advantages are hard to beat.
• The conversation acknowledges potential omissions and encourages listener feedback for future episodes.

"Software is hard to beat."

Ben Gilbert concludes the discussion by emphasizing the difficulty of surpassing software companies in terms of valuation, given their inherent economic benefits.

• Todoist is recommended as a superior to-do list application.
• Felix Gray is endorsed for their computer glasses, which combine functionality with a stylish look.
• These personal recommendations highlight tools that the speakers find useful in their daily lives.

"I'm loving it. My to do list. Apple reminders. Just like, I just finally couldn't take it anymore."

David Rosenthal shares his positive experience with Todoist, suggesting it as a reliable tool for managing tasks, while also mentioning Felix Gray glasses for their practical and aesthetic value.

• Deadmau5's Masterclass is recommended for its in-depth exploration of the creative process in music production.
• The class offers insights into Deadmau5's approach to avoiding generic software and creating unique sounds.
• It is suggested for anyone interested in the creative process, regardless of their taste in music.

"It's interesting from watching the ways in which he is resistant to using a lot of out of the box software or cookie cutter loops."

Ben Gilbert praises Deadmau5's Masterclass for providing a window into the artist's unique approach to music production, which avoids conventional methods in favor of originality.

• The episode concludes with a reminder to subscribe and engage with the show's community.
• There is anticipation for future episodes on specific topics.
• An accompanying blog post with a data table and analysis is mentioned as a resource.

"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."

Ben Gilbert mentions the creation of a blog post to complement the podcast episode, providing listeners with a written reference for the discussed content.