How to acquire companies and keep what makes them work

1 The bottom line

Buy when you are short of time, a brand or a missing piece, and pay only what the asset's return or strategic value supports. Then keep the people and names that made it work, because that is where the value lives.

2 Key takeaways

• Buy when time or position is what you lack and your own attempt would probably fail. A late start is slow and costly to fix from the inside.
  • Sam Walton, Walmart42:10 could not grow fast opening two or three stores a year. He bought chains of about 16 stores and converted them, and went from 78 to 153 stores between 1974 and 1977.
• Set the price from the return you need and the currency you pay with, and walk away when a bidding war starts. Contests push the price past what the assets are worth.
  • Michael Eisner, Frank Wells and Bob Iger, Disney3:15:56 paid $71.3 billion for Fox after Comcast bid it up. Iger called it the worst of the four big acquisitions.
• Pay a premium only when the asset could be used against you. The cost of losing it can be larger than the price.
  • Larry Page, Sergey Brin and Eric Schmidt, Google1:45:08 paid $3.1 billion in cash for DoubleClick. Microsoft then paid $6 billion for number two player aQuantive and fell behind in advertising.
• Keep the management, names and independence that made the target work. The value sits in people, loyalty and a way of working, not in the legal entity.
  • Rockefeller, Standard Oil47:39 let acquired companies keep their management and names, and the momentum to join became irresistible after the first few deals.
• Cut the parts you do not need once the deal closes. You often bought one asset and received a bundle.
  • Bernard Arnault, LVMH18:10 bought the Boussac group only to get Dior. He kept Dior and sold the textile business.

You cannot have a winning cooperation except by willing partners.

John D. Rockefeller, Standard Oil

2.1 Decide whether to buy or build

Buy when a rival already owns what you failed to build, when you are late, or when the missing piece defines your product.

• Buy the thing you tried and failed to build. See Larry Page, Sergey Brin and Eric Schmidt, Google1:15:52.
  • Google Video had failed, while YouTube had the consumer brand and the attention. Google bought it for $1.65 billion in 2006.
  • Google judged buying a better bet than building again, even though infrastructure, music licensing and a Viacom suit were crushing the startup.
  • YouTube lost about a billion dollars a year on $30 million of revenue at first and was called Google's first mistake. It now makes over $50 billion in revenue with about $8 billion of operating income.
• If you know you are late, buy early and cheaply. See Google2:37:44 and Bill Gates, Paul Allen and Steve Ballmer, Microsoft1:43:00.
  • Larry Page offered to buy Android in July 2005 for $50 million, before it could raise another round. Google was already running about 350 versions of Maps for different phones.
  • Microsoft bought rights to Tim Patterson's quick 16-bit operating system for $25,000 up front and $50,000 later, then hired Patterson.
  • The iPhone arrived 18 months after the Android deal, and the team switched to a touchscreen device. Android now runs on over 3 billion active devices.
  • Microsoft did not think operating systems mattered much then, yet every Windows version until 95 was built on DOS.
• Buy the piece that defines your product. See Jensen Huang, Nvidia40:00 and Andrew Carnegie, Carnegie Steel41:05.
  • Jensen reasoned that a desktop and a data center use the same CPUs and GPUs, so networking is what differs. He bought Mellanox.
  • Carnegie's bridge business led him to make his own iron and then steel. He bought, took over or partnered with any supplier he needed to control the process.
  • Nvidia beat Intel to Mellanox, the last real InfiniBand provider, for $7 billion in cash in March 2019. Its 8.3 billion parameter Megatron model on 512 GPUs in 2019 had shown that bandwidth between machines would be the bottleneck Nvidia1:03:30.
• Count what passing costs. See Coca-Cola's leaders2:08:30.
  • Coke turned down Frito-Lay in 1965 and passed on Monster in 2012 at an $11 billion market cap, later paying over $2 billion for 20%.
  • In 2000 its CEO announced a $16 billion Quaker Oats and Gatorade deal without board approval. It collapsed and Pepsi bought it.
  • Monster is worth about $70 billion today, and Frito-Lay generates twice the profit of Pepsi's beverage business.

2.2 Pick the target and approach it well

Choose strong, profitable targets, learn their numbers, and let sellers come to a buyer they trust.

• Buy profitable leaders in niches, and avoid turnarounds. See Henry Singleton, Teledyne7:20 and Rockefeller47:39.
  • Singleton bought profitable, growing companies with leading positions. Jack Hamilton described them as high margin products sold by the ounce, not the ton.
  • Rockefeller went after the most powerful and technically advanced firm in each region.
  • Singleton bought 90 of his 130 companies during 1966 to 1969 alone.
• Learn the targets' real numbers before you choose who to buy. See Rockefeller, Standard Oil39:40.
  • As president of the National Refiners Association, Rockefeller saw every member's costs and volumes.
  • He sorted members into competent operators to buy as partners and weak ones to squeeze out.
• Let the seller come to you when you can afford to wait. See Bernard Arnault, LVMH39:00.
  • When the 1987 crash pushed LVMH shares down 50% to 1,200 francs, Arnault wanted to raid at once. His Lazard mentor told him to wait until they came looking for him.
  • The founders did, because they feared a takeover and wanted an ally.
  • He was ready, with about 1.5 billion francs of credit arranged and battle funds of around 6 billion francs.
• Be candid, and match the seller's mission. See Ed Catmull, Pixar54:09 and Larry Page, Google1:21:02.
  • Iger broke the usual rule and told Steve Jobs that Disney was in trouble. Jobs liked the openness immediately and the deal closed.
  • Facebook reportedly offered up to $800 million for DeepMind and Elon Musk offered Tesla stock. Demis Hassabis chose Google at $550 million because Page shared the AGI mission.
  • The DeepMind founders would have made about twice as much from Facebook.
• Offer a fair deal first, and keep pressure for holdouts. See Jay Gould's railroads43:30 and Rockefeller34:16.
  • Gould offered fair prices to roads willing to join and attacked holdouts in the securities market. He moved so quietly that rivals thought they had a truce.
  • Rockefeller worked down a list from the top rival, and by halfway the rest had to sell. Those who tried to expand found his bankers would not lend to them.
  • Rockefeller bought 23 rivals in four weeks, and only five of them took his stock rather than cash.

2.3 Set the price from returns and currency

Price from the return you need and what you can afford to lose, and be wary of paying in a rich stock or in a contest.

• Anchor to the return you need, and stop when the market stops offering it. See Henry Singleton, Teledyne35:18.
  • From 1961 to 1969 Singleton bought about 130 companies, nearly all with Teledyne's high-multiple stock, which was cheap relative to the targets' PE.
  • In mid 1969 the multiple fell, prices rose and rival conglomerates bid for the same companies. He dismissed his acquisition team and never made another material purchase.
  • His rule: "I won't pay 15 times earnings. That would mean I'd only be making a return of 6 or 7%."
• Do not merge with a partner whose stock value is not real. See Michael Eisner, Disney1:18:09 and Google1:11:21.
  • Eisner turned down Steve Case's offer to combine with AOL, whose richly valued stock was nearly worthless in intrinsic value. AOL's later merger with Time Warner destroyed value.
  • Google paid for YouTube in stock, and CFO Patrick Pichette said it would be the last stock deal Google ever did.
  • Google's market cap rose twenty times after the YouTube deal closed, so the stock cost far more than cash would have.
• Size the deal against what you can afford to lose. See Steve Ballmer, Microsoft4:00:00 and Bob Iger, Disney2:49:36.
  • Ballmer treated the roughly $7 billion Nokia handset deal as a venture bet. Microsoft had $27 billion of operating income in 2013, and he said "it was only money."
  • Iger bought Marvel and Lucasfilm for about $4 billion each. Together with Pixar, the three cost only about four years of ESPN cable profits.
  • Ballmer's bet was about 2.3% of a $300 billion market cap, yet the board and division heads, including Nadella, opposed it.
• Look for the cash engine inside the target. See Disney1:08:28.
  • Disney agreed to buy Capital Cities/ABC for $19 billion in 1995. Buried inside was ESPN, which used must-have sports rights to raise cable fees every year.
  • ESPN's fee reached $9.42 per subscriber per month. The cable networks produced 60% of Disney's operating income from 2008 to 2011.
• Do not let a rival set your price. See Disney3:15:56 and Microsoft2:39:20.
  • Disney agreed to buy Fox's entertainment assets for $52 billion in stock. Fox's library turned out to be worth less to streaming than hoped.
  • Microsoft bid up to $47 billion for Yahoo, which with Yahoo Japan and the Alibaba stake meant only about $15 billion for 15% of search. The deal collapsed over distrust.
  • After selling regional sports networks and Sky, Disney's net price for Fox was about $44 billion. The India assets were later merged with Reliance at a fraction of the value.
  • The Yahoo Japan and Alibaba stakes alone were worth over $30 billion, and Alibaba was worth $92 billion at its 2014 IPO.

2.4 Pay up only to deny a rival or win a prize

A high price can be right when speed, a loved brand or a rival's gain is at stake.

• Treat price as the cost of moving to the next arena. See Rockefeller, Standard Oil34:58.
  • Rockefeller usually paid a fair price and often overpaid. He opened his books so a sensible target would see that competing was hopeless.
  • At 25 he outbid his former partners at a $72,000 refinery auction. The next year the refinery had sales of $1.2 million.
• Make certainty part of the offer when a rival is bidding. See Google1:45:08.
  • When Tim Armstrong learned DoubleClick's team was in Seattle, Google realized Microsoft was bidding. Google entered a contest with Yahoo, AOL and Microsoft.
  • Google won with a hell or high water clause that dropped diligence, even after Steve Ballmer offered DoubleClick a blank check.
  • The whole Google network business made about $30 billion in 2024, against $200 billion from search.
• Buy the beloved local rival instead of fighting it. See Howard Schultz, Starbucks1:14:30.
  • Boston had George Howell's Coffee Connection and Dunkin Donuts holding good real estate. Starbucks bought Coffee Connection and got the Frappuccino trademark too.
  • The 1994 price was $23 million for 23 locations doing $16 million a year, roughly one times sales.
• Merge early if the partner might go to your biggest rival. See Jim Sinegal and Saul Price, Costco1:14:57.
  • Price Club was going to land with Walmart or Costco, and Saul Price did not want Walmart. Sam's Club was expanding quickly, so waiting risked letting it run away with the market.
  • Costco gave 52% of the equity to its own holders and 48% to Price Club, plus a premium of over 30%.
  • Each company had about 100 stores and 8 billion dollars of revenue, 16 billion combined. Costco was growing faster and could have waited.

2.5 Keep what makes the target work

Leave the people, names and mission alone, share the upside, and give acquired talent a bigger stage.

• Give competent leaders autonomy, a stake and a seat in strategy. See Rockefeller, Standard Oil41:05.
  • He believed forced partners never succeed. He told rivals to look at the facts, take their time, and either own part of the best oil company or keep competing.
  • Division leaders in Pittsburgh, Philadelphia, New York and the oil regions ran semi-autonomous units and sat in on company strategy.
  • Independent-minded founders found the offer hard to refuse, and none did.
• Use equity to turn rivals into partners. See Standard Oil Part I1:15:53.
  • Flagler, not a lawyer, drew up a joint stock company in 1870 and then a trust whose trustees held shares in companies across states.
  • Standard Oil of Ohio was capitalized with $1 million and paid a 105% dividend in its first year while still reinvesting heavily.
• Protect the mission and the location that make researchers productive. See Google1:21:02.
  • Page let DeepMind stay in London and keep researching, with an independent oversight board as part of the deal.
  • The data center cooling project cut energy use 40% by 2016.
• Tread lightly on a brand people love, and use its founder. See Starbucks1:14:30.
  • Schultz said "we had to tread very lightly after the acquisition." Starbucks asked George Howell to help validate what it was doing.
• Give acquired talent a bigger stage, and put the better team in charge. See Disney1:52:03 and Marvel at Disney2:49:36.
  • Iger lost faith that Disney Animation could be fixed from within and decided Pixar's leaders should take it over. He called Steve Jobs the day he got the job.
  • Disney gave Marvel's storytellers a bigger canvas and built the interconnected Marvel Cinematic Universe.
  • Disney paid $7.4 billion in new stock for Pixar, giving Jobs a stake of about 7%. The Marvel films grossed nearly $32 billion.
  • In the Costco merger no one was laid off Costco1:14:57.

2.6 Cut and consolidate what does not belong

After the deal, keep the core and remove the rest, then pause to digest.

• Rebuild the acquired capacity into a few strong units. See Rockefeller, Standard Oil34:35.
  • In the Cleveland Massacre about two dozen refineries were consolidated in a few weeks. Most were sold for scrap.
  • The 24 refineries became six large state-of-the-art installations, and Rockefeller was the largest refiner in the world in his mid-20s.
• Accept the whole bundle if the prize is worth it, then sell what you do not want. See Bernard Arnault, LVMH18:10.
  • The Boussac owners would only sell the whole money-losing group. Arnault accepted what others avoided, believing "companies that are in Ruins hold the greatest surprises and bring the greatest profits."
  • He turned the failing asset into roughly 100 million in cash flow within two or three years.
• Pause to absorb what you bought before buying more. See Teledyne35:18.
  • Singleton paused after about 150 acquisitions to consolidate what he had.
• Check the regulators and the structure before you build the plan on one deal. See Jensen Huang, Nvidia1:17:00.
  • Nvidia wanted Arm to own everything in the data center. Regulators worried that a vertically integrated chip company would control licenses sold to rivals, and the deal was abandoned.
  • Nvidia still built its own Arm based data center CPU, Grace.

2.7 Where they differ

The right price, target and treatment depend on whether you are buying speed, a bargain or a position.

• Overpaying for speed versus strict price discipline. Rockefeller34:58 accepted overpaying, while Singleton35:18 stopped buying when returns fell.
  • Rockefeller bought a dominant position that kept paying. Disney's overpayment for Fox Disney3:15:56, did not.
• Buying ruins versus avoiding turnarounds. Arnault18:10 dug into a failing group for one jewel, while Singleton7:20 bought only profitable leaders.
  • Arnault's case worked because he wanted one asset and was ready to sell the rest.
• Waiting versus moving fast. Arnault39:00 waited for sellers to come to him, while Walton42:10 bought fast once the format was proven.
  • Costco1:14:57 chose not to wait because Sam's Club was expanding quickly.
• Pressure versus willing partners. Rockefeller1:43:13 had railroads slash rates to starve a rival pipeline and force a sale in 1880, yet he also said41:05 a winning cooperation needs willing partners.
  • He used pressure on rivals who refused and open books for those who could be persuaded. The fair offer always stood.
• Keeping names versus scrapping assets. Rockefeller kept management and names at strong firms Standard Oil47:39, but scrapped most plants the same history34:35.
  • Keep what carries talent or loyalty. Scrap the capacity you can replace with something better.
• Paying in stock versus cash. Google1:11:21 swore off stock deals after YouTube, while Rockefeller1:31:10 used stock to give sellers a share in the winner.
  • Rockefeller offered Cleveland refiners 25 to 50 percent of book value in cash or stock. He bought 22 of 26 Cleveland refiners between February and April 1872.