What Makes a Successful Acquisition? | Rowan Trollope (CEO, Five9)

What makes for a great acquisition? Because Cisco, are they the most acquisitive of all companies?

They've done almost 400 acquisitions.

That's incredible.

Yeah. Over whatever, 20-some years.

Which one are considered the most successful?

I think Meraki is probably the biggest and most successful one that, you know, they bought it, I think it was $100 million and it's now doing over $1 billion in revenue. That's, I think, rough and tough. And that was, I don't know, 4 years ago. Wow. In that case, it was like strong channel synergy. So, so Cisco is a go-to-market machine and they've got the world blanketed with their channel. Uh, and so you bring in a company that has a brand new awesome router that's, you know, powered by the cloud, which is Meraki. And it was like, okay, that was, uh, just went right through the Cisco channel.

So all these integrators and value-added resellers and the channel that installs the Cisco equipment now just has another item on the menu.

Exactly.

It's like adding like a beer or a new dessert to a menu of a packed restaurant. Yeah, it's just like, yeah, this is going to do okay.

High margin, high recurring revenue. So that one did really well from a, from a performance perspective. You know, the thing I always think about when it comes to acquisitions is the culture that you're buying. And Jony Ive used to have this saying, like he was asked when I don't know if it's a saying, I read it once. He was asked, why doesn't Apple do more acquisitions? And he said, well, it's one thing to build a product. But it's way harder to build a team that builds great products. And when you buy a company, you're buying a team and you're getting what you get, what you get from a cultural perspective. So when I would do acquisitions, big or small, would really be thinking about the cultural aspect. It's great at the company I'm at now. It's completely organic. We don't— we haven't done acquisitions.

So it's— but you also—

one cohesive culture. Yeah.

So did you have to reset the culture of Five9 or did you have to—

it was good. Oh, it was already good. And that was the— that was the— I got very lucky in that sense and actually was one of the choosing factors from one of the deciding factors for me was, you know, I don't have to fix a broken culture here. This is a great culture already. You know, if you look in Glassdoor or any of the review sites, amazing culture. People love working there. I, I would— I was hiring executives, bringing them in, and they're at the end of the day after they were done, they were kind of like, I've never seen something like this. This company culture is weird. Like, this is not what I was used to. And so I love that about the place. Um, I, I would say that's one of the biggest, uh, struggles with acquisitions. An example of Symantec back in the day did the largest software acquisition in history, which was Veritas. I think it was $10 billion at the time. And they were totally different cultures. It was online backup, a backup and storage company, which was Veritas, and Symantec, which was security. And John Thompson, who was the CEO at the time, who's now the chairman of the board at Microsoft, and they eventually spun it out, by the way, recently. But they, they never integrated the cultures and the cultures are so radically different that it just kind of never really worked and clicked. So now they're spun out years later.

It's interesting when you think about it, what are the cultures that are attractive for acquisition? What would you say the characteristics of those are? I mean, obviously dysfunctional culture is dysfunctional culture, so you don't want that.

Yeah.

You don't want too aggressive of a culture coming into a—

Exactly. It's more about getting the match. I mean, you know, you could look at Silicon Valley companies and like Some places are very sharp-elbowed. And so if you're a sharp-elbowed culture, you're probably gonna fit in well there. If you're not, you're gonna get pushed around. You're never gonna get anything done. So it's about sort of understanding your own company and what you're buying. And will these people actually just like working here?

Oh, it goes the other way too. Yeah, you're right. I'm just thinking about how Twitter just had like a really promising M&A start and then it turned into a disaster. They bought Vine, they bought Periscope.

That's right.

And they had bought TweetDeck and one or two other really like cool companies. They might have bought Nip or did they buy the other one, Datasift? I can't remember. But anyway, they bought like all these great companies and then Twitter had no culture or a weird quirky culture and Vine got shut down. Periscope seems to have been the slowest iteration.

They wounded it, they didn't kill it.

It's almost like they shackled it. They're just like, yeah, you can fly Periscope, but we're just like only to 1,000 feet. It's almost like, I think Periscope would be 10x larger now if it wasn't part of Twitter.

Well, what if Facebook Live, didn't that really?

Well, I just think also Facebook knows how to do these integrations where they're just like, if we bought you, we're gonna send you to a billion users.

I mean, it was like a pixel for pixel copy of Periscope.

Of course, yeah, no, that's what their specialty is. Like sell to us or die. Or we're gonna try to kill you. But if you just think about what they did with Instagram and— WhatsApp, it was like, let's just take all the friction out of this and get everybody who has friends on Facebook to find their friends easier on Instagram.

Mm-hmm. Oh, now there's Instagram TV, right? Is that what it is? The live broadcast?

IGTV. IGTV. I guess they're competitor to TikTok? But they have a TikTok competitor too. So IGTV might be a YouTube competitor, I think. They wanted to get YouTube stars, but the fatal flaw of Facebook is their greed. And that circle the wagon mentality, which is they don't take criticism. They don't reflect inwardly like in the way they should. And they don't share revenue because they're so self-centered. Can you imagine if they took a Google YouTube approach and they're like, we'll give 30% where 45%— they give— YouTube gives 55% of the revenue to creators. Apple gives 70%.

So do they on, on their podcast or on apps?

On apps.

Yeah. What about on podcasts?

They don't have a—

There's no monetization.

They don't have it yet.

'Cause you're on there, right?

Yeah, we're on there for free. I do think YouTube now has a Patreon competitor where you can subscribe. Oh. Yeah.

YouTube is one of the great acquisitions of all time. For sure the best.

I would say Android.

LinkedIn, maybe.

LinkedIn's up there, but too soon to tell if it's gonna 10x from here. But if you just look down on our market cap, YouTube was $1.6 billion. Independently, what do you think YouTube would be worth with— it's got to have $30 billion in revenue. And what do you think it'd be worth?

I don't know. 6— what are they growing? Who knows? What are they growing? Do you have any idea?

I got to think.

So 5 to 10x multiple.

Yeah, it's got to be a $200 billion company.

Yeah, it's big. Yeah.

$150 to $250 billion on the open market.

What a great acquisition. Instagram was cited as a great acquisition.

It would be worth now $200 billion now. So that's a 200x. I would say both of those are 100, 200x.

What's consistent in both of those is they left them alone.

Correct. Until they didn't.

Yeah.

And actually, YouTube is still left alone. Instagram wasn't.

Most acquisitions are not done like that, right? They're done with the idea of, oh, you've got to justify it with synergies, cost synergies, revenue synergies. And, you know, if you don't— and it's like there's enough cases where if you don't integrate it, it causes problems. So I don't know what the right answer is, to be honest. Yeah, it's a tough one. Yeah, it does seem I like building stuff. I don't like, like, I don't like buying stuff. So if I could build it, I'll build it.

Yeah, that's Apple's position. And the one thing you miss with that—

except for they didn't buy Netflix, right? They missed out on that one. Was he saying they should buy Netflix?

Yeah, of course. I, I thought Netflix—

oh, Stratechery, Ben Thompson.

I've been saying they should have bought Netflix and Tesla when they were $10 billion companies.