Good companies are built from new and valuable products or services, but great companies build and innovate on top of their initial success.
For example, Google’s initial success was built on search, but it was closely followed by YouTube, Android, and the Google Play store.
However, we can’t expect a company to build everything internally. Sometimes another company will come up with a valuable idea that can be bought.
Some companies focus on building products, others focus on buying products. But here at Spaceship, we believe that great companies do both.
Build products or acquire companies?
Building products takes time but it's usually cheaper and lower risk. Buying or acquiring another company can be riskier, with additional costs and complexity, such as integrating the other company. However, the right buy decision can fill a key strategic company need. In respect of the companies in our Spaceship Universe Portfolio, we have seen a number of game-changing buy decisions. The following are the most impactful acquisitions our portfolio companies have made so far.
YouTube and Android
YouTube is the second most popular site in the world, after Google, of course. Android is the world’s largest mobile operating system.
Google acquired both companies, filling a strategic need for prime position on smartphones. YouTube has more than 1.8 billion users every month, with half of all viewing done from mobile devices. Google bought YouTube for US$1.65 billion in 2006. The acquisition was controversial at the time, due to copyright concerns and potential legal liabilities. Frustratingly, Google still doesn’t split out YouTube revenues (so you can't tell how much they're making from it), but YouTube is a significant driver of Google’s growth. YouTube is one of the most important internet platforms by usage.
Can any acquisition be more important than YouTube? We believe the answer is yes.
Google bought another game-changer in Android, which now has 2.5 billion active Android devices. It was acquired for an estimated US$50 million in 2005, even less than YouTube. As at June 2019, Android has 76.03% mobile operating system market share, giving Google prime position on mobile homepages for its apps and Google Play (an app store).
If you imagine Google without YouTube and Android, you realise it’s an entirely different business. These acquisitions made Google into the mobile company it is today.
Making a billion dollars isn’t cool; spending a billion dollars to make tens of billion is.
Facebook purchased Instagram for nearly US$1 billion in 2012 and the purchase was initially treated with scepticism. A billion dollars for a company with no revenue, 30 million monthly active users and 13 staff? On the face of it, it looked crazy, but there was substantial value for Facebook plugging Instagram into their systems. Not only did it eliminate a potential competitor, it helped Facebook gain a strong position in mobile photo sharing (Facebook was essentially desktop photo sharing) thanks to the Instagram app.
Fast forward to today, Instagram has 1 billion monthly active users. Facebook bought Instagram just ahead of its IPO, when Facebook was valued at US$104 billion. Giving up less than 1% of its market capitalisation at that time was a savvy move to gain a leadership position in mobile. Facebook doesn’t split out revenues from Instagram, but its estimated to be worth more than US$100 billion, nearly Facebook’s value at the time of its IPO.
Marvel and Lucasfilm
Avengers assemble and may the force be with you.
In 2009, Disney bought Marvel for US$4 billion, and with a snap of the finger the world changed. Post acquisition, Disney has orchestrated one of the great box-office runs, culminating in “Avengers: Endgame” grossing US$2.73 billion. The key for Disney: Marvel’s own universe of characters and content.
Is there a universe bigger than Marvel? Disney followed up with the 2012 acquisition of Lucasfilm, which is the owner of the Star Wars and Indiana Jones franchises, for US$4.05 billion. Post acquisition, the four Star Wars films have grossed more than $4.8 billion at the box office. Disneyland recently opened Star Wars: Galaxy's Edge and accordingly increased the price of annual park passes.
Plugging Marvel and Star Wars into Disney’s ecosystem of movies and theme parks is the best of both worlds. Combining Disney’s storytelling and distribution superpowers with Star Wars and Marvel’s superheroes has been a powerful combination. Disney is the owner of multiple universes in entertainment; not many companies can say that.
So good they changed their name.
Booking Holdings carried out arguably the best acquisition in technology history, purchasing booking.com for US$135 million in cash. The acquisition was so successful that the company changed their name from Priceline to Booking Holdings. Booking.com gave the American company exposure to Europe and its more holiday-oriented culture, not to mention a better market structure for selling rooms online. Europe’s multiple languages and lack of large hotel chains compared to the US made for a much more attractive travel market for an internet hotel aggregator.
Booking Holdings is now worth US$83 billion with booking.com the major reason for the company’s market capitalisation. Booking.com records 48.3% of all web-based bookings in Europe and is one of the top five largest customers/spenders on Google advertising.
Their “billion dollar” moment.
Last but not least, we have an Aussie example. Pro Medicus provides software for radiologists that helps them manage practices and digitise medical scans and images. Their software Visage is the key product. Visage allows Pro Medicus to add imaging and visualisation viewing to their original radiology practice management software, which in turn gained Pro Medicus a technology platform and exposure to the US.
Pro Medicus bought Visage for $5 million in the midst of the global financial crisis and then offloaded their research arm Amira for $15 million. It was a big win from the beginning and Visage has continued to deliver. Visage software is now used by the famous Mayo Clinic in the US and other respected institutions. Pro Medicus’s market capitalisation is AUD$2.6 billion with Visage the major reason for their success.
Build or buy? Both
At Spaceship, we prefer organic growth to acquisitions, but acquisitions can sometimes be a great way to gain access to expertise or products quickly. For example, the transition from desktop to mobile was a significant driver for some of the acquisitions above. The right acquisition can significantly add to a company’s growth prospects by plugging the acquisition into an existing business and eliminating potential competitors. Just ask Facebook, Google, Disney, Booking Holdings and Pro Medicus; we think they’re great businesses because of it.
The Spaceship Universe Portfolio currently invests in Google, Facebook, Disney, Booking Holdings and Pro Medicus.
The Spaceship Index Portfolio currently invests in Google, Facebook and Disney.
Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.