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I should see what episode is going to be. 10. 10. Easy. Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight. Another story on the way. Who got the truth? Welcome to episode 10 of Acquired, the podcast where we talk about technology acquisitions that actually went well. I am Ben Gilbert. I'm David Rosenpill. And we are your hosts. Today we come to you with an acquisition that is actually not a technology acquisition, but something that David and I were inclined to talk about anyway because we both sort of have a little romantic fascination with anything involving airplanes and this is particularly interesting. Today we are going to be talking about Alaska Airlines acquiring Virgin America right here in our own backyard in Seattle. Before we get into the acquisition history in fact, I wanted to remind you that you can sign up now at a acquired FM to get our episodes delivered via email. We also would really, really, really appreciate it if you could rate us an iTunes. It will help us grow the show and expand what we can do with it from productions to new topics and guests. A presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how the group is together and then they say it's like the best curriculum for founders and executives. And really, as we use your show for research a lot, I listened to your episode of the story of Akyo Marina before we did our Sony episodes. This is incredible primer. You know, he's actually a good example of why people listen to founders and to acquired because all of his great entrepreneurs and investors, they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows and they're such good compliments is unacquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders. Listeners, the other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes. Who were their heroes? And the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas. And now he's gone and we can use those ideas. And so I think what acquired is doing what the founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well, listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. Now without out of the way, David, you want to dive into acquisition history in facts? Indeed. Yeah, this will be a fun one. And let us know what you think. Don't worry, we're not changing the topic of the show, but we thought we'd have some fun and analyze a very different industry than technology. Yeah, and not to mention the fact that it's not a tech acquisition. There is technology involved, but the way we're breaking the mold on this one too is this just happened last month. It's not like this month actually. A couple weeks ago. Yeah, so this is something where it's going to be highly speculative. But I think it's going to be a fun ride. All right, with that. So Virgin America was actually founded in 2004 by Richard Branson. And then had to go through a whole series of machinations to end up finally launching their airline service in the US, not until 2007. And over those three years, a whole bunch of things happen. So one, it turns out that due to some crazy laws, US domestic airlines cannot have foreign ownership greater than 25% of the company. Crazy. Crazy. So Branson and Virgin had to basically sell off 75% of the company before they could even have a hope of operating. It's wild. And I think at that point when they were first starting, it was Virgin USA even. And then they rebranded a little. It was later that they rebranded the Virgin America. So Branson sells 75% of the company to a couple hedge funds. And licenses the Virgin brand to Virgin America. So that Virgin America doesn't even own Virgin that's painted on their own airplanes. Yep. And there was talk at various points in time about ditching Virgin. The name would that help get regulatory approval earlier faster craziness. Anyway. And finally, clear all the regulatory hurdles. They buy some aircraft. They start operations in San Francisco with SFO as their hub. They launch in 2007. Things go fairly well. They don't die at least. Like a lot of start up airlines. And they actually have some major kind of technology related innovations. So in 2009, Virgin actually becomes the first airline to offer GoGo in plate wireless. She in plate Wi-Fi. Which is, that's hard to imagine now. Take it. As Louis CK says, is magic and is the newest thing I know that exists? I still, I hate it when I am now the random, you know, rare times when you end up on a plane without Wi-Fi. Sorry. They also are the first airline to, I believe, to install in flight seat back interactive touch screens for everybody all throughout the whole plane. Not to mention purple after glow lighting. Not to mention nightclub inspired. We're lighting. For our listeners who haven't flown Virgin America, they're probably going to have no idea what we're talking about. But. Yeah, I guess it's pretty West Coast. I think anybody listening to the Bay Area has definitely flown it since their hub data of SFO. So the Virgin actually ends up going public having an IPO in November 2014. And then not that long later, we're about 18 months since then, a bidding war erupts for the company between Alaska, which ended up buying them. And had been interested, rumored to be interested in the company in Virgin for a long time. And JetBlue. And then Monday morning April 4th, Alaska announces that they have agreed to acquire Virgin per $2.6 billion, which was a 47% premium to the stock's closing, the Virgin Stocks closing price the previous Friday, and about an 80% premium to where the stock was before rumors came out that a bidding war was happening. Yeah. And this is the first red flag for me. I mean, I think that basically a massive premium. Yeah. Anytime you see a spike like that, you start to dig into why. And I think we'll talk a little bit more about the way the industry is shifted. But with all the consolidation, the only way that an airline can really compete with the big guys is to be big themselves. And the big guys being United Delta, American, and Southwest. And so, you know, which itself started as a little guy. Very true. I think that's like the typical low end disruption case study. That's a great business and a really interesting story on its own. But I mean, clearly Alaska in trying to compete, there's a limited number of airlines that it could buy. And JetBlue clearly identified the same opportunity and the results is very, very inflated purchase. Yep. So when the dust clears and all is said and done, basically the total enterprise value of the deal ends up being about $4 billion if you include the debt and the aircraft leases that Virgin had. Which is fascinating because normally when we talk about these acquisitions, we would say, uh, $2.6 billion purchase, you know, in cash and stock or maybe in all stock deal. This was an all cash $2.6 billion purchase plus taking on that $1.4 billion of leases on airplanes and debt. And what a ridiculous capital intensive high fixed cost industry air travel is. That's four Instagram spend. Wow. And then perhaps the craziest part about this deal is again relative to the technology sector. So it was announced a couple weeks ago on April 4th, 2016. Not expected to close until early 2017 at the latest huge amount of regulatory review that still has to happen here. And we've actually seen precedent, I think in the American Airlines, US air merger where there was regulatory troubles and it almost don't go through. And the government extracted huge concessions from those two airlines when they merged. So we may be doing a follow up at some point in the future. If by 2017 we don't see a joined airline here. And our listeners don't revolt against us for talking about airlines. It's true. The other really interesting thing here is in just talking about the deal price, Alaska Airlines does not have $2.6 billion in cash to make this purchase. They, if I have my numbers right, as of November of 2015, according to their earnings, they had 88 million in cash and 1.1 billion in marketable securities. So I believe what happened here is in the bidding war with JetBlue, Alaska has incredibly clean books. They have, they're one of the few airlines that actually is invested in it. Very low debt load. And actually I have investment grade debt, which for listeners who aren't in the, come from the investment banking world basically means that the amount of debt that Alaska has is small enough relative to its earnings power that people think it's very, very unlikely they'll go bankrupt, especially for an airline. No other airline has is rated as highly basically, which means that people who lend to them think there's a good chance they'll go bankrupt. Yeah. So is there a chance then that the way I sort of understand it is is JetBlue sort of had to cry uncle because they didn't have the amount of debt available to them. They don't have the borrowing power to be able to make the purchase. Yep. Reach this price. But now this is going to totally transform Alaska. Like they're going to take out another billion and a half, perhaps plus of debt. Yeah, to make the, well, yeah, I mean to make the purchase and then to take on the debt and leases that that. And Virgin was also a fairly low debt load airline as far as airlines go. But still it's changing the capital structure of the company, combined company pretty significantly. Yeah. Great. So we move on to acquisition category. Yeah, that sounds good to me. Why don't I start with that? Uh, moving on to the acquisition category. This to me doesn't fit our mold necessarily of people, technology, product, business line or other, I guess if everything fits another. In some ways it's a business line. They picked up a brand that people have tremendous affinity for and access different customers with. That's assuming they keep the brand. Well, yeah, and that's something we should talk about. Ultimately though, what I think they're requiring here is capacity. They identified the opportunity that they wanted to be the West Coast airline and right now they don't have a meaningful presence in California. So they they hubbed out of Seattle. They have very little San Francisco and even less LAX presence and this gives them major major capacity to kind of be the West Coast airline. Yeah, basically, you know, if you look at, if you think about kind of airline route maps that you see on the back of the cards and the back nature. Make your head spin. Make your head spin. But it's usually, you know, it's like the spider web that emanates from a few major cities. You know, the Alaska hub is Seattle and there's a huge spider web coming out of Seattle to every country in America and every city in America and several international destinations. And then very few route pairs from other cities and Virgin is the same thing but just from SFO. So, in your opinion then, well, before we get into that, how would you categorize the asset? So, yes, I was actually, we hadn't discussed this beforehand but I was going to go down the same path you are and say in our framework, this would fit closest to a business line kind of like, you know, buying the local San Francisco airline and you're the Seattle local Seattle airline. But I actually think the best categorization is this is industry consolidation which is, you know, in a super mature old school industry like the airline industry, very different from technology. You get these periods of consolidation where players merge with each other because they feel like they need greater scale to compete and I think that's what we're seeing happen here. Yeah. And this is an interesting time to go into how Alaska makes the case to their investors for this. I mean, the airline industry is not furious for, I mean, we should talk about, there's a great, great, I almost included this as my car about for the week but I'm going to do something else because I knew we'd talk about it on the episode. There's a great paper that was written by Michael Malbuson and his team who's a great investor. He was head of Lake Mason, which is a large mutual fund and credit suites for a long time. I believe he's now back at Credit Suisse. He's written a number of great books. He's also a professor at Columbia Business School, I believe. And he wrote this great paper called measuring the moat and it's all about the concept of the moat, you know, as an investor is sort of the most important thing. You know, Warren Buffett emphasized and Berkshire Hathaway and Charlie Munger emphasized the moat as sort of the most important thing they look for and he uses the airline industry as an example of a terrible industry that is destroyed so much economic value and has no moat. Yeah. And this is, I'm not sure if this, I think this is still true, it was at least a couple of years ago. If you look at the airline industry, sentence, inception and you look at basically a profit and loss statement for an aggregate of every single airline, it's lost value. Like it's actually been, it's actually not been profitable if you look at every industry. The entire industry. Yeah. And not just lost value but lost a huge amount of a huge amount of capital has been destroyed in this industry. So when, you know, when they say that 77 in 2009, you know, they've lost $52 billion as an industry, it is interesting that people continue to invest in it. But from 2010 to 2015 over the last six years, it's a, it's, it's, it's, it's, it's a generation. It's a good time in the airline industry. Yes. $45 billion of value. And so that the, some of the things they cite are, or Alaska sites to their investors are fundamentally changed industry structure. And that, I think, is largely, I mean, when you look at the consolidation that's going on, they're basically saying, okay, the fragmentation's gone and right now the industry structure is that there's four relatively perfect substitutes in these, these big ones that are all, you know, you're going to get treated sort of like cattle when you're in, in coach. And you've seen in the past few years, I believe the first was United and Continental merged. You've seen all the major legacy domestic airlines consolidate and merge and then, then USA are an American merged. And so you've got this, this consolidating power structure of the industry that actually represents, you know, between the top four airlines, 80% of all US domestic airline traffic. Yeah. So it's interesting. I went and grabbed all their market caps today. Highest right now, Southwest is a $30 billion company. Delta's, I'm sorry, Delta's higher at $36 billion. Southwest at 30, American at 25, United at 21. And then if you look at Alaska is $10 billion without Virgin, Virgin's 2.5 and JetBlue at 7. So if you just look at those players, $132 billion, effectively market cap for the industry. And when you think about like Apple as a $590 billion market cap company, you start to understand like, wow, the whole industry here is, is, you know, if we were looking at this, any given airline and comparing it against one of these mega technology companies that we usually talk about on the show, an airline company just don't create that much value. Yeah. Or maybe more accurately, they don't capture that much value. Yeah. And it's super interesting. I'm sure we'll get into throughout the show the supply chain of the airline industry is fascinating. You know, you've got basically a do-opily that are direct suppliers to the airlines in Boeing and Airbus that make the big passenger jets. They have a huge amount of power over the airlines because, you know, while there is two of them, you could go from one to the other. It's not like you can say, it's not like the airlines can be like a, you know, like a Google and be like, you know, oh, we're going to like, you know, become a full-stack company. We're just going to obsolete you and we're going to make our own cloud or whatever. Like, the airlines can't make their own airplanes. Yeah, getting good at servers is different than getting good at airplanes. Yeah. So, getting back to the Alaska reasons they're bullish on the industry, the industry structure is consolidated. This is sort of a BS bullet point, I think, but returns focused leadership teams. That's sort of like two-year-unhored and claiming competency constrained airport real estate. This one's sort of interesting. I guess they're sort of saying like, we reached a saturation point right now where we're not building more airports that airports aren't getting bigger. And over the last, you know, since 1960, that's been the case. And now it's all about sort of vying for space at the existing airports that we have. And then the capacity acquisition starts to make a lot of sense. Yeah, there are only so many gates. Right. Right, right. Growth and leisure travel, which is interesting to sort of pick apart and think about why that might be. And then new revenue sources. And I think we can all agree about how we are well aware of all the revenue sources that airlines can... Surging for bags. Food and entertainment. And some of these are new services they've added and Virgin and Alaska have both been kind of the believing edge here of doing flight Wi-Fi and entertainment and movies and snacks that are actually... How valuable. And co-branded with Tom Douglas. So it's always so funny to get on those planes and see how far... For those of you not from Seattle, he's sort of like the big restaurant tour in town. To see how far he's leveraged that brand now that I open the little snack pamphlet on American Airlines and there's Tom smiling at me in on the front of it. Love it. So artisanal. So yeah, from a category perspective, I think absolutely I would chalk it up to capacity. Yep. And the other point I want to explore here a little bit is there's a really interesting context for this deal that people in Seattle might be aware of but I doubt anyone not here is and that's that Delta actually has been putting a huge amount of pressure on Alaska here in Seattle and they're in their hub. Delta has been growing over the last few years. Their presence in Seattle a lot. And for a long time, I think Alaska was probably concerned either concerned or expecting that Delta was going to make an offer to buy them. And they haven't. Instead they've just organically grown and taken more and more gates here in Seattle. And it's really interesting. I was talking to somebody who is far more of an airline industry expert than we are. And he was making the point that the frame of reference is really different for these two companies. Delta and Alaska. You know, Alaska is a domestic carrier and it's a west coast focused carrier. Delta is an international carrier and Delta coming into Seattle was part about competing with Alaska domestically because Alaska is built a really nice business here. But also an even bigger part probably for Delta is using Seattle as a gateway for international flights to Asia because gate real estate as you were saying Ben is so scarce and at the other big cities on the west coast at SFO and at LAX is so competitive and impossible to get to get more real estate there. I think Delta really viewed Seattle as kind of their gateway so that they could send people from all over the US on flights to Seattle and then hop over to Japan to Korea to China to what have you make sense. Whereas for Alaska, you know, that's not even an accessible market to them right now. Right. Right, right. In looking at the acquisition category and the kind of the way we've both defined it, in a $2.6 billion sale that it seems inflated for two reasons. One, kind of the bidding war because it was the scarcity of good airlines to buy that would complement JetBlue or Alaska well. But two, a lot of the value, the kind of intrinsic value that was given to Virgin even before rumors of a sale was brand value. I mean, they have tremendous customer affinity. They do things a little bit differently. People who love Virgin love Virgin. I always have a better level ask. A level ask it too. It's true. And actually, this is two of my favorite airlines to fly. But Virgin is notoriously different and better and feels premium and that had to be factored into their market cap. And when you think about what they are going to be used for, Alaska announced that by 2018, they hope to be fully rebranded as Alaska. Hopefully they can learn some things from Virgin and they've been watching them very carefully. But if they obliterate that brand, what was the point of paying a markup on a markup for capacity? Yep. It's a great point. The Alaska brand, again, it was very good, especially in the airline industry on its own. I think, really was kind of like very professional. They had either the best in the industry or the best on the West Coast on time percentage. Lots of great, very, very business commuter friendly. And Virgin was like, we joked earlier, like a nightclub on a plane. There's lots of, it was the favored airline of all of me and all my classmates when we were in business school and we can leave it at that. So then one other thing that I want to bring up in that realm is payback period. So they cite in, or Alaska sites that they'll have $225 million of total net synergies at full integration. So what we can pull from that is that there will be $225 million of cost savings after they're fully integrated. So let's call that 2018-ish. And that means that there's probably other value that they can create on top of that, like ability to create more revenue because they have these economies of scale. New things just on top of that. But that means that they have on this, if we look at the $4 billion as the figure, that's a 17 year payback period on this acquisition just on the synergies. And do we think that... Now Virgin had earnings as well that would contribute to that, but at two points I want to make, but go ahead. Yeah, no, no go for it. I've pretty much made the point that it seems like it's going to take a while to... Yeah, because anyway you slice it, it's going to take a while. And I think there are two really head-scratching things about this merger that are really important, that some... Certainly industry experts are questioning, but Alaska hasn't talked a lot about. One, the primary reason for the sort of economic renaissance of airlines in the last couple of years has been falling fuel prices. Yeah, which are only nominally passed on to consumers and everyone's getting a little... Right, and so airlines as a whole across the whole industry have gone from, you know, call it spending X on fuel, which was a huge amount of their operating budget and kept their margins load and negative to spending X divided by two on fuel. And thus they are enjoying as an industry much greater profits than they used to. Now the question is like, is that a new normal or like, is our oil price is going to go back up at some point? And, you know, we could do another show on the oil and gas industry and this is a major existential question for that whole industry, but if you were to take the viewpoint that like this is a temporary thing and prices will go back up, which historically they have, you know, fluctuated throughout history. You know, gosh, it seems like you're buying at the top of the market here where profits are artificially inflated. So that's one. Two, you know, synergies, as you rightly mentioned, Ben are often about the combined revenue potential and being able to extract more money from consumers, routes and whatnot, but they're also really about cost savings. And it's all in the back. And economies of scale and all that front, but there's kind of a problem here with this acquisition. And that's that Alaska flies Boeing planes and Virgin flies Airbus planes. Lusively Airbus. They're entirely. Alaska only flies Boeing and Virgin only flies Airbus. And you might say as a naive consumer, as I did before I started looking into this, like, that we do. I mean, like they look like it's a plane. A plane is a plane, right? Like I get on it. It looks the same. It turns out that actually they have completely different control systems and pilots who fly Boeing planes can't fly Airbus planes and pilots who fly Airbus planes can't fly Boeing planes. So it's not like they're going to be able to share pilots at all between these fleets. Not going to be able to share pilots. And of course, all the maintenance and all the parts are completely different. Now there are the other major airlines do use a mixed fleet of both. Separate Southwest. Except for Southwest, yes. But. So Southwest is entirely Boeing 737s because they realize that a part of their business model was going to be staying as lean as possible and keeping everything totally interchangeable and swappable. And that's actually been a big part of their story to Wall Street and investors, you know about why they're a great company. That's been kind of a pillar of it. And Alaska had the same playbook. And now all of a sudden, there are like a 50-50 shop of Airbus and Boeing. Yeah. And, you know, from a heartstrings perspective too, how dare a Seattle company buy a company that's entirely Airbus planes? That's just not patriotic. Well, much, much sorted in painful history on Seattle and Boeing and perhaps for another show. Yeah. Yeah. So, yeah. And I think that kind of actually sags into what usually is a short segment for us. And I think we'll also probably be short here of what would have happened otherwise. And here clearly the other way. I mean, Virgin was going to be acquired. And the otherwise was JetBlue had acquired them. Now, JetBlue is also an Airbus company. So it would have been a lot easier for them to realize cost synergies. Yeah. And there's two points I want to make here. One, Virgin is sort of only recently profitable. I think that so they launched in 2007, took them three years to have their first profitable quarter. They're struggling as pitching themselves as both a low cost airline and an airline that has a really premium service. And I think that they were better at adhering to the premium service than they were to the low cost. Yeah, that's a tough story to sell to consumers. And I think they were struggling with how to be both because you can't both be a Volvo and a Cadillac and have that story be sustainable and enduring. And so I think that Virgin didn't necessarily need to sell. They were definitely in the right place right time where they had exactly what they had. They got an 80% premium to their pre acquisition. Share price. That's pretty good. Yeah, good on them for their M&A positioning. But that seems like a little bit of a precarious position. And as you know at Pioneer Square Labs a lot when we're thinking about starting these companies, I think I would get a lot of crazy looks if I was like, well, we're going to be a low-cost premium company. It reminds me of I've been reading another. Could have potentially been my car belt, but won't be. I've been listening on audiobook to a great book called Business Adventures. It's a classic. It's from, I believe it was written in either the 70s perhaps. I was recommended to me by a good friend and I've been listening to it. And it's just, it's 10 vignettes of like more, more aptly titled business misadventures. The first one is about a stock market crash in the 60s. But the second one that I'm listening to now is about the Edsel, the car that Ford launched that's widely considered the worst product launch in history. And one of the key lessons from it is that Ford wanted the Edsel to be everything to everyone. Like they say, daringly adventurous with a dash of conservatism. You know? It's like, what are you getting me? You're for the elegant luxury for the aspiring young executive. And affordable for the middle market. And it's like, what? And it failed spectacularly. Yeah. I'm not over here preaching that that was going to be Virgin's path, but that was always sort of a head scratch from me about that company. Now the question that I want to post to you is, what would have happened to Alaska with all the consolidation of the market going on and kind of moving the four major players, the pressure from Delta and the home front, what if they don't expand? Yeah. And I think this, to give some credit to Alaska, I feel like we've been sort of taking pot shots at this deal. They were in a tough position, I think. You know, doing well in the moment, but facing this pressure from Delta, this consolidation across the whole industry, and they had developed a really, really nice niche here in Seattle was by far the best routes and customer service for people who live in Seattle and flying in out of C-TAC, but great business routes. But they kind of had nowhere to go. They were getting pressure from Delta here. Super hard for them. What are they going to do, expand internationally? Are they going to go to other cities? And that's what they did with this. They said, we kind of need to grow. It's going to be super hard to do organically. Here's an opportunity. We have a great balance sheet. For an airline, a lot of cash. We know we're relative to the industry, pretty well run. Here's an opportunity to buy Virgin and basically double our size and run the same playbook again. Or they could have just stayed in sort of steady state where they are. Well, it's funny. You would hope that they double their market size because the acquisition is so expensive. But when you look at the numbers of what Alaska is doing and what Virgin is doing, Alaska is 32 million total passengers a year. Virgin is seven. Alaska is 1,000 departures a day. Virgin is 200. There's 112 destinations served by Alaska. Virgin is 24. Pre-tax profit from Alaska, $1.3 billion, Virgin, $200 million. So that is an expensive purchase for a much, much smaller operation. And a much smaller operation with no room to grow in San Francisco. I mean, not just SFO, but the other airports in the Bay Area to Oakland and San Jose. Which are different. They're really commuter airports, although pro tip for Seattle to Bay Area computers, commuters never fly to SFO. You always got to do Oakland or San Jose. Because if you do a SFO, there's so much fog and fog delays and they always delay the Seattle flights because they want the cross-country flights to land on time. Got to do Oakland or San Jose. Pro tip. Pro tip. Anyway, but there's no room to expand in any of these airports. Yeah. Alright, let's move on to our next section. What tech themes does this illustrate for you? Yeah, this is a really interesting one. I debated a lot of ideas here. It's ironic because this is not a technology acquisition. Actually, I'm going to go with niche marketing. And again, even though we've been taking potchats against the steel, both Virgin and Alaska before the merger really succeeded at this. Like in a crowded marketplace with lots of big platform players in the big national carriers, they found a niche. Alaska, here in Seattle, and with business travelers and Virgin in San Francisco with sort of quality of service and sort of style-minded customers. And they served it really, really well. And they grew very big businesses out of that. I mean, combined the, obviously, the price for Virgin at $2.6 billion. Can you remember, what was Alaska's market cap before? Oh, it's, oh, both. Their stock actually went down on announcing the acquisition. It's about $10 billion now. About $10 billion. You know, these are great businesses. And I think that same principle totally applies in technology. And people especially start up often over, look at it. They try and go after the Delta or the United or the Southwest on day one. They try and go after Google on day one. You're not going to be Google on day one. The way you're going to be Google down the road is you start with a small audience, a small niche of people who love you passionately. And then you grow from there. And then you can knock down, you know, and crossing the casinospeak, the next bowling pin and the next bowling pin and the next bowling pin. And that's much easier to do in technology than it is in airlines. But the great thing about it is that you're probably not going to become the next Facebook or Google. But if you knock down a couple of bowling pins along the way, you're still going to become a really great valuable company. And then maybe you get a chance to knock them all down and you will become the next, you know, you will be Snapchat and become the next Facebook. Calling it here. There you go. That's a good point. Does that analogy also kind of apply to the brand loyalty aspect of airlines? They've, you know, huge innovation in the inventing, you know, the loyalty in the airline miles and status. So you're possibly saying that they're in order to either other technology companies that have probably not enough, there should be more, but that have taken that sort of loyalty aspects where like the more I use a platform, the deeper I get locked in because the more, you know, airline miles I have on it for lack of a better word. Yeah, I mean, totally. I think that everybody that has, has like done well at loyalty in the last 50 years has taken it from airlines. The question is like, do you need to open table definitely did? Yeah. Quite successfully. Yeah. Well, I guess I'm wondering, do you need to that would be a great acquisition to cover at some point, open table? Yeah. Yeah. Well, add to the list. We, yeah, I'm trying to think about like, is it necessary? Has something changed in the world where it's necessary to consolidate, to keep loyalty because like does something exist now that didn't exist before where people only ever want to use one airline? Or I mean, that's definitely the case in technology. Like I think about, you know, the power law and the power of network effects like hip chat, right? Like two years ago, a bunch of our portfolio companies used hip chat and some of them used Slack and some of them used hip chat and they would, you know, I talked to people using hip chat and I'm really like, you should really check out Slack and they'd be like, ah, you know, we use hip chat, it's good enough. But then like as their friends and other companies got on Slack and then Slack channel started popping out for, you know, industry groups and whatnot and then it was like, well, we should really think about moving to Slack and like, then, you know, this power law takes over and being on, even if, you know, I think Slack has done a lot of great product innovations, but even if they hadn't, you would be pushed to move towards it even if you're on hip chat because the rest of the world is on it. Yeah. And with Slack, I think that the like network effect was because people were starting into company slacks, so you would end up with like, I'm in this Slack, it's like a social thing or an industry thing and then it was like, I'm not going to keep using two separate applications. So like, does that apply here where I'm not going to maintain points at two separate loyalty programs because that was always super annoying. I mean, there was a few startups that I was trying out that were trying to aggregate my loyalty programs for me or at least help me keep track. That was, that was a kind of total pain. But to segue off of aggregator onto another technology trend, let's see if this, let me think through this and see if it's logic kind of follows. So sites like Kayak and HitMonk and all these, you know, travel loss price line, travel aggregators pop up. And that's 15, 20 years ago. And that effectively commoditizes airlines and compresses their margins because people's loyalty, people's loyalty to those airlines is shaken because they have an easy way to find cheaper prices and the price can be and so therefore margins are driven down because airlines get more commoditized and when they're more commoditized and there's less profit to be had, even though they weren't making a lot of profit before, they need to consolidate to create a cheaper back office to, you know, take advantage of economies of scale. And now if you're a smaller airline, the inefficiencies from you having a smaller operation could kill you. And so if you follow it all the way back to the online travel aggregators, does that sort of create the environment in which you need to have a bidding war for this acquisition so that you can be a more major player in a talented market? It's interesting. It feels a little bit different because it hasn't fully become a digitized industry but it's reminiscent of Ben Thompson's aggregation theory, right where aggregating the consumer endpoint and experience he argues in the digital 21st century post-internet world is where all the value is and then you can aggregate all the difficult content creation behind that content creation eases but in this case airlines point to point travel and own that relationship with the customer at the front end and then you commoditize everything on the back end and that's completely happening. And interesting Southwest has refused to participate in the aggregators to let themselves be aggregated and probably has some of the most loyal customers. I mean their ticker symbol is love of LUV, right? And they always talk about how much everybody loves each other at Southwest. Yeah, they've fought that actively and they've probably had the most success on the branding front. Yeah, yeah. Why don't we move on to rendering our conclusions? I think that's, I think it's that time. Yeah. And I think we are kind of expressed our opinions, least in a bunch of comments throughout this. For me, I think the value is inflated both by the bidding war and by the fact that they bought something that had brand built into the market cap when they're not necessarily a leverage and in fact have announced they're not going to leverage that brand. But I think they needed to and I don't think they had a lot of options and I think they both picked the time right when this, you know, was an available purchase and they put themselves in a really good position to make that purchase by, you know, I'm probably the wrong person to talk about this but by putting their books in a great position over the last five years and being really intentional about having or being an investment grade or having investment grade credit. And, you know, I think that Jeff Lüden prioritized that as much and they did any of the other smaller airlines and in a world where they, you know, need to consolidate, they put themselves in a position where they're able to do so. So I'll give it a B minus. Yep, I mean, it's hard to separate out just at least for me, the sort of coming from the tech industry, the sort of shock at looking at the terrible economics of the airline industry as a whole in dynamics versus the actual quality of decision making in this acquisition. So I think a lot of what you said I agree with, but I'm going to go lower, I'm going to go C minus because what you said is right but they paid so much money, could they paid so much money? I mean, I don't think it's public and I don't know that anybody except the executives involved know what Alaska's initial bid for Virgin was but like, it got bid up so many times until like, ooh, that's a large price for something that your pilots can't fly. Can an airline make a good purchase? Yeah, good point. Good point. Yeah. All right, should we move on to the carve out? Yeah, so this is wild. Like, I was like stopping myself from laughing and my jaw dropped and I think it almost ruined David's train of thought earlier when he started talking about how it wasn't going to be his carve out but it was a paper that Michael, is it man, man, Madison, that Michael, Madison wrote about this. I picked my carve out as a Michael, Madison talk that he gave at Google. Oh, this is so good. Everybody, everybody should watch this talk. It's really good. Like, and this, David, this is so weird. I haven't watched this in probably two years and it was something that I've recommended to friends very often and so I was sitting here before the episode thinking, you know, I didn't see anything particularly interesting this week that I wanted to recommend but I have an oldie but goodie. It is absolutely wild that this talk is great and it's based on a book that I've read the book too, which is worth reading too, called Untangling Luck and Skill. Yep. Untangling Skill and Luck the Success Equation and it is so, so fascinating. He gives so many great examples that will make you both like follow it logically and nod your head and sort of scared that about how much of your own success has been out of your control or how much the world is out of our control. So how much of your own success cannot be attributed to you and how much of your own failure cannot be attributed to you and trying to figure out what are things that you have affected. Attributed to your own skill. Yes, yes. And what are things that, you know, you actually should be focusing on and what are things that you should know that there is going to be randomness in the world. It's this, the, the talk, if you only have an hour, listen to the talk. If you really want to go deep on this, get the book. It's so good. I will restrain myself. I could go in so many directions. But one, one real quick vignette I want to throw out is one of my favorite themes from this talk in book is the paradox of skill, which is such a cool thing that like in a, a given activity, the whole, the whole premise of the talk in the book is that any activity, the results of which are going to be based somewhat on the skill of the participants and the activity and somewhat on luck. And there's a spectrum and some things go more towards the luck end and some towards skill end. The paradox of skill is that even in things that are highly skill based, as the level of play gets higher. So imagine the example, Malvisin uses his basketball as basketball, which is very skill based, as the level of play gets higher and higher and the parity of skill amongst the players gets more and more uniform, then luck plays an increasing amount of role in the outcome, even though it's a skill based game. Particularly due to globalization, because the only people who are even considered for this are the best in the world. So then it's like, well, among the people that are all the best that look very similar to each other in skill level, the variation in skill gets so minute. The luck is magnified. Yeah. Super. And the exact same dynamic holds to in investing, in startups, in lots of things. When the world is the pool, you always have the cream of the crop and then it's all about all the crazy dynamics that play out from there. So I can't recommend it enough. It's on YouTube. We'll link it in the show notes. Definitely check out the success equation on Tangling's skill and luck. I've taken enough time. I'm going to save mine for another time. It wasn't super interesting anyway. Well, I'm going to doubly recommend this. It's so good. All right. Well, there you have it. Thanks for listening today. Again, if you have the time, please, please, please, leave us a review on iTunes. 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