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Episode 22: Zillow + Trulia (with Zillow Group CFO Kathleen Philips)

Episode 22: Zillow + Trulia (with Zillow Group CFO Kathleen Philips)

Fri, 14 Oct 2016 00:23

CFO of Zillow Group Kathleen Philips joins Ben and David to cover the show’s first true “merger” versus “acquisition" (only took 22 episodes!), Zillow’s 2015 combination with Trulia to form Zillow Group.
Note: our audio glitches unfortunately continued on this episode, and quality is rough. We recommend listening on speakers vs headphones if you’re able. We apologize and will be back to normal quality next time!
Topics covered include:
  • Zillow and Trulia’s beginnings during the “Web 2.0” era in the mid-2000’s
  • Zillow, Trulia and other online players’ place within the massive US real estate market
  • The lengthy “dance" between Zillow and Trulia and earlier aborted merger talks between the two
  • The difficulty of "true mergers” among private companies and why the path is easier for public companies
  • Public company shareholders’ influence and role in M&A transactions
  • Details of the blazingly fast negotiations (27 days start to finish!) per disclosures in the SEC filings (scroll down to "Background of the Mergers”)
  • Structuring the deal and incentivizing Trulia and Zillow mangers to stay and continue growing as separate brands
  • Trulia cofounder Sami Inkinen’s whereabouts during the merger negotiations
  • The experience going through a lengthy FTC review of the merger, and defining what the relevant “market” is the FTC should be considering
  • Introducing our new acquisition category: a “timeline acquisition” ;) (h/t Kathleen)
  • Zillow Group’s overall approach to acquisitions, folding into its broader HR strategy
  • Zillow founder Rich Barton’s startup thesis of searching for "What piece of marketplace information do people crave and don’t have?"
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Hey acquired listeners, we hope you enjoyed this episode with CFO of Zillow Group, Kathleen Phillips. Just a quick heads up that the audio quality is a little bit rough this time around, and we recommend listening on speakers rather than headphones if you're able. We'll get back to our normal standards next episode. Thanks for bearing with us. Welcome to episode 22 of acquired, the podcast about technology acquisitions. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. We're on a serious role here at acquired and we have an awesome, awesome guest for you today. We'll be talking about Zillow's 2015 acquisition of Trulia and their M&A strategy overall. Kathleen Phillips is our guest. She is the CFO of Zillow Group and was formally Zillow's COO and General Counsel. She has run corporate development for her entire six-year history at the company. She's also previously been a VP and General Counsel for StubHub and Hotwire. Welcome and thanks so much for coming on Kathleen. Well, thank you guys very much for having me. I'm super excited about having this conversation with you today. So are we. So are we. Thank you. Our 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 founder. 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 they group us together and then they say it's like the best curriculum for Founders and Executives. It really is. We use your show for research a lot. I listened to your episode of the story of Achaomarita before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to Founders until acquired because all of history's greatest 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 there's such good compliments is on acquired. 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 a 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. All right. Well, I think I think it's time to dive in with them. Yeah. I, you know, normally Kathleen David leads us through the acquisition history in facts. I figured the best way to cover it in this episode would be kind of David, you lead and kind of have a discussion with Kathleen on. Yeah, I'm sure lots of lots and lots of good stuff will come up. This was a as we joke on the show and we were joking with Kathleen before we started recording. We love two things. We love public company acquisition. Two things on the show, public company acquisitions where everything about the negotiations comes out in the SEC filings and lawsuits where the same thing happens. So fortunately, we just have the former. Yes, fortunately, just the former in this case. I'm sure for Kathleen Sanity. So maybe I will do a very quick history in facts on the founding of both Zillow and Trulia and then we'll jump into the acquisition process with Kathleen. So Zillow was founded in 2005 by Rich Barton and Lloyd Frank who previously had worked together at Microsoft here in Seattle and then had founded Expedia in 1996, which probably most wireless news they're familiar with. That was a lot of people don't know these days was founded within Microsoft. It was part of it was a division within Microsoft that they started and then they spun it out from Microsoft and it became a separate public company in 2001. And then in 2005, they left and they started Zillow and Zillow is focused as Trulia on the US housing market and buying and selling of houses in real estate. And Zillow's big innovation that was the big brand that they launched with in 2006 was this concept of the Zestimate. So it was a data driven estimate for every home in their database about what that home would be worth on the market. And this was I believe the first time that US homeowners had any idea of what you know any indication of what the value of their house might be without actually putting it on the market. And it was based on a whole bunch of factors but especially access to new comps of houses that were selling in the market around the house. So this was a big deal generated a lot of press. Zillow over its private company lifespan raised about $80 million in venture capital from benchmark TCV and others ends up going public in July of 2011. And we will press pause and pick up the story in a minute. Meanwhile Trulia was unlike Zillow which was based up here in Seattle. Trulia was founded a year earlier in 2004 in the Bay Area by Pete Flint and Sammy Inkinen who were actually students at a place close to my heart the Stanford Graduate School of Business. They were MBA students and they founded the company in between their first and second years when they were according to legend and I know how difficult this was having lived through it trying to find housing for their second year at Stanford Business School in Palo Alto and having a very difficult time and thought there's got to be a better way. So they work on it during their second year. They end up raising over the years significantly less in venture capital $33 million dollars from Excel and Sequoia and others. And then Trulia goes public in September of 2012 and that's where we pick up the story actually a little bit before then when according to the SEC filings of the ultimate acquisition it was actually before Trulia went public but after Zillow had just gone public that Zillow approached Trulia the first time about potentially acquiring the company in late 2011. So I want to pause and say Kathleen number one did we get it in the that that all right and then number two had had you been at Zillow yet at this point? Yes I joined Zillow in July of 2010 almost exactly a year before we completed our IPO. So 2010 through July 2011 for me was completely focused on getting that deal done and then the rest of it you got absolutely right. So you just gone public in 2011 and then it must have been very shortly thereafter that your approach Trulia this first time. What was where you guys kind of waiting to get public and then and then sort of approach Trulia from from that position of strength there? How did what was the thought process behind that? Yeah so it was it was more a factor of us having you know liquid public currency following the IPO and that was actually one of the primary reasons that we concluded the IPO and you can see that if you look at our timeline of acquisitions we had done one small acquisition prior to July 2011 but then as we had stock available that was liquid and publicly traded that was really our goal was to give us the flexibility to pursue more acquisitions and Trulia was the natural choice to start with first. And yes we know you know being on the VC side and working with many private companies you know some of which at various times are either approached by or thinking about approaching other private companies to talk about merging and it is so difficult to agree on value when both companies nobody has any idea what either companies stock is worth. That's absolutely true and it's also a complex endeavor to think about an acquisition of the scale that it would have been between Zelo and Trulia followed by an IPO and having to construct that story is far more complicated than you know knowing our own business as we did and being able to tell a great story to the street. Yeah and not to mention having you know when when public companies acquire one another all the all their financial data is available to the public whereas when you're private. Absolutely. So in this round of talks in 2011 Trulia does end up hiring an investment bank as an advisor with a higher catalyst but talks break down in early 2012 and then in August 2012 so a few months later Trulia is preparing their own IPO and Kathleen and Zelo approach again and try a second time. Did you guys know that Trulia was was on the path to going public at that point? Oh definitely I mean it was such a natural thing for them to be doing you know we had we had forged the path ahead for them they had a very similar story. We knew that that was something they aspired to do so we expected that that would happen. Did you ever consider waiting the IPO for them to IPO first and give investors confidence in this sort of business? You know we never really thought about it with respect to them and we were always a much larger player so you know we we were charting our own course so we didn't really think about our timing relative to theirs. So talks break down again for the second time and in September of 2012 Trulia completes their IPO and continues executing as a public company for a while as Zelo at this point and I believe during the first couple of years I didn't look up the exact number but I'm remembering I remember it super well when Zelo went public it was one of the first Seattle tech companies to go public in a long time and the mark Zelo's market cap I believe was what right around six seven hundred million dollars at IPO. Yeah I think that's about right it's been a while the thing that I remember very well is that our revenue I think was something around 40 million which the reason I I note that is because when we look at our group of emerging businesses now they're larger than we were when we went public. So we made a lot of progress in the last five years it's pretty terrific. Yeah I mean the growth was just incredible in still is but in those early years as as a public company and by this point you know after Trulia's IPO in a couple years later again I don't have the information in front of me but you were you know your market cap was multiple higher of what it had been at the IPO I believe right. Yes yes. And so a couple years go by finally spring of 2014 so not quite two years after Trulia's IPO and the last time Zelo and Trulia had danced the acquisition dance Zelo is still thinking about about you know this and it's a natural fit that these two companies will come together and so you guys take an interesting step and you go out and you talk to public shareholders of both Zelo and Trulia under NDA with with major shareholders to talk about potential according to SEC filings quote potential strategic opportunities including the acquisition of Trulia. What how did how did you guys think about taking that step? I have. So there's a there's an important clarification here which is they were the same shareholders. So our our major shareholders also held a stake in Trulia so this was not a matter of us approaching Trulia shareholders who we did not have in common. So it makes a little bit more sense when you think about it from that perspective and part of the invest of this of our investors all along who were invested in both was that ultimately there would be a transaction. You know they had no ability to predict when or to direct that but it was such a natural industrial logic that that was part of what they were betting on. That makes sense and at this point in time and I'm sure still the thesis of a lot of public company invest or public markets investors that hold them. Zillow group stock is you know real estate is this enormous enormous market and it's coming online for the first time and you know the market share of online players and real estate is still tiny compared to the whole market and we just want to invest in in that wave that's coming. That's absolutely right and you know one of the stats that bears that out is that we think that notwithstanding our category leadership you know we have about two-thirds of the traffic on the web overall and three-quarters on mobile on Zillow brand properties and yet we only touch about 4% of real estate transactions in the US. So there's a massive greenfield still there for us to take advantage of and we're you know we see this huge opportunity ahead of us still. Yeah it's incredible it still boggles my mind you know having followed this market you know closely for several years. How little of the real estate market is as you said being touched by any online player whether it's whether it's you guys at Redfin or other folks it's you know and having having shopped for houses myself online I can't imagine doing it you know the old way through you know newspapers or just working with you know offline agents. Yeah I mean it is remarkable and obviously it's it's a key reason why we continue to invest in the business because we think it's really the long-term opportunity you know many years down the road when this is going to be a mature market. So it's pretty exciting and it honestly it keeps us disciplined you know we get asked all the time how come we haven't expanded internationally for example and you know the reason is because the opportunity right in front of us is so huge that we try to stay focused on that. So it's it's a pretty exciting time and with the Trulia acquisition you know we dramatically accelerated the expansion of our scale. Yeah and you know I would bet this is one of those things where there are a lot of different sectors right now that have a large generation gap as with any adoption of new technology but real estate in particular it seems like I'm 27 myself and my whole peer group kind of live on Zillow for entertainment value. I mean it's amazing how and you're not a homeowner right right I rent and it's amazing how often Zillow links get sent around just wait till you own a home and then you want to track its value right right what we hope so right I mean that's I would imagine you have a massively it's significantly more than than 4% of millennials buying homes right it has to be many multiples of that but significantly less than older generations and do you guys like do you guys track that and look at that and try to specifically target younger folks buying homes for the first time or anything like that. Well I think it sort of happens naturally right because of the you know the the millennials are used to doing everything online so yes we keep them in mind when we're designing our products the cool thing about that is you know we've just recently taken a look at buyer activity in the market and for the first time about 50% of home transactions are actually involving millennials so they're starting to buy which wasn't happening a handful of years ago so you know it's great because it's a great you know opportunity for our product because it really resonates with them so it's it's an exciting time as that market starts to develop and as you know as you know as you know sort of the generational focus of the real estate market shifts. Yeah it's I mean we see it every day in our peer group and I'm 31 and you know it's kind of like that you know when you get to the end of your 20s early 30s it's amazing how much your conversations start shifting to like what's the real estate market like and like oh yeah I've been home shopping and I've put in like three offers and it's like a switch flips. Right right and I think that's that's much more true in Seattle you know in San Francisco unfortunately it's still pretty challenging for young people but I think in Seattle you know folks in their early 30s are really thinking about settling down and suddenly you know it's it's not uncool to be a homeowner anymore. Yeah and with the market such as it is and how competitive like I can't imagine not having these online tools to help navigate it. Yeah for sure. So getting back to the drama of the deal so you'd spoken to shareholders and obviously they were holding you know if they were already holding both stocks they were their thesis so as I would imagine quite supportive of a combination. In early June you guys end up hiring Goldman Sachs as an advisor before you approach truly again and then this is where the day by day we'll link to this in the show notes the day by day negotiations in the filing are just start to play out and it's it's so much fun to read. So apparently on June 3rd Rich Barton contacts Pete Flint the riches is at that point was Rich still the CEO of Zillow or he moved to no Spencer became CEO prior to our IPO and Rich's rich was chairman throughout that time and still has got it so he's chairman and he contacts Pete Flint whose young co-founder of Trulia and attempts to schedule a dinner on June 3rd and quote Mr. Flint indicated that his near term schedule would not accommodate a dinner. Little did you know what was coming? It happens to me all the time so I totally understand. Yeah right well I would say you know not to put any words in Pete's mouth but I think he knew very well what was coming but keep in mind the backdrop of this which is you know we were we were pretty fierce competitors for a long time we each admired what the other was doing but we were playing in the same sandbox we had been around and around about valuation a couple of times and I think both companies went through a long period of believing we should just go in our own and you know it shifting course from that is challenging when you're looking at a company that you've grown from the ground up. Yeah not to mention the you know the psychology here I mean it's a little bit of a prisoner's dilemma right like you you know both sides probably I can only imagine the amount of posturing like you want to show strength because even though you know both sides might feel and obviously did in the end feel that a combination was you know the best outcome for both you know I'm sure you were very focused on how you were going to do in that negotiation. Absolutely absolutely we owe nothing less to our shareholders right so both parties are interested in getting the best terms possible. As did the you know Pete and the Trulia board for their shareholders so on June 5th two days later rich context Pete again and this time is more overt and says the zillaboard fully supports a merger proposal and mentions that you've spoken to these shareholders that you have in common and they're supportive of of the merger as well and then a couple days later Rich does send the letter to Pete and to Greg Waldorf who was Trulia's lead director had in the previous negotiations had things gotten to that point before had you had was was there had you guys put a put a deal on the table so to speak or was this a new tactic you were taking. We had not directly put anything before the Trulia board we had had I recall one meeting with more more representatives of management on both sides and I expect and I'm sure that that Pete and team would have conveyed the substance of our discussions to the board but we had never directly approached the board I mean this was a way of kind of turning up the urgency of the offer a little bit. Indeed I mean it's process must have been a whirlwind it was six weeks less than six weeks later I think the merger ends up getting announced so from kind of you know even though you'd had these stalled talks in the past from over the couple of years but you know to go from zero to fully negotiating and announcing a merger that's a tight timeline. Yes and I actually was going to bring that up as I was looking over this I was getting tired just reading it because I remember this time so well but the really critical time period that you're looking at is you know from July 1st when we start diligence to July 28 when we announced the merger we did full diligence and negotiation of the acquisition agreement. So 27 days I is pretty quick we have a terrific internal finance and legal team and they were working around the clock we all were but it's part of how we do deals at Zilla we try to move them through really quickly so that we can get back to our day jobs. I can't think of an acquisition that we done that we took more than about 20 days this one took a little bit longer because it was a little more complex but we try to get them kicked off and done to avoid distraction to avoid risk of us losing the deal and like I said to get back as business to business as usual. Yeah as we were talking about before the show I mean one of the things that I really admire about getting to know some of some of the folks at Zilla over the last couple of years you know it's important for our audience to know Kathleen it's not like your only job was to be you know head of Corp Dev right you had quite a lot of other operational responsibilities at the company at the same time right. That is absolutely true at the time I was still chief operating officer at Zilla so in addition to having legal under my umbrella and corporate development I had the whole people organization and people are most valuable assets so I couldn't just ignore them while we were busy on this deal and you know that didn't end with the signing of the acquisition agreement we'll get to the FTC review and all of that later but for me it was about eight months that I was pretty fully consumed on this. Well she was great fun don't get me wrong. Yeah so what's pretty interesting here to me is especially not having lived through this with public company merger side but on the private company side you guys converged on a number pretty quickly I mean there's a range there from you know 30 of your first offer to Pete coming back after a few rounds with 37 but like that's not a lot of difference compared to you know I'm used to well we think 10% and we think you know 60% you know how did you guys you know think structured things like I'm sure this helped it move along much faster like were you were there specific things that you did that got that range you know tight very quickly. Yeah so I mean I wish I could say we're some kind of financial geniuses and we had some model that dictated this but it really was as simple as we had you know side by side nearly 10 years of operating history and we were always kind of two-thirds and they were one-third so it was a pretty natural way to think about the valuation and interestingly even now you know a year post closing in terms of lead volume it still is about two-third to one-third so we really were quibbling at the margin there because with all the public company data out there was very obvious to us what the correct proportion was given how similar the businesses were. Which is interesting because two days later on July 5th Richard Pete talking again and on that conversation they basically agree like yep 33% is what makes sense here and then they move on to start discussing some of the non-price related terms which I want to get into which I'm sure were fascinating and at least according to the filings that's when they first start discussing retention packages for the truly a management team and employees especially for you given that you were in charge of people at the time too like how did you guys start to think about that I mean it ends up the final package I believe you know we'll get to it the end but I believe ends up being $33 million in equity retention for truly a management. How did you even get to you know set a framework for thinking about that yeah I mean you know it it was super complicated I will say as you might guess and it really involved an exercise of kind of putting ourselves in the shoes of the truly a management and thinking about who did we need to keep for various time periods and we were cognizant of preserving their culture and preserving their team and keeping folks interested and you know we never lost sight of the psychology of this deal which is you know being acquired by your primary competitor who you have competed with ferociously for 10 years so you know we felt like we needed to keep folks energized and make everybody feel like this was a winning deal and this but this is a good spot I think too to jump off into one of the really interesting things about this deal the plan was never at least at the beginning not immediately to combine the two products I mean there's still very much separate brand separate products separate sites with separate customer bases so of course you needed truly a management to stay involved and motivated and they were obviously very good at running truly a how did you guys at Zillow sort of evaluate from that spectrum of completely independent Trulia within the Zillow group umbrella to merging Trulia directly with with what was that evaluation process like well we always knew that we wanted to keep both brands you know it's it's easy when you're looking at Zillow in a vacuum to kind of forget about what a strong business and strong brand Trulia was on its own so there was a lot of brand equity there very strong team doing different things than we were doing even though you know our ultimate consumer missions were very well aligned and we knew that there were you know consumers out in the marketplace who strongly preferred one over the other so there there never was any question about you know just folding the Trulia brand into Zillow but what we did recognize was there were a lot of other things that we could fold into one for example our ingestion of real estate listings we run from a central source now so there's efficiency there which unlike in you know more industrial type mergers of competitors rather than us shedding product development resources because of these efficiencies instead it let us deploy a bunch of very talented people to new products and new projects that we never would have had time to do on our own perfect example of that is there's a substantial development team in San Francisco that were former Trulia people who now work for Zillow group broadly and they developed our premier agent app which is one of our most successful product launches of this year and is really the foundation for a lot of the developments that we've been seeing in our ad products so you know it was a gold mine of talent that we could deploy to things that were far more interesting in the end for both our consumers and our advertisers yeah can you you mentioned the premier agent I guess product or business line can you talk a little bit more about that and what the strategy is behind that for Zillow group all up sure so you know fundamentally what it is is a subscription based advertising product where agents pay to be promoted next to four sale listings to be potential buyers agents for consumers with the acquisition of Trulia that advertising is purchased by agents across both properties so agents are advertising on both Zillow and Trulia and it has been you know it is the workhorse of our revenue definitely the focus of our efforts our sales efforts as well as our our development efforts it's been hugely successful more recently what we've been seeing is really innovative and entrepreneurial agents who are forming agent teams and buying advertising in large quantities and really building big businesses from which to operate one of the things that we talk a lot about on this show is we joke about it you know Ben Thompson we're just huge fans of his writing and his thinking and you know he talks about aggregation theory and one of the consequences aggregation theory being that you know in the kind of the information economy is opposed to the industrial economy aggregating customers and having the best customer experience and ability to do that is the winning strategy versus in an industrial economy where distribution is costly and has friction you want to aggregate distribution and think about customer second and one of the things I love about the Zillow group business and this merger in particular is it's such a like pure play example of that like they're these levers in distribution that by being internet based you have and then by combining these businesses whether it's acquiring the data feeds about data on homes and home sales which we'll get into in a minute because there's more drama to come there or advertising sales or you know what have you website back ends it doesn't make sense for any of that to be separate but what does make sense to put the combined effort of the companies into is exactly what you're saying is developing these great customer experiences whether it's the advertising customer or the the you know homeowner home buyer customer it's it's cool to watch and it's so when you guys were were thinking about the rationale for this merger was that like as you're identifying kind of the key levers for this like were those was that at the front of your mind oh absolutely and I would say it has unfolded in a way that was even far more beneficial than we could have imagined you know we were most focused on the acceleration of our audience growth which is you know natural when you're running an internet media business and we thought that there would be some other benefits of scale but those have far exceeded our expectations and real estate listings is a perfect example of that we we we struggled and I see I think we're going to get to this a little bit later about the listings drama you know we we struggled in acquiring listings over the years there were parties who just didn't want to provide them to us now it's pretty difficult for listings providers to look at you know the the dominant real estate brand on the web and say oh no we you know it's not in our sellers interest to have their listings on Zilla or Trulia it just it's unfathomable to make that argument anyway so that has certain our ability to attract direct listings was certainly strengthened by this acquisition because of the scale and that that perfectly follows the you know same same framework that you can apply to the Facebook or Google that you know if it's if it's what the users want and it's what the the people on their app are their website the best user experience they can flock to it gives you enormous power in in you know getting the content to get in front of them and then run whatever business you want to on top of that and in Zilla and Trulia's case it's you know selling advertisers to arm sellers selling advertisements to the real estate agents who want to listen next to those properties yeah uh Ben you're exactly bleeding into my tech theme but all right let's get through the let's get through the acquisition drama uh with still more juice to come in that and then we'll get into the also fun stuff on on tech themes um Trulia's word comes back with a counter offer at 34 and a half percent um and then also starts to it includes official terms on some of the non-pray stuff so includes a go shop clause uh which for our listeners who aren't familiar with that would basically mean that um if this clause were in the merger agreement after it was signed and announced Trulia could still entertain other offers from other potential acquires they also wanted a fairly large breakup fee in case the merger didn't happen that Zilla would have to pay um and to give people enough uh to give people kind of a sense of how taxing this is on an organization the breakup fee ended up being a hundred and fifty million dollars so that's effectively the kind of opportunity cost that the two parties believe that uh Trulia could be spending focusing on their own operations instead of being distracted by a deal that didn't go through yeah so i mean uh just imagine um how many people and how much time it would take to to justify a hundred and fifty million dollars of value yeah uh and and it's just a not even a day goes by the zilla board basically says right off the bat like nope not gonna fly no way 33% final offer and no go shop uh in the in the agreement um what was that like when you guys received that counter offer oh gosh i'd have to line my memory on that one i mean it was you know that this is a dance so you don't throughout this process i tried to avoid placing too much weight on any specific set of terms that somebody is is coming back with because we know where we're going to end up because we know what we're willing to tolerate and you just you kind of push each other around so i don't recall that there was any particular shock um you know with an acquisition of a competitor like this there was just no way we were going to entertain a go shop it wouldn't have made sense um and honestly i'm not sure it would have made sense for either of us because it just would have created a you know some some frenzy in the market um that wasn't going to benefit either of us in the end so you know i don't recall any particular drama associated with that we knew what we were marching toward and what we would tolerate there was there was no way that um at least you guys were going to have that so July 28th finally emergency gets announced and uh start working towards clues uh and i should mention here because the when we walk through it like this it makes it feel like all that was happening was the price negotiation you have to picture you know 50 people or so at zillow working on the merger agreement and all the diligence because we needed to announce it right away so you know it was a pretty nerve wracking period of time where we were still waiting to reach agreement on key terms but meanwhile we're negotiating the whole host of other things that you negotiate in the merger agreement which um gets me to the the what i think is the certainly the most amusing part of this deal um that i was going to break up you know after you close on announce on July 28th uh and and then and news comes out the market reacts uh but news also comes out then that um trillia's co-founder uh not Pete but uh sami uh ink it in sami was literally in a in a robot uh in a in a in a cruise uh skull rowing across the pacific ocean for the entire time that this negotiation was going on and that is right that is right it you know i don't know what it was like in that boat but we probably would uh you know jockey to say who was feeling a little bit more miserable at the time anyway and so he was he was he was life the two of them in a in a robot you know in a cruise call rowing thousands of miles across the pacific ocean to Hawaii from california were you able to reach him by satellite phone or you know was did that what was that you know i honestly don't remember um whether he had given someone his proxy before he left i don't believe he was in any kind of substantive contact beyond you know making sure they were safe out on the boat but i really just don't remember well presumably he'd given proxy to somebody because uh i would imagine his his he would need to vote his shares uh for um for the deal but uh yeah yeah that's that's a first ure on a quark yeah that is the first we have never had a story like that it's pretty awesome uh he seems like quite a uh quite a cool guy and uh in character as you would imagine from that so that was that was sort of all the pre-closed challenges but then the then the what pre-announced challenges and then the post-announcement challenges start so this deal underwent a serious amount of ftc uh government regulatory scrutiny right i mean uh there were two requests for information which is uncommon typically the ftc will make one request for information in reviewing you know coming to a decision uh which they ultimately decided that trillions of it was not but whether this merger would create a monopoly in the market which obviously would be illegal um and uh and so typically we will do one request but in this case they did too and that's usually taken as a bad sign by the market and indeed when that happened the share prices reacted negatively what was all that you know drama like i mean you guys must have been on knife's edge yeah it was um it was a pretty nerve-wracking period for all of us um you know i i essentially spent four months in dc full time trying to get the deal pushed through um um before for those out there who who aren't familiar with the ftc approach in this kind of case what what they're trying to determine is what is the correct definition of a market and once they have defined that market then whether there is monopoly pressing power in the market based upon the combination and you know the the ftc was having fits and starts about you know is is online real estate is the online real estate portal market in market unto itself um and you know our view was no i mean the most of the activity that takes place in this market takes place way outside of where we are you know one one stat about that is what i mentioned at the beginning of this conversation which is you know we think we we touch about four percent of transactions and we think we have a small percentage of advertising spent by real estate agents um that being said if you look solely at consumer transaction to real estate portals only were pretty big so um tons of back and forth and economic analysis hours and hours and hours of deposition and ultimately we think they reached the right decision but i had a lot of sleepless nights i can tell you that and um you know for me personally i felt like the weight of the deal was on me running this process um not only hukuk dev but also general counsel right right well i i i had we have a general counsel of bradoens um who who runs most of this but for this i i'm still chief legal officer and i was on point for the deal so i was the one in the thick of it while he was holding down all the things that needed to be done in Seattle so um yeah it was it was quite a ton i think i aged a few extra years in that six months i bet how how does the ftc decide what the market is is it like a a number of transactions or is it a dollar amount or how do they determine because you could imagine two people hanging out on the street one guy wants to sell something to the other that right there's a market yeah so they they look at it from through many many different lenses um you know we had multiple economic experts many many antitrust lawyers who um work on these kinds of pieces every day and what they're looking for is any characterization of the market that can give someone you know additional pricing power simply by virtue of the combination is what they're concerned with um it's an interesting thought processing our transaction because the pricing power they were thinking about of course our creditors are all free to consumers was will the price of online real estate advertising be impacted by this combination for real estate agents so you know does it become more expensive for real estate agents to advertise simply by virtue of this combination yeah how deep did they go i mean i imagine it was a six month review and you practically lived in Washington for four months i mean were they uh were they subpoenaing or they're the equivalent there of in this process information i mean like were they looking back at like the series a pitch decks of both companies oh yeah all of our email everything yeah to see our own characterization of the transaction right um and given the long history of this acquisition dance there was a lot there they were talking to other market participants they were talking to individual real estate agents um you know we didn't have full visibility into all of their activities but we would hear anecdotally from people in the industry who would say they had had calls or been deposed or provided documents and they had their own economic experts so uh it was an incredibly in-depth and detailed process yeah i mean it's a good reminder for those of us you know it's like the you know broader defined silicon valley ecosystem it's so easy to be like blase about i'm starting to start up we're gonna like take over this market or you know just like you actually need to be really careful about how you characterize things um because you can come up in this nightmare scenario yeah and even with you know perfectly innocent characterizations of market dynamics can be you know taken out of context or paired with other information and can cause real questions about your intentions and and the potential outcome uh well hey you know i i want to talk a little bit about um the mLSs some data fees but maybe let's do that quick and then i really want to talk about um zillow groups overall acquisition strategy and sort of how it fits into the landscape for the next few years and kind of Kathleen give you a chance to talk about that so um let's do the let's talk about kind of what we have well real quick and then we'll wrap up the the history uh the the final twist in the story here is right before so the ftc finally approves the the merger in February and then it goes through and you close the deal but right before that happens um both truly a anzillow we're getting i believe uh if not a majority a significant amount of your real estate listings from a company called list hub which is a data provider which is actually owned by a third competitor in the market uh which uh had i believe just been acquired by newscorp um and list hub actually cuts off both trillow and trillow trillow trillow and zillow from these data feeds which are the lifeblood of your business and uh so you had this other wrinkle of like now you have to go rebuild your supply essentially uh from the ground up by signing direct uh direct data deals with all the the mls or multiple listing service for people who aren't familiar with the market these are local organizations that aggregate real estate uh listings as they come on the market um in each you know each city each you know demographic each geography kind of within the country and their hundreds if not thousands of them and so all of a sudden now you guys have to go to biz dev deals with all these folks directly wow can you just talk about that what that was like sure so um let me just tie that back to the ftc for a second because of course one of our arguments to the ftc is how can we be a monopoly when our oil which are isn't our listings are controlled by a competitor who's sponsored by the national association of realtors it kind of boggles the mind to think we could be the monopoly when they provide us all these listings um so you know the the the cutoff of the listings actually came as a result of a natural termination of our contract and we had engaged in negotiations to try and renew so it it wasn't overnight um we knew this could happen so we had been gearing up for a substantial amount of time to try and cover this because of course you never want to run your business at the mercy of one of your competitors which is you know essentially what what that was now that's sort of a plain way to put it one thing that people don't focus on is there was actually a pretty symbiotic relationship between zillow and trulia and list hub because list hubs primary business is not syndication of listings it's the sale of listing reports to agents that say things like you're listing on 123 Main Street was viewed 50 times on zillow so it you know it's not as straightforward as to say we were at their mercy because actually we were a key ingredient to their business as well it's just that once they were acquired by move and then subsequently move was acquired by newscorp they were thinking about that business differently from a strategic perspective so we had already engaged in a ton of effort um knowing that this could happen and not wanting to to you know have this relationship with a competitor but you know we certainly had to try pretty hard at that and as I said at the very beginning of this conversation you know one of the unforeseen benefits of the combination was that our increased scale sure made it a lot easier to get those listings not that it was easy and it's an ongoing process but you know it was a lot easier to go as number one and two in the market to try and acquire these listings then it had been when we were on our own yeah let's move on I think been the right frame to discuss what you were talking about in zillow's M&A strategy generally is that let's quickly do acquisition category to me this is pretty clearly a business line acquisition note well I guess I don't know maybe you think differently yeah it's funny the way I was going to categorize it and so um Kathleen and for our new listeners we have uh several different categories people technology product business line asset which is newly added or other and in this scenario um you know what I really think was was the way I look at this deal is um it's a rapid way to expand the kind of core marketplace uh that that zillow offers so you know on the supply side of the marketplace you have um people who are looking at pages that display homes and on the demands or uh yeah on the demand side of the the marketplace you have real estate agents that want to advertise their services and so so to me you know this is just um providing uh it's it's buying more supply and more demand and kind of putting it together and there's all sorts of interesting you know way yes it's good point it's like I totally agree with you like it's a business line acquisition but not a new business line it's the same business line it's buying more supply and demand of the same business line and kind of like you know having multiple marketplaces but um having ways to for example the the combined portal for for uh um real estate agents to put their their ads on both you know the ability to funnel to both of those marketplaces simultaneously yeah I almost want to say asset in that case but it's like an asset generation I don't want to create another new category we have a nice stuff to do into business line yeah I mean you know another way to say it is it's it was sort of honestly kind of a time machine acquisition right just accelerating what each of us was doing already put it by putting it together so you're exactly right it's both sides of supply and demand and we each you know combined got where we were going a lot faster yep very cool well how does this fit into you know what what's the zilo group strategy for the next couple of years and and why have you been doing the acquisitions you're doing and how does this fit into that picture yeah so I mean that this one is pretty different than our other acquisitions because it really was just an acceleration of of our scale um in terms of overall strategy I mean we we continue to invest in a number of different things um you know dot loop is a good example of a a product that is designed to help real estate agents become more efficient and close more transactions more quickly um which in the end we believe will make our advertising more valuable to them um it's also you know kind of doubling down on having agents embrace technology by closing transactions um on online versus on paper um so that that's that's an extension of the products and services that we provide agents that really enhances the value of the advertising they buy from us um you know the other branded acquisitions naked apartments hot pads and street easy are just continuing to build out our portfolio of brands so that we have something for everybody for whatever they're looking for you know hot pads tends to focus on younger urban renters um street street is focused only on New York primarily was focused on um purchase and sale but um always had a rentals product and now with the addition of naked apartments has open rentals which are you know something that street easy had not um focused on before and as we look at at each of these candidates and I mean we look literally like last year I think we went back and counted we looked at about 125 potential deals we think about you know will this accelerate something that we are already doing and and get us there faster is it something we haven't figured out yet um is another way of going um but fundamental in every acquisition what we start with is we look at the people and decide whether they are people who we could work well with within our existing um silo group uh portfolio because ultimately we we are acquiring the people who have built these brilliant products and we want them to stay we want them to be successful with us how do you think about you know when you acquire a naked apartments or a hot pads you know those properties aren't being combined they're they're different websites with their own um ability to acquire traffic do you combine the the back end um you know real estate agent services or what what ways do you uh hate using the word but how do you achieve synergies and and why is it advantageous for silo group dough those businesses yeah so you know hot pads is a great example you know one of the things that that's pretty cool is we look at teams that are really good at certain things and when hot pads joined us we realized for example that they were really good at ingesting rentals feeds and normalizing them to present them in a way that was useful to consumers so now a segment of the hot pads team is responsible for all rentals listening syndication throughout our entire platform um and so we tend to kind of pick and choose where there are strengths within each of the teams um it's street easy for example because they're a New York City brand very focused on vertical living and you know while they don't work directly on vertical living products for other brands they certainly inform and educate our teams about how to present a condo building versus a single family home very cool so it's almost like a little reverse acquisition of of knowledge there to get that DNA up into the the rest of the silo group products sure yeah let's let's move quickly into uh tech themes then which is uh one of our favorite parts of the show i had a tech theme written down that i'm gonna mention a mullink to this in the show notes there was a great great interview with rich Barton in New York times a couple years ago that the interview was focusing on like you're like this hitmaker you know you have expedient you have silo riches intimately involved in the origins of glass door and avo and many other marketplace based really you know important marketplace based businesses uh you know kind of what's your secret and rich said um the thing that i think about is is quote what piece of marketplace information to people crave and don't have um i think that's really interesting it a zillow's like a perfect example of that i like i want to know what my home's worth you know and i don't have that right once you give that to me like i'm like uh i'm like a mouse in a lab like you know turning the wheel to get the cheese i want to know every week what's my home worth um and uh i think that was a really good example the the other one i want to throw out quickly um Kathleen that you know you've talked about a bit on this show um isn't so much uh at the normal level of technology themes for us on this show but we talk being a VC and working with management teams and entrepreneurs and founders um you know hiring uh and building your organization from a people perspective takes as much time as anything else in the business if not more time um and we always talk about like oh it's so important to hire athletes you know like not literally athletes although literally athletes can be great too but you know and people are like well what does that really mean um i think zillow and and your m&a strategy is a great example of that of like people who are very smart very flexible in their thinking and can adapt and over time play multiple roles because that's what you need in a startup like you can't predict exactly where the market's gonna go where your product's gonna go your organization and you know i think you guys have done a really good job both in your hiring obviously of your management team um but also your acquisitions of looking for these types of people who can um evolve their thinking and evolve their abilities as the company does because that's gonna be you know that's gonna be the constant in in a high growth industry right now that that's absolutely true and i you know i can give you a couple of specific examples from the acquisitions um Susan Daimler who now runs straight easy here in New York City which is where i'm standing right now um she came to us by way of acquisition of the company bifullio that she and her husband Matt started um and you know as we needed a new leader for street easy Susan and Matt stepped in and now they they play a key role in the in the street easy business so you know they they went from running a very small company that was focused on a sharing of information among co-shoppers to now running street easy so you know perfect example of that just in le joy who was the founder of diverse solutions um we've recently divested diverse solutions but Justin is still with us running an entirely different product line uh so we definitely look we look for culture fit and you know a broad ability subject at matter expertise is important but it's not the critical piece and you'll see that throughout our management team as as we all move around in different roles and expand our skillsets very interesting and totally totally validates the uh the the tech theme mine um mine so what we do here at Pioneer Square Labs is come up with new business ideas and then work on them and try and spin them out as as their own startup companies and so we're always thinking about um you know how do we apply a framework from some business or or a theme that's been successful in the the recent years to new businesses and one thing that uh Zillow and Troulee have totally nailed is this idea that real world objects are also media and in traditional media companies you can sell advertisements uh you know against content against articles people make or photos and something that Zillow's done is I touched on this earlier they they've made it a form of entertainment and um a thing that people do together to to share these listings a lot because it's so aspirational and Airbnb capitalizes on this too where um a lot of traffic is there not to buy but just to like participate in that experience yeah and we used to joke at uh when I worked with Wall Street Journal that this is house porn oh yeah I mean and and and something that that folks miss a lot is we didn't have any real estate listings on Zillow for the first three years we only had assessments oh wow wow didn't did not so wow yeah it sounds I didn't know that in the was there a business model then or was uh was it kind of in construction you know I was not around I'm sure that people had in mind all kinds of different ways um that we were going to monetize and we tried lots of different things different kinds of ads for homes but ultimately the the initial thought was build your audience first and advertisers will come and we still believe that and that's you know that's also central to the investment thesis for Trulia is you know advertisers follow audience so if you can increase your audience by a third over you know the span of six months you're going to be in a pretty good spot yeah should we move to uh rendering a conclusion on that note I think so so for me this one is uh obviously it's very recent so some of the acquisitions we do when we're looking back at bungee or companies that are ten plus years old um in previous episodes we have a lot of information to be able to render a conclusion on and in this case you know I think it's pretty new but um Kathleen like you were saying you know you you look at the financials from each of the companies over the um entire you know existence of the companies and it looks like kind of one third to third so the way that we generally grade this acquisition um is from the perspective of the acquirer so from zillow group's perspective was this an a b cd and you know to me this is a solid b plus it is it's sort of obvious um it's it's uh amazing that the legwork got that you guys did the legwork to really get the deal done um it's an accelerant to the business you know it it has all kinds of returns but you know our our a's um and we said this on other episodes are for these like ridiculous multiple you know ten x things the Instagrams the the Instagrams the androids the things that change the course or save a business um and uh you know to me I think like we've been talking about earlier um I I feel like a a b plus with some variance here and there to see where it goes in the next few years is uh yes what are the things for me I'm super I was super impressed doing the research for this episode reading reading the filings and then you know like um you guys did just such like a professional uh and um elegant job uh valuing this deal negotiating it making it happen dealing with all these roadblocks along the way and um you know I actually this will come up in my car belt in a minute but um you know when the the FTC review and the um and the list of you know situation even though you knew that might have been coming anyway um really impeccable job but like this is like just a an a plus execution deal yes overall I agree with you Ben you know it's a fantastic deal but uh when Instagram is our benchmark uh that's that's just that's just a different class of of acquisition and uh you guys might uh ultimately have Instagram type acquisitions that way surprise you on the upside but you know you thought this would give you you knew exactly that this would boost your traffic by 30 per you know about a third you paid about a third of the combined company market cap for it made total sense um so I'm going to go also with with B and then the plus B plus B for the deal and plus for the execution excellent well I I will humbly accept your compliments on the execution um I often said during the time that everything was happening that I felt like I was living in a textbook um and that the opportunity to participate in a deal like this in the way it played out really only comes along once in a lifetime so um it was a fantastic experience for our whole team um and you know I think I think B plus is is fair because I think we're early days still in in reaping the benefits of this combination and as I said earlier there are all kinds of ways in which we've benefited that we haven't foreseen yeah all right let's move uh quickly into the uh the tail end of our show um uh we have three quick sections follow-ups on episodes we've done in the past where new news has come out hot takes on deals that are relevant in the moment in the press and uh and then carve out my favorite at the end first follow-ups Ben um snap ink yeah I mean well I'll be buying some spectacles I can tell you yeah uh snapchat uh is releasing uh basically like the cool version of Google Glass and changing their name to snap ink at the apple moment they are and you know when we talk about apple moment I haven't been this excited about um kind of like following a company uh sends like the early days of apples Renaissance yeah like I can't help but feel like what what snapchat is doing right now um is so it's like smart and super ambitious and so unexpected I tweeted this when um um you know they they dropped chat and they just became snap ink it reminds me a lot of apple dropping computer from their name and they have ambitions far beyond being constrained to exactly the the form that they're in now and I think that um you know there I've been thinking like oh they're this new form of communication but this kind of changes it outside the software world and I think where snap is going right where Google went wrong with glasses they're not starting with these ridiculous grand plans of like you could do anything on this thing the comp for me it's you know you look at postmates and they said you can order anything and Uber said you can literally just order me to drive you from here to there and people immediately latched on to that oh I get it who goes for taking me places and so I think with um you know Google Glass being who knows what it will do for you um what the spectacles does is here it's it's just for this little thing we'll see if we expand from there but right now it's it's a toy it's it's almost flamplanned it's crazy it's ridiculous try out my um my favorite take on this uh as I saw um Bill Gurley retweeted a tweet from one of the callus and brothers the founders of stripe um uh sing something you need a pect of it is uh snapchat with this move like what is following snapchat in general like they are just so astonishingly original in what they do and I think that's like why they've kind of captured this side-guised uh you know it's um they're not like you know x for y it's you know even though this is man google glass done right it's like whoever would have thought that snapchat would release some glasses that take video like super cool Kathleen are you gonna buy a pair? I'm on my way now I thought they were pretty cool and I have to say I like the blue lipstick too yeah actually let's have comments about that um hot takes moving on from one social media empire to you know on the rise to one potentially on the decline twitter who we talked about this with uh with Alex from Bloomberg on our last show but um also heating up yeah I mean it's super interesting that the most credible rumor yet is uh is the Disney uh yeah the potential Disney offer coming in and awesome having Alex on the last show Alex actually broke the story that uh you know people familiar with the matter both from Disney and from Twitter people then people not person that's right um our our sources in uh you know kind of confirming that um that we're in talks so uh it seems to be a little out of the woodwork but makes a lot of sense when you think about Disney's other acquisitions of late it's not just you know Mickey Mouse it's it's uh really a media empire yeah well if it is that means yes PN why couldn't they own twitter we've Disney's made some great acquisitions that we've talked about on the show already picks our Lucasfilm um but uh you know I mean like so many companies these days like they face as successful as they are like they're an industrial age company and like what is Disney's future and the information age and they've done great things organically you know magic bands are an incredible experience if you haven't gotten to do it yet um at the parts you are on your your wrist of the Disney's artworks but yeah well I don't know who knows will happen with this there will be an episode coming I'm sure uh next real quick hot take uh we got some requests for this in the Slack channel um this is pretty amazing company called app love in uh that is a um mobile app uh marketing broad based marketing firm uh customer acquisition advertising and analytics um was just acquired by a Chinese private equity firm for 1.4 billion dollars they were basically bootstrapped they'd raised about four million dollars and kind of seed money that they didn't really need they're profitable the whole time um pretty incredible story yeah pretty unprecedented type of uh a bootstrapped company um turn into that I mean they almost always have have institutional backing yep and I think uh my only comment on this one is it's interesting to see how history repeats itself I think 10 years ago we were in this same place with email marketing and the start of sort of the digital marketing that we talked about with Scott on exact target exactly exactly now see him in the in the mobile era yeah okay that's what we got carveouts been yeah so for for any new listeners this is a thing that is unrelated to the episode or really the theme of the show in general but it's just something uh something we've enjoyed over the past few weeks um there's a great video floating around called the Marvel symphonic universe and uh it's on youtube and it looks at um why is it that we can on command on the theme of star wars James Bond but when asked how about any of the Marvel movies despite being the highest grossing franchise ever in in Hollywood none of us can hum a Marvel franchise theme oh so it goes just yeah I have no idea what the yeah when you start killing that apart there it's one of the really interesting things they bring up is uh temp music and it's so cool to watch um what music the director used as temporary music like oh yeah grab that one song from that other movie and throw it in until the mute the real music is written and composed for for this movie and it's a it's a super interesting uh ten minute watch so I highly recommend it oh that's fascinating um mine is a book I just finished reading um uh that uh lots of people recommended to me uh is Phil Knight the founder of Nike's memoir shoe dog uh and um had some personal significance for me because Phil actually uh I went to went to Stanford Business School which or I studied on the night management center campus that Phil donated to Stanford at incredible incredible new campus for the business school that was constructed a few years ago uh and then Phil uh gave the graduation speech at my at my graduation um and it was uh in many ways uh although we didn't know it at the time kind of an outline of this book and uh I went back and rewatched it um the book is fantastic it's uh you know I mean it's I guess broadly you'd call it a business book but it's um it's really just the story of Nike and this and it's pretty incredible and um one of my my favorite thing from it is uh in the introduction Phil talks about you know going for a run in 1962 we just graduated from Stanford had this crazy idea to start a you know shoe company and um you know this he's just thinking like I have no idea where this is gonna go but I'm just I'm just running I'm gonna keep running and I'm not gonna stop don't stop and that's just you know he's like I mean so many mistakes so many things I regret along the way but like I just kept going and like didn't stop and um and that's where he is today a great book very cool Kathleen you the car about sure um mine's a little more frivolous my husband and I spend our free time traveling to music festivals and thought I would recommend the band of the summer which for us was the struts so if you're in need of a dose of glam rock I would say check them out I love it awesome well um I think that is uh that's all we've got for today so uh Kathleen where can our listeners find you on Twitter um you can find me at Kathleen Phillips on Twitter with one island Phillips on Disney Twitter thank you again Kathleen this has been super fun and um also always great to have a hometown Seattle company on the show it was my pleasure thank you guys very much yeah well uh for any listeners um if this is your first episode then you'd like to hear more subscribe through your favorite podcast and client um and if uh if you enjoyed it feel free to share it with your friends or leave us a review on iTunes thanks so much for listening